Donor Advised Funds

by Zachery Bow

Definition

Donor-advised funds (DAFs) are unique philanthropic tools that allow donor – or donor sets – to form a fund at an institution and remain in an advisory role for the life of the asset base’s existence (Council on Foundations 2015).  Oftentimes, donor-advised funds are established through community foundations or the philanthropic arms of investment firms as apparatuses to support causes in which the donor values (Council on Foundations 2015).  While the donor is given advisory rights to the fund’s allocation, the holding institution handles all managerial tasks related to the fund and ultimately has the final authority to determine the distribution of assets (Council on Foundations 2015).  A donor-advised fund can live in perpetuity – or be spent down in a given time frame – according to the wishes of the donor outlined within the agreement established with the holding institution. (Florino 2015).  In a more official manner, the government, through the Pension Protection Act of 2006, defines a donor-advised fund as any fund or account: “1) which is separately identified by reference to the contributions of a donor or donors; 2) which is owned and controlled by the sponsoring organization, like a community foundation; and 3) with respect to which a donor or person appointed by the donor has or reasonably expects to have advisory rights with respect to investments or distributions” (Council on Foundations 2015).

At a simplified level, the process of creating a donor-advised fund begins with an initial charitable gift to a supporting organization; whom, in turn, creates, develops, and oversees a fund for the assets (Florino 2015).  Once the assets are within the fund, the donor is able to immediately take a charitable tax deduction on the gift given and begin directing the supporting organization in the disbursement of grants using the fund’s assets (Florino 2015).  At many national or larger organizations, the donor or donors will even have access to an online portal to monitor and disburse gifts at times that are deemed most opportune (Florino 2015).  This type of flexibility and accessibility is a major selling point for donor-advised when discussing potential philanthropic vehicles with prospective donors.

Historic Roots

The first donor-advised fund was established by the New York Community Trust in 1931 for William Barstow and his wife, Francoise (Florino 2015).  William obtained his means by working with Thomas Edison at the now famous Menlo Park laboratory; which, subsequently, led to William’s appointment as the general manager of the Edison Electric Illuminating Company in Brooklyn, New York (Florino 2015).  William and his wife were looking for a mechanism that allowed them to efficiently distribute their wealth to organizations that offered support and technical education to underserved children.  The paperwork and extensive rules surrounding the formation and management of a foundation were obstacles for the Barstow’s, so the couple decided upon a new giving vehicle: donor-advised funds (Florino 2015).  The donor-advised fund allowed the Barstow’s a level of giving freedom that was similar to a foundation’s but without the associated management burden (Florino 2015).  In 1935, four years after the formation of the Barstow’s fund, the second donor-advised fund was created with the Winston-Salem Foundation (Sacks 2014a).  

A monumental shift to the traditional structure of the giving platform transpired in 1991.  In this year, Fidelity was given permission by the IRS to accept funds for charitable purposes (Sacks 2014a).  The Fidelity Charity Gift Fund was formed as a result of this decision and marked the first time a donor-advised fund was established by a traditional for-profit entity (Sacks 2014a).  The Fidelity Charity Gift Fund provided a major shift in how and where donor-advised funds were formed; and, as a result, community foundations faced their first substantial competition in the providing of this lucrative giving vehicle (Sacks 2014a).

Legislation introduced by the government through the years has played an important role in the development of donor-advised funds.  In particular, the Tax Reform Act of 1969 played a crucial role in the eventual popularity of donor-advised funds.  The Tax Reform Act of 1969 placed heavy restrictions and severe penalties on private foundations; while, subsequently, categorizing community foundations with the preferred status of a public charity (Sacks 2014a).  As a result, community foundations –and the donor-advised funds within them—became more attractive giving vehicles for many donors; allowing for relatively steady growth in the use of both philanthropic tools (Sacks 2014a).  In addition, the Tax Reform Act of 1969 recognized that funds held by a private foundation, but contributed to by multiple donors, were able to obtain the preferred public charity tax status (Council on Foundations).  The definitional framework provided by the act did not specifically mention donor-advised funds, but laid the foundation for the tax status of such giving vehicles that fit within this description (Council on Foundations).

Throughout the history of donor-advised funds, numerous organizations have been created with the primary intention of creating funds oriented towards specific political, economic, social, or religious views: the National Christian Foundation, DonorsTrust, and Tides Foundation are of particular note.  In 1982, the National Christian Foundation created one of the first donor-advised funds designed specifically for Christian donors (Zinsmeister 2016b).  In contrast, DonorsTrust and the Tides Foundation formed as means to express particular political leanings through donor-advised funds.  DonorsTrust, founded in 1999, encourages the creation of funds that support traditionally conservative policy reform stances such as free enterprise or limited government (Zinsmeister 2016a).  On the opposite end of the political spectrum, Drummond Pike started the Tides Foundation in 1976 as an avenue for the creation of donor-advised funds for traditionally liberal causes such as global warming or AIDS based policies (Florino 2015 & Zinsmeister 2016a).   

Importance

One of the most important roles donor-advised funds play in today’s society is the giving vehicle’s propensity to bring a greater number of individuals into organized philanthropy.  Donor-advised funds offer the investment expertise, community knowledge, and professionalized staff experience of a larger foundation without the administrative burden and startup hurdles associated with managing such an entity (Florino 2015).  In addition, donor-advised funds are constructed in such a way so as to easily allow the addition of a family member as an “advisor” to the fund. (Florino 2015).  Moreover, DAFs allow for the seamless conversion of numerous asset types into a monetized form that can be utilized for charitable purposes within the fund (Florino 2015).  As a result of these conveniences, donor-advised funds are attractive options for the ever increasing number of individuals and families who want to give philanthropically but do not have the means, desire, or capacity to start a stand-alone foundation.

In addition to providing an avenue for more donors to enter into the formal philanthropic landscape, donor-advised funds often act as community shock absorbers during economic downturns (Florino 2015).  During difficult economic times, individual giving decreases and established endowment values decline; which, in turn, threatens the financial solvency of many nonprofit organizations (Council on Foundations 2015).  Donor-advised funds smooth these financial valleys for nonprofit organizations by providing the needed funding that allows programs and operations to endure. (Florino 2015).  For example, during the difficult economic year of 2010, DonorsTrust distributed 61 million dollars through donor-advised funds despite only receiving 38 million dollars in donations (Florino 2015)

Furthermore, donor-advised funds act as foundational elements in the formation of civically engaged communities.  More than 70 percent of community foundations report that the average age of a benefactor to a donor advised fund is between 46 and 64 years of age (Council on Foundations 2015).  This data suggests that donor-advised funds act as philanthropic entry points for individuals seeking to invest and give within a community (Council on Foundations 2015).  As evidence, surveyed foundations reported that 81 percent of benefactors to DAFs served in some form of charity based or general leadership role; moreover, 68 percent of donor-advised fund benefactors helped address pressing community needs (Council on Foundations 2015).  Additionally, donor-advised funds provide community foundations with critical sources of funds that can be used to meet a myriad of needs such as long-term systemic issue resolution or emergency assistance (Council of Foundations 2015).  Collectively, donor-advised funds can act as important tools in the building of strong, civically engaged communities.

Ties to the Philanthropic Sector

Growth has been an ever present factor in recent years in concern to donor-advised funds.  From 2007-2014 alone, the number of DAF accounts grew from 161,940 to 238,293 with assets rising from 32 billion to 70.7 billion dollars during the same time period.  The largest portion of this growth has been concentrated within the donor-advised fund options available through commercial investment companies: Vanguard Charitable Endowment Fund, Fidelity Charitable Gift Fund, Schwab Charitable Fund, etc.  As a result of this rapid development, donor-advised funds now outnumber private foundations at a rate of more than 2:1 (Zinsmeister 2016c).  Even more stunning, the 2016 Philanthropy 400 study, conducted by The Chronicle of Philanthropy, indicated that the top fundraising entity in the United States was the Fidelity Charitable Gift Fund, which almost exclusively manages donor-advised funds (Lindsay, Olsen-Phillips, and Stiffman 2016).  The Fidelity Charity Gift Fund raised $4.6 billion dollars in the most recent study, an increase of 20 percent over the previous year’s total (Lindsay, Olsen-Phillips, and Stiffman 2016).  The study’s results also revealed a larger number of donor-advised fund based organizations supplanting traditional fundraising charity stalwarts such as the United Way, the Salvation Army, and Harvard University (Lindsay, Olsen-Phillips, and Stiffman 2016).  With an increasing number of sponsoring organizations and asset bases to draw from, donor-advised funds are poised to have an immense impact on the future and direction of the philanthropic sector as a whole.

Discussions concerning donor-advised funds often center on the tension and apparent competition between two of the largest providers of the funds: commercial investment firms and community foundations.  While community foundations and commercial investment firms often compete over the same share of potential donors, the two organizational types also cater to distinct groups of benefactors that do not heavily overlap.  For example, community foundations commonly attract donors who are seeking a sponsoring organization with a deep, wide encompassing knowledge of a local community or city.  In contrast, commercial investment firms frequently attract donors who have a high level of certainty of the specific nonprofits they wish to support (Sacks 2014a).  In this manner, community foundations and commercial investment firms are able to fill a niche within the market without directly competing with each other.

While donor-advised funds have continued to gain prominence in both size and scope within the philanthropic world, the platform has not managed to escape the distinction of being one of the most controversial topics within the field.  The primary point of contention in relation to donor-advised funds is the platform’s tax-advantaged public charity status.  As a giving vehicle, gifts – including appreciated assets – to donor-advised funds are immediately able to be deducted on a donor’s tax returns at the more favorable rate assigned to a public charity —compared to the lower rates associated with private foundations.  In addition, the assets within a donor-advised fund do not have to be distributed in any given year or at any determined rate.  Critics argue that because of these characteristics, donor-advised funds allow donors to indefinitely withhold needed funds to nonprofits despite receiving immediate tax related benefits from the initial donation (Madoff 2016).  Despite these criticisms, studies have shown donor-advised funds actually pay out at a rate of 22 percent a year while private foundations are closer to the required 5 percent threshold.  In addition, organizations such as DonorsTrust are heavily encouraging “sunset” policies on sponsored DAFs in order to prevent accounts from shielding assets and existing in perpetuity (Florino 2015).  As donor-advised funds continue to gain affluence within the philanthropic community, the conversations concerning the needed regulations and issues with the platform will continue in earnest.

Key Related Ideas

• Affinity Fund Provider: Affinity fund providers are philanthropic entities that provide donor-advised funds to very specific causes such as religious beliefs, environmental advocacy, and cultural engagement.  The National Christian Foundation and the Jewish Federation are prominent examples of large affinity fund providers (Pierce 2014).

• Community Foundations: Community Foundations are philanthropic entities – officially categorized as public charities – that cover and serve a defined geographic region; raise money within the defined community while building a permanent resource to support the local nonprofit infrastructure; and maintain a board of local citizens who are tasked with maintaining the organization.  In addition, community foundations are expected to serve all citizens of a given region independent of race, religion, ethnicity, or political affiliation (Sacks 2014b).

• Educational Fund Provider: When discussing donor-advised funds, the term “educational fund providers” often refers to universities that provide donor-advised funds to alumni and other supporters of the institution.  In an educational setting, donor-advised funds are just one of a myriad of charitable options provided by universities.  Universities will frequently require that donor-advised funds award a significant portion of grants to institutional causes (Pierce 2014).

• National Fund Provider: National fund providers offer benefactors donor-advised funds that are not tied to a geographic region and can be distributed to any number of charities across the country (Pierce 2014). The national provider model was made popular by the philanthropic arms of investment firms – such as Fidelity Charitable Gift Fund or Vanguard Charitable Endowment Fund – but has recently been utilized by other sponsoring organization types like community foundations: Silicon Valley Community Foundation is a prominent example of one such organization (Pierce 2014).  

Important People Related to the Topic

• Barstow, William (n.d.): William Barstow – a former general manager at the Edison Electric Illuminating Company in Brooklyn, New York – is credited with creating the first official donor-advised fund with his wife Francoise in 1931.  William and Francoise created the fund through the New York Community Trust as a mechanism to support charitable organizations that provided access to technical education to underserved children (Florino 2015).

• Carson, Emmett (1959-Present): Emmet D. Carson, Ph.D. is the founding CEO and President of the Silicon Valley Community Foundation: the largest community foundation in the world and one of the foremost providers of donor-advised funds.  Dr. Carson is an eminent thought leader in the field of philanthropy and has previously held leadership positions at both the Ford Foundation and The Minneapolis Foundation (Silicon Valley Community Foundation).  

• Norley, Pamela (n.d.): Pamela Norley is the acting president of Fidelity Charitable: the largest provider of donor-advised funds in the world. Outside her role at Fidelity Charitable, Ms. Norley is an active member of the philanthropic community serving on the boards of such organizations as Points of Light, the Boston Ballet, and the Greater Boston Food Bank (Points of Light).

Related Nonprofit Organizations

• Fidelity Charitable was founded in 1991 as the philanthropic arm of Fidelity Investments, LLC and initiated the trend of traditional investment firms offering donor-advised funds to prospective benefactors.  Today, Fidelity Charitable is the largest sponsoring organization of donor-advised funds in the world and has given away over 24 billion dollars to charity since its founding (https://www.fidelitycharitable.org/).

• National Christian Foundation was founded in 1982 as an affinity donor-advised fund sponsor specializing in charitable gifts oriented towards biblically based causes and organizations.  Today, the National Christian Foundation is one of the ten largest providers of donor advised funds in the world and continues to see rapid growth in the amount of assets under management (https://www.ncfgiving.com/).

• Silicon Valley Community Foundation was founded in 2007 as both a traditional community foundation and a national provider of donor-advised funds.  In 2016, the Silicon Valley Community Foundation – with over 7.3 billion dollars under management – was the largest community foundation in the world in addition to maintaining a status of one of the ten largest providers of donor-advised funds (http://www.siliconvalleycf.org/).

Reflection Question - Given the growing influence and subsequent controversy of donor advised funds, should legislation be considered that would ensure a certain percentage of a fund’s assets are allocated in a given year?

Bibliography

• "Board Members." Points of Light. http://www.pointsoflight.org/people/board-members/pamela-norley.
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• Florino, Joanne. "Giving Made Easy." Philanthropy, Spring 2015, 30-35.
• "Highlights: An Overview of Giving in 2015." Giving USA. June 13, 2016. http://givingusa.org/giving-usa-2016/.
• Lindsay, Drew, Peter Olsen-Phillips, and Eden Stiffman. "Fidelity Overtakes United Way as New Charity Champion." The Chronicle of Philanthropy. October 27, 2016. 
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• Pierce, Benjamin. "Understanding the Differences among Donor-advised Funds: Structure Influences Philosophy." Vanguard Charitable. June 18, 2014.
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• "Who We Are." Silicon Valley Community Foundation. http://www.siliconvalleycf.org/emmett-d-carson-phd.
• Zinsmeister, Karl. "Major Achievements: Public Policy Reform." In The Almanac of American Philanthropy, 812-917. Washington, DC: Philanthropy Roundtable, 2016.
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This paper was developed by students taking a Philanthropic Studies course taught at the Lilly Family School of Philanthropy at Indiana University in 2017. It is offered by Learning To Give and the Center on Philanthropy at Indiana University.