Giving Made Easy

Donor-advised funds are bringing new convenience to philanthropy

When Dan Smith lost his wife, Joellyn, to breast cancer, he and his children wanted to honor her legacy. Turning to the ­Communities Foundation of Texas for help, the Smiths received needed advice and direction, resulting in the Joellyn Smith Fund for Breast Cancer Support. With further guidance from the foundation, the Smiths eventually discovered and supported the Bridge Breast Network, whose mission, assisting low-income uninsured women with cancer, was a fitting tribute to their beloved wife and mother.

When Communities Foundation of Texas CEO Brent Christopher explains ­donor-advised funds, he often cites this story. People create funds for various reasons: to share good fortune with others, to remember a happy or tragic life event, to encourage multigenerational giving—all without incurring the administrative burdens of setting up a charity or a foundation. A ­donor-advised fund offers efficiency and flexibility, allows money the chance to grow while it is invested in the market, and gives even small donors access to a large foundation’s accumulated knowledge of community needs and the best nonprofits that address them.

Donor-advised funds now make it easy for families to transmit values and teach younger members how to engage in creative giving. “Donor-advised funds are attractive to generous people and actually encourage them to set aside more for charity,” states Christopher. Today over one thousand organizations offer donor-advised funds in the U.S., housing over $50 billion in charitable assets.

Making it simple

In 1931, the New York Community Trust established the first donor-advised fund for William ­Barstow and his wife, Francoise. William worked with Thomas Edison in his Menlo Park laboratory and served as general manager of the Edison ­Electric Illuminating Company in Brooklyn, in addition to his own entrepreneurial ventures. The couple didn’t want the paperwork and rules of their own foundation, so they used a new charitable mechanism to give to several organizations offering technical training and other support to poor children.

Many givers followed in their footsteps, and today donor-advised funds span the globe, housed in local community foundations, ­mission-focused funds, ethnic or religious federations, and ­charitable funds sponsored by companies like Fidelity, Schwab, and Vanguard. The funds run by the latter custodians have recently grown so rapidly, because of their ease of use, that they now rank among America’s largest charitable conduits, accounting for three of the ­Chronicle of Philanthropy’s top ten public charities in 2014. (A fourth, the Silicon Valley Community Foundation, also sponsors DAFs.) Donor-advised funds now outnumber private foundations by more than two to one in the U.S., and in 2013 they funneled nearly $10 billion to charities favored by their donors.

What’s the most important factor driving philanthropists to donor-advised funds? In a single word, “simplicity,” says David Wills, president of the National Christian Foundation. Contributions of complex assets that donors would be unable to give to smaller charities and hesitant to give to any one large charity can be monetized to give donors flexibility. (For more on NCF and the way it helps people convert complex assets like real estate, private stock, and even oil interests into gifts to others, see “Alms Alchemy” on page 12.) In San Francisco, Tides Foundation CEO Kriss Deiglmeier also cites the ability of DAFs to take complexity and messiness out of gift-giving as one of their main advantages. She reports that Tides—located in the city that is now home to Salesforce, Twitter, Pinterest, and other tech companies—is now using DAFs to help people give away full and partial business interests to­ ­progressive causes. Brent Christopher says the Communities ­Foundation of Texas has even translated donated art into charitable purposes via a donor-advised fund, capturing more value for the end recipients.

One of the ways DAFs expedite giving is by allowing people to turn the act of donating and the act of giving away—both of which can be complicated—into separate transactions, conducted without time pressure or competing interests. First a donor creates a fund at a sponsoring organization, receiving the charitable tax deduction for the gift. Once dollars are in the fund, donors can ask the sponsoring organization to disburse a grant at any time. At some national funds, online account access enables donors to monitor and disburse their gifts at opportune moments. At Fidelity Charitable, 86 percent of 2013 grants were initiated online.

The ease of these funds invites family involvement. Parents are establishing funds for their children as ­Christmas presents or to celebrate a bar or bat mitzvah, or setting up funds that a geographically-dispersed family can share. In Dallas, Christopher works with a family that has its own private foundation, yet added a donor-advised fund so it could fold additional family members into its philanthropy.

As an aid to those who find philanthropy daunting or time-consuming, DAF sponsors offer advice as desired—from basic summary information to personalized guidance. Several community foundations offer special programs on particular issue areas, and some conduct site visits to nonprofits. The Communities Foundation of Texas curates knowledge about needs in North Texas, for instance, and produces a giving guide focused on that area.

For the first ten years of his work at Vanguard ­Charitable, president Ben Pierce saw the role of the organization as “making gifts happen for those who know what they want to do.” But as more and more givers saw the potential of donor-advised funds to help them carry out high-impact philanthropy without hassles, Vanguard began to field more questions about strategy, about the pros and cons of specific grants, about conditional or matching gifts, or the wisdom of multiyear grants, or offering general operating support. Today when donors seek “deep-dive” knowledge about specific subject areas, Vanguard provides more philanthropic consultation.

At Fidelity Charitable, the story is similar. Fidelity’s website offers information on a variety of common giving areas—including extensive guidance on disaster relief, for instance. Most of Fidelity’s givers are self-directed, says president Amy Danforth; three quarters do not ask for assistance. To aid the other quarter, Fidelity partners with philanthropy advisers around the country to offer answers to questions. Danforth believes that when millennials enter their philanthropic years, “donor-advised funds will be their strategic giving vehicles.” To aid their decision-making, Fidelity Charitable is now exploring ways to build communities of donors around specific issues such as K-12 education.

Funds with a purpose

Donor-advised funds also enable birds of a philanthropic feather to flock together. In 1976, Drummond Pike started the Tides Foundation after he recognized the potential of donor-advised funds to help liberal philanthropists join together in collaborative giving for policy change. Today hundreds of Americans support progressive causes through Tides; the foundation distributed over $94 million in 2013. In 1996 the foundation set up the Tides Center to incubate new organizations and projects that advance the goals of “social justice and shared prosperity.” In addition to attracting funds to these groups, the center provides donors with technical assistance on management, fundraising, and public relations. About 160 left-leaning organizations now operate through the Tides Center.

On the other side of the political spectrum, ­DonorsTrust offers DAFs for givers who wish to support “the ideals of limited government, personal responsibility, and free enterprise.” Founded in 1999, DonorsTrust both administers funds and launches new projects and charities under its ­tax-exempt umbrella. DonorsTrust encourages its givers to “sunset” their DAFs in order to preserve donor intent. As a “failsafe” to insure there will be no perpetual accounts that drift into causes not favored by the original giver, “only the original donor can name successor advisers, and accounts should be closed 20 years after a donor’s death,” explains CEO Whitney Ball. Since inception, DonorsTrust has received over $700 million in funds for granting to charities and has disbursed over $600 million.

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Some critics, such as Boston College law professor Ray Madoff, have complained that since there is no rule on how quickly money must be distributed after being placed in a donor-advised fund, philanthropic dollars can end up “warehoused” while charities are in immediate need. In 2014, members of Congress considered limiting the “shelf life” of contributions to donor-advised funds to five years as part of a tax-reform overhaul.

This criticism has been a moot point for ­DonorsTrust, where the aggregate annual payout rate is 85 percent or more. “Our experience is that ­donor-advised-fund donors give more, and give faster, because they’ve already parted with the money and resolved tax issues,” says Ball. With a payout rate of 35 to 40 percent, the National Christian Foundation turns over its assets every three years. “Our folks are moved to give their money out quickly,” agrees Wills. At Tides, the aggregate payout rate is about 50 percent. “Our mission is to accelerate the impact of partners in social change, so our culture is about ‘right now,’” Deiglmeier explains. The National Philanthropic Trust reports that the overall payout rate for donor-advised funds in 2013 was 21.5 percent—considerably higher than the 5 percent mandatory distribution rate for private foundations.

An encouragement to give

It’s common knowledge that during the recent Great Recession, individual donations to charities decreased significantly. What’s less well known is that even during this time of economic stress, donors continued to give money from DAFs. Though contributions to DonorsTrust dropped to $38 million in 2010, $61 million was nonetheless distributed in grants that year. Donor-advised funds thus act as shock absorbers, smoothing the peaks and valleys of giving over different economic phases.

Because these funds encourage givers to consistently share more over time, they can also provide ongoing operating support for charities. The Jewish Federations of North America collectively hold $4.7 billion in donor-advised funds, recommending grants to a variety of Jewish and other causes. These DAFs also provide over 10 percent of the contributions to the federations’ own annual fundraising campaigns. What this indicates, says JFNA’s senior tax policy counsel, Steve Woolf, is “the increasing significance of planned giving and donor-advised-fund accumulation and spending on the current operating budgets of our federations and affiliated agencies.” (For more on the Jewish Federations, see page 15.) 

Donor-advised funds aren’t just for fat cats. To the contrary, they have brought the convenience of professionalized giving to middle-class givers. At Fidelity Charitable, it takes a contribution of only $5,000 to set up a fund, and 60 percent of accounts hold under $25,000. “Donor-advised funds are democratizing strategic giving for folks who would never have a private foundation,” summarizes Danforth. 

MaryAnn Rich, a retired schoolteacher and mother of two sons, cherishes her family’s funds at Vanguard ­Charitable, created after her husband, Gordon, died in 2000. His life insurance and other payments that arrived upon his death stocked the fund, and MaryAnn continues to make contributions 15 years later.  “I keep making gifts,” she remarks, and “through this fund, Gordon is still with us.”

Rich also opened funds for her sons so they could learn to give as a family, with everyone participating in research and decision-making. This process led to a significant grant to their local food bank, where one of the sons volunteered. Using their individual funds, the young men have the freedom to recommend grants to any number of nonprofits pursuing whatever causes they feel strongly about.

For this family, the payout flexibility of ­donor-advised funds enabled them to make smarter gifts. At the time of her husband’s death, MaryAnn was teaching full-time and raising two young children. She knew she wanted to earmark financial resources for charity, but needed time to get her bearings and learn how to be a good donor. “That takes hard work,” she says. In addition, a time limit would have prevented her sons from participating as young adults. “It would have changed the way we did things, and not for the better,” she concludes.

“When you’re talking about philanthropy,” Rich asks, “why make it difficult?”

Joanne Florino is senior vice president for public policy at The Philanthropy Roundtable.

“The shadow of ‘dark money’ haunts the midterms,” warned the Washington Post in September. Two days later, a Huffington Post headline chimed in: “It’s Time to Name the 2014 Midterms the Dark Money Election.”

The notion of dark money was first introduced in a 2010 report from the Sunlight Foundation, a nonprofit group that calls for greater transparency in government. Originally, the term referred to funds of undisclosed origin being used to influence elections. It has since morphed into a term of art mostly employed by the left to describe any undisclosed gifts to right-leaning nonprofits. While donors are within their legal rights to remain anonymous, the implication is that something nefarious is afoot.

Philanthropic privacy has long been a cherished part of American civic life, and philanthropists, whatever their political stripe, should be allowed to remain anonymous. No one appreciates this more than Whitney Ball, president and CEO of DonorsTrust, a group dubbed by Mother Jones “the dark money ATM of the conservative ­movement.” Founded by a small group of donors and nonprofit executives with the common agenda of “promoting our free society as understood in ­America’s founding documents,” the organization helps philanthropists manage the logistics of their giving and be sure that their gifts are directed to advance the cause of liberty.

Donors run the full spectrum of the right, from libertarians to conservative traditionalists. Ball estimates that 70 to 75 percent of gifts go to public-policy organizations. The balance goes to more conventional charities such as hospitals, religious institutions, art museums, schools, and homeless shelters.

While foundations are required by law to disclose where they spread their largesse, individual donors need not disclose their gifts to any charity. In other words, the philanthropists who use DonorsTrust could remain private simply by giving directly to their favored organizations. ­DonorsTrust does not invest them with any legal privileges they wouldn’t otherwise have.

“I like to think of it as sort of a charitable bank account,” Ball says. Donors do have the right to make recommendations as to where the money should go, which Ball says are honored in most cases. (Gifts to ­violence-promoting groups, organizations that receive a large portion of their funding from the government, or relatives of the donor are all examples of requests DonorsTrust would deny.) DonorsTrust also protects donor intent, a hot-button issue for givers who have learned that if they establish a foundation of their own, their heirs could easily put it to alternative purposes upon their demise.

Ball thinks that transparency advocates often conflate donor-advised funds with organizations affected by Citizens United v. Federal Election Commission, a landmark 2010 Supreme Court ruling that broadened the rights of 501(c)(4) organizations to spend money in political races. Unlike their (c)(3) cousins, (c)(4)s are allowed to directly fund political-campaign activities, but their donors are not given tax breaks. “Every community foundation operates how we do,” she says.

Casual observers might be left with the impression that “dark money” is unique to the right. However, there are plenty of other donor-­advised funds ranging ideologically from ­progressive—like the Tides ­Foundation—to politically neutral—like funds run by financial-services giants Vanguard and Fidelity. It is far more prevalent on the left than the right to criticize “dark money.” TV host Glenn Beck decried the Tides Foundation’s anonymous donations, but his argument never gained traction; most conservatives believe Tides should be allowed to give as it sees fit.

This is really a dispute over the value of donor privacy, no matter what the politics involved. As Adam Meyerson wrote in the Fall 2013 issue of Philanthropy, “the right to privacy enjoyed by contributors to ­donor-advised funds is no different than the right to privacy that governs the overwhelming majority of charitable giving.” Philanthropic privacy, he argued, is justified by the same reasoning as the 1958 Supreme Court case of NAACP v. Alabama, in which the court unanimously ruled that if the civil-rights organization were forced to disclose its membership, supporters might be subjected to “economic ­reprisal, loss of employment, threat of physical coercion, and other manifestations of public hostility,” thereby restraining “their right to freedom of association.” Some of the reasons donors might wish to remain anonymous include “to protect themselves from unwanted solicitations, to protect their children from knowledge of their family’s wealth,” and most resoundingly to protect their “freedom to support controversial organizations without fear of reprisal or ostracism” like NAACP donors of old.

DonorsTrust’s benefactors describe a variety of reasons for wishing to remain private. One tells me that his first large anonymous donation was a six-figure gift to his synagogue. “I didn’t want everyone to think that I was a big shot entitled to special treatment,” he says. Later, he established a family foundation. “The whole point of this was to get my kids involved and encourage charitable impulses in the next generation,” he says. “To my horror, people could Google and see my kids, the amount of money in the foundation, and when I saw that on the Internet it totally scared me for my kids’ safety.” He also cites the medieval Jewish philosopher Moses Maimonides, who posited that the more anonymity there is between donor and beneficiary, the more righteous the act.

Another anonymous donor, the head of a foundation with an interest in education reform, says he does not want his friendships clouded. If his giving were in the open, he would be frequently hit up for money by pals whose favorite charities put them up to it. And in any case, he stresses, privacy is among the rights that should be afforded to everyone. “Any discussion around ‘dark money’ is somehow secondary and irrelevant to fundamental freedom of speech,” he says. “The founding fathers believed that, generally speaking, we were to be left alone…. I don’t think we came over here with the mindset that we would have some sort of benevolent dictator looking over our shoulders to see what we are doing.”

—Excerpted from “Dark Money” by Bill Zeiser at National Review Online