When Eaton Vance created its U.S. Charitable Gift Trust last year, it knew it had to do more than educate clients about how such a donor-advised fund can simplify the charitable gift-giving process.

The other cog in the project was convincing advisors to utilize such a fund for their clients. Considering that Eaton Vance works with advisors and brokers who largely are paid on commission and have had limited, if any, involvement in their clients' gift-giving, that could be viewed as a tough sell.

But John Vaughan, managing director of Eaton Vance's Alternative Investment Group, says the message is sinking in gradually. Since it launched it in the third quarter of 2000, its donor-advised fund has grown to $130 million in assets and 100 donors.

"I think it's a multifold incentive," Vaughan says of why advisors should be interested in donor-advised funds such as the U.S. Charitable Gift Trust. "One is that they're able to diversify their business from stocks and bonds into the area of planned giving, which is burgeoning."

It also adds another dimension to the relationship between advisors and clients-one that clients may not have realized was possible. "They're able to present themselves to their clients in a sophisticated and meaningful way ... It rounds out their relationships."

The growth of donor-advised funds, led largely by Fidelity Investments, has exploded over the past five to six years. Simply put, such a vehicle is a tax-exempt public charity in which money is managed in a similar fashion to a retail mutual fund. Money put into a donor-advised fund is considered a charity donation that can be claimed as an immediate income tax deduction. The contributor does exert some control over how the funds are used after the donation is made by recommending the groups that will receive the money-a request that is virtually guaranteed to be granted unless there is a problem with an organization's charitable status. Donors also can specify the time frame over which the donations are made, pick from among several ways in which the money is invested and can designate successors to oversee the fund after they pass on.

For clients used to writing out checks to their favorite charities, donor-advised funds simplify the process and provide a lump-sum tax deduction for donations that otherwise may have required tax deductions over a span of several years.

"The main benefit is for people who want to take a sort of gradual and deliberative approach," says Gregory Jones, director of philanthropic services for the National Philanthropic Trust in Jenkintown, Pa. "They can get their tax deduction all in one year but spread out their giving."

Unlike forming a private foundation, a donor-advised fund has no startup costs, excise taxes or annual tax-reporting requirements. Deductions for cash gifts can be up to 50% of adjusted gross income, and the deduction for appreciated assets up to 30%. The deductions for cash and assets given to private foundations are 30% and 20%, respectively. But private foundations offer donors more direct control of how funds are managed and donated.

"I think the key issue is control," says Janne Gallagher, deputy general counsel for the Council on Foundations. "A donor-advised fund obviously offers tremendous efficiencies. But donors do have to give up some control, since the entity is housed in a public charity."

That's why private foundations typically are more suited to people planning to donate large sums. "Donor-advised funds are the best route for those with relatively small amounts to donate," Gallagher says.

They're also soaring in popularity as investors try to find something to do with highly appreciated assets from the booming 1990s. From 1995 to 1999, the amount of assets in donor-advised funds grew from $2.4 billion to $7.5 billion, according to a survey by The Chronicle of Philanthropy. The number of individual accounts grew from 16,242 to 36,308 during that time.

Another aspect of this growth has been the rush by mutual fund companies to move into the donor-advised fund market.

Donor-advised funds actually have been available for decades. But up until the early 1990s, individuals would have had to start one with a community foundation that funded local and regional organizations. That started to change in 1992, when Fidelity launched its Charitable Gift Fund-a donor-advised fund that has since grown into the nation's fifth-largest public charity and top grant-giver. Assets in the fund currently stand at about $2.6 billion.

Fidelity's fund and the heavy marketing that came with its launch put donor-advised funds on the map, observers say, and soon, other companies offering mutual funds followed, including Vanguard, Charles Schwab, Oppenheimer and Eaton Vance.

"The national services are shifting a lot of money to these donor-advised funds," says Eileen Heisman, president of the National Philanthropic Trust, which runs donor-advised funds in partnership with JP Morgan, Legg Mason and Credit Suisse First Boston.

The marketing muscle these companies provide actually has benefited philanthropy, says Jeffrey Daniher, an advisor who has several clients either using or considering donor-advised funds. "People have always thought, 'Gosh, I have to have a lot of money to give to a foundation,'" he says, noting that some funds require a minimum donation of as low as $5,000. "I believe Fidelity has actually helped dispel this."

Along with increasing the visibility of donor-advised funds, the new layer of national players has created more choices for clients-and their advisors. And the reason advisors need to take notice, and maybe get used to a new way of thinking, is that these choices aren't always centered on investment style and rate of return. Quite often, the choice centers on the many intangibles that underlie why a person gives away money in the first place, some advisors say.

Daniher, of Ritter Daniher Financial Advisory LLC in Cincinnati, says he started his own advisor fund with the Greater Cincinnati Foundation to support local nonprofits. "I decided to put my money where my mouth is," he says. "Supporting the local community is important to me."

Advisors who use donor-advised funds say that before they recommend them to clients, they first establish that a client has charitable intent. The reason: The tax breaks offered by a donor-advised fund are, by themselves, are probably not worthwhile but charitable giving can be abused by someone with delusions of huge deductions. "A donor-advised fund is a hard sell if no one has charitable intent," Daniher says.

That's one reason many in the donor-advised fund industry feel that the upcoming reductions in estate taxes won't have much impact on philanthropy. Another reason is that income tax deductions will continue to be a benefit even if the death tax is repealed permanently.

"Donor-advised funds have a strong focus around living giving," says Cynthia Egan, president of the Fidelity Charitable Gift Fund. "Most of our donors are really operating around current income tax challenges."

William Baldwin, president of Pillar Financial Advisors in Waltham, Mass., describes two typical situations in which clients use donor-advised funds. "The first thing is when someone with not enough money or assets to start a foundation, or who has appreciated stock, would like to contribute," he says. Donor-advised funds are ideal for someone with appreciated stock because the stock can be transferred to the fund, where it can either be sold immediately or held in hopes of further appreciation. Plus, all capital gains become free of taxation.

This becomes a significant factor if a donor plans on using the appreciated stock to make gifts to charities. By using the fund, the donor doesn't have to sell the stock, pay capital gains and then make payments to each charity. The fund provides a tax-exempt shield and takes care of all the payments, Baldwin says. "It's impractical to give stock on a $500 or $250 gift," he says. "Now they can simply do it all at once and get it out of the way."

Another common situation occurs when a client gives money to charities every year, but not enough for a foundation. For someone who, for example, donates $10,000 annually to charity, a donor-advised fund allows for multiyear planning and provides an instant lump-sum deduction.

"It lets you pre-fund the next couple of years of charitable giving," Baldwin says. "By doing that, they get essentially an interest-free loan of tax money."

Choosing a community foundation or a mutual fund company for a donor-advised fund can be a personal decision. Sometimes the determining factor is how much a donor trusts a national mutual fund company versus a local foundation, says Bruce Berno of Berno Financial Management in Cincinnati. While some donors name family members to take over a donor-advised fund after their death, some will leave the fund in the hands of a fund's board of directors. Funds often address this by asking donors to name substitute charities or general areas of interest to guide the giving of their money after they die.

If the focus is on local charities, a donor may be more comfortable with a community foundation, and its familiarity with local charities, than with a national mutual fund company. "I think the big difference is, in the future, who has the better gift-giving ability," Berno says. "A community foundation knows the local organizations and knows who's good at running a homeless shelter."