In the early part of this century,community foundations hit upon a way to meet several needs at once: the urge of people of means to share their plenty and leave a legacy, and the want of community groups that needed the monetary assets to accomplish their missions.
There are still thousands of such community trusts and foundations throughout the country, but a new, more efficient alternative has become popular: donor-advised funds. Like community foundations, these funds allow people with a charitable bent to gain a tax deduction in the present and to see that gift of cash or other valuables continue to fund the good works of nonprofit organizations. T. Rowe Price, Schwab, Vanguard, and Eaton Vance all run such funds, but the granddaddy of them all in tenure and size is Fidelity Investments. Cynthia Egan, president of the Fidelity Charitable Gift Fund, visited IA’s offices to talk to Senior Editor Cort Smith and Editor Jamie Green about philanthropy, donor-advised funds, and the Fidelity approach to charitable giving.
What was the genesis of the Fidelity Charitable Gift Fund? It came about because the Fidelity organization itself has a number of foundations and is very philanthropic, and the chairman of the Fidelity organization was very philanthropically involved. It was in the 1980s where he said, “We need to figure out something to get our investors more involved in charitable giving. Let’s take some of the concepts of pooling and scalability that we’ve learned with mutual funds, and figure out how we apply that to charitable giving.” The private foundations were examined carefully, but viewed as pretty cumbersome. Then the donor-advised fund was developed. In the early 1990s the IRS granted the determination letter and the national launch [of the fund] occurred in 1992. Since then, the fund has raised in excess of $4.2 billion, and we have given away in excess of $2.2 billion. We stand today at $2.7 billion in assets.
How does a donor-advised fund actually work? The donor would make an [irrevocable] contribution [of cash or securities] to the account. They receive their tax deduction, and their contribution can be invested in any of four investment options that we offer. The contribution can then grow tax free, and the donor has the ability to make recommendations at any point in the future against that account to qualified 501(c)3 public charities. It’s particularly applicable to folks if they’ve had a windfall, or appreciated securities, or if they are looking to move money out of an estate. There are no capital gains on contributions on appreciated securities. Donors can deduct up to 50% of adjusted gross income for cash and up to 30% for appreciated securities. That’s higher than you can [get with] a private foundation.
What’s the biggest advantage of these funds for donors, and advisors? What advisors are really pleased about is that it’s a great option, or supplement, to private foundations. Many of our donors [also] have a private foundation. They can have some increased tax advantages by coming to the donor-advised fund, and they don’t have the [2%] excise tax or the [5% annual] distribution requirements. They also can have complete anonymity.
It’s a great immediate solution for an income tax issue, or an estate tax issue, or for somebody who really wants to set up a charitable giving program. Administratively it’s very, very easy.
So it’s not just for people who don’t have enough money to start their own foundation? There are benefits to the donor-advised fund that you don’t get from a private foundation, and it’s flexible enough from the advisor’s viewpoint. It can run with you or without you, however you [want to] manage it with your client.
Donors can also name successors. So John and Mary Smith can name their children or grandchildren as successors to the account. They’re able to donate privately held securities, restricted stock, even contributions of real estate. We work to liquidate [the donation] as quickly as possible so the donor can get the tax deduction right at the point that they make the contribution. The proceeds are then placed into their accounts so they can make grant recommendations right away.