Flexibility of Donor-Advised Funds Spark Growth, Concern

Flexibility of Donor-Advised Funds Spark Growth, Concern

As donor-advised funds at financial firms such as Fidelity, Vanguard, and Schwab have grown in popularity in recent years, critics of the vehicles have begun to complain that they are being used by the wealthy to park their assets and avoid taxes, the Los Angeles Times reports.

Even as charitable giving overall has remained flat since the Great Recession, DAFs have experienced significant growth, receiving some $14 billion in contributions in 2012 alone, according to the National Philanthropic Trust. Indeed, the Fidelity Charitable Gift Fund, which was established in 1991 and pulled in some $3.3 billion in 2012, has surpassed the Salvation Army in annual contributions and is on track to becoming the nation's largest charitable fundraiser, replacing United Way Worldwide, which traces its roots to 1887, Chronicle of Philanthropy editor Stacy Palmer told the Times.

The funds allow donors to claim an immediate tax deduction on any assets they put into their account, even though they may not make a charitable gift from the account for months or even years. What's more, giving from a DAF is significantly easier than establishing a private foundation or giving directly to charity, in that donors aren't required to fill out paperwork for multiple contributions and can donate non-cash assets such as stock and property to their funds and avoid capital gains taxes if those assets appreciate in value and they donate the proceeds to charity. DAFs also give donors the flexibility to spread their giving out over time, allowing for "more informed and nuanced giving," said Schwab Charitable president Kim Laughton. "They are not having to rush into a decision," she added. "That is really helpful to people who want to give when they are ready."

Critics worry, however, that the rapid growth of DAFs is hurting other charities. The biggest concern, said Ray D. Madoff, a Boston College Law School professor and expert on estate issues, is that donations going into these funds are too often parked for long periods instead of going immediately to charities in need. To rectify the situation, Madoff suggests imposing a mandatory time limit on DAFs to distribute their funds to charity.

Meanwhile, United Way Worldwide sees DAFs more as allies than as adversaries, said Sherrie Brach, the charity's executive vice president of investor relations. "We are not competitors," said Brach. "The United Way is also a recipient of charitable dollars from donor-advised funds."