The financial crisis has made the popular donor-advised fund an attractive alternative to the venerable private foundation. "When the market beat up the asset values in foundations, people really began to look at their cost and how much time they require," says Kimberly Wright-Violich, president of Schwab Charitable, the donor-advised fund sponsored by the house that Chuck built.
The average foundation's assets dwindled 28% in 2008, according to the Council on Foundations, a non-profit association in Arlington, Va. It is now less palatable to pay foundation expenses such as the annual federal excise tax on investment income, accounting fees to have IRS Form 990-PF prepared, staff salaries and other costs.
Moreover, explains Wright-Violich, "in this environment many people can't devote the time they once did to charitable activities. They're having to spend a lot more time running their companies or managing their investments."
These vectors have led to record levels of conversions from foundations at Schwab Charitable. Ditto at Fidelity Charitable Gift Fund, the donor-advised entry from Fidelity Investments that has quietly grown into America's third-largest charity, behind United Way and the Salvation Army.
Whether your client should abandon his private foundation for a donor-advised fund, or utilize one instead of a foundation in the first place, is driven by his objectives, says Pittsburgh advisor Chris Roe. "Understand all the reasons why the client wants to give to charity and address it on that front. Know thy client," advises Roe, senior wealth counselor at Waldron Wealth Management, an independent LPL Financial affiliate. It really comes down to understanding the benefits each vehicle can yield the client.
A donor-advised fund is an account established at a sponsoring charity. The donor contributes cash, securities or other assets to the giving account, then recommends which charitable organizations should receive distributions out of it. Though the donors cannot by law dictate themselves where the money goes, their recommendations are denied only when implementing them would violate regulations. The sponsoring charity handles all due diligence, tax filing, compliance and administration.
"All donor-advised funds are independent non-profits," explains Wright-Violich. Some are sponsored by financial-services concerns. Others are administered by community foundations. Both genres evolved their offerings considerably in the '00 decade. Today, for example, advisors can manage the client's donor-advised fund assets, possibly without being restricted to the sponsor's investment products.
That said, donor-advised funds vary widely in their features, in the size of client that's eligible for special features and in cost. For instance, the minimum asset requirement for an advisor-managed giving account can be anywhere from $250,000 to $1 million, observes Tim Freundlich, a Calvert Foundation senior vice president. You'll have to canvass the marketplace to determine whether there's a product that meets your client's needs.
The Advantages Of Donor-Advised Funds
Giving accounts cost less than foundations and thus stretch the client's charitable dollars. There is no excise tax or costly return to file, just a modest annual administration charge. One family now pays Schwab Charitable 22 basis points after transitioning its $12 million foundation, which had had a small staff and annual expenses of roughly 120 basis points. Depending on the complexity of a foundation's administrative needs, the Fidelity Charitable Gift Fund indicates that potential savings can range from 20% to 50% annually on administrative and investment expenses, according to its president, Sarah Libbey.
Simplicity is perhaps equally attractive. The sponsoring charity handles everything. The donor avoids dull administrative chores and wrestling with the cobweb of regulations that governs private foundations. With some of today's donor-advised funds, clients can simply go online to view their account balances, analyze their giving and research charities, in addition to recommending grants. "They've made it pretty easy for people," says John Poulton, head of the Strategic Advisory Group at Brown Advisory in Baltimore.