It’s all the rage in charitable giving -- and it’s actually got some charities worried.

Donor-advised funds — money that grows tax-free in individual accounts — are reshaping the landscape of U.S. philanthropy. After creating their account, donors choose how it’s invested, and the money compounds until they decide where to dole it out. DAF assets mushroomed to more than $85 billion at the end of 2016 from $30 billion in 2010.

Not everyone thinks that’s good news. Critics say the approach may slow the flow of money directly into nonprofits that serve the needy on a daily basis. Moreover, it injects charitable affiliates created by for-profit financial players such as Fidelity Investments and Charles Schwab deep into the big business of philanthropy -- a boon for them and their clients, but, some worry, not so clear a win for the causes.

The Salvation Army is grateful for DAF contributions, said Jeff Hesseltine, director of gift planning for the not-for-profit’s western territory. But “the best option is for donors to work directly with a Salvation Army fundraiser who can assess their charitable intent, decide on a giving strategy” and have gifts put to good use immediately.

The financial-service industry’s interest in giving is tied to a looming generational wealth transfer -- and a desire not to see assets walk out the door. (A common DAF marketing theme is the ability to leave a legacy of giving for heirs.)

The money in many of these accounts started out as highly appreciated, publicly traded stock and illiquid “complex assets” such as shares in closely held businesses, restricted stock, oil and gas royalties, and real estate interests. Then there’s the art, the cruise ship, the Bitcoin and bushels of wheat and soybeans DAFs have liquidated to fund accounts.

Huge Tax Bills
If the donor sold them, those assets could produce huge tax bills. If they’re donated to a DAF, they bring huge tax benefits and a bigger pool of charitable funds than if they’d been sold and the proceeds donated.

This tax-powered alchemy has been called “philanthropic fracking” — a way to tease out more dollars from rich people’s portfolios. Fidelity Charitable took in $1 billion last year in complex assets and will probably get another billion this year, said President Pam Norley. At Vanguard Charitable, more than 80 percent of 2017 contributions came from non-cash assets including securities, restricted stock and real estate.

DAFs offer advantages over private foundations. Donors who contribute privately held stock or real estate to their foundation must value it at cost basis -- likely to be low for depreciated property or businesses started in a garage. The income-tax deduction is capped at 20 percent of adjusted gross income (AGI), which can be carried forward five years.

No Capital Gains Tax
If instead that asset is contributed to a DAF, an appraiser determines its fair market value before it’s donated. That yields a bigger deduction, which can offset as much as 30 percent of AGI (and can also be carried forward five years). Since the DAF is a public charity, the donor pays no capital gains tax -- and neither does the DAF when it sells the asset.

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