Give, Wisely

No one need be extremely wealthy anymore to participate in charitable giving through donor advised funds (DAFs), but they can be, and some participants have endowed their DAFs with enough assets to easily support a foundation. Yet donor advised funds have become so easy to use, so liberal in what they accept as donated assets, and so great at helping donors vet organizations they’d like to gift to, that it’s tempting to abandon the idea of a foundation altogether. Overall donor advised fund assets increased from $15.9 billion in 2005 to $19.2 billion for 2006, according to a May 2007 article by Noelle Barton and Peter Panepento in The Chronicle of Philanthropy.

These funds now run the gamut, from initial donations as low as $5,000 to accounts with tens, or even hundreds, of millions of dollars. Private foundations may be the right choice for some clients, but for many others, the ease of setting up a DAF, higher deduction limits, and the fact that foundations must file a tax return, disclose all grants in public documents, and pay an excise tax of up to 2% of income, can make a DAF a very desirable option.

Clients and advisors may find funding a DAF account easier than they realized, because the types of assets that can be used are surprisingly broad. That means that publicly traded securities and cash aren’t the only ways to fund a DAF anymore–so if it is in the client’s best interest to donate that Renoir painting, or the emerald necklace she inherited from her grandmother, or her ownership share in the Knicks, chances are good there’s a major DAF sponsor that can accommodate that gift, bring in the experts to evaluate it, and liquidate it. That sort of turnkey service can give clients the advantages of scale and expertise in dealing with unusual assets, a bigger tax deduction by donating the appreciated asset rather than liquidating it first and donating the proceeds, and assets under management by the advisor can stay intact, or grow if the advisor and client elect to have the advisor manage the converted assets in the DAF, something that’s possible at several big sponsors.

Advice is one of the important drivers for DAFs. David Giunta, president of Boston-based Fidelity Charitable Gift Fund, by far the largest DAF with a total of $10.1 billion donated since the fund began in 1991, says he sees many donors who have spoken to “either an advisor or a planner somewhere in the process, and we’re seeing that percentage grow.” He adds that clients are inclined to speak to advisors about making charitable gifts as part of their overall plan, and advisors are getting more “comfortable engaging clients in those type of philanthropic conversations.” Though minimum amounts vary, at many of the largest DAF providers advisors can manage the assets in the DAFs of their larger clients, if they so choose. That way, the assets are donated, the tax deduction is triggered, and assets in the DAF can be granted to qualified charities by the donor in planned, strategic ways, while the remaining assets stay under the advisor’s management.

“Unlike a private foundation where you have to hire an attorney and set up an independent, nonprofit corporation,” says Kim Wright-Violich, president of Schwab Charitable, in San Francisco, “the client and the advisor select the assets they want to fund the account, they transfer those, probably appreciated securities–that’s the most likely asset,” to the charitable account, “fill out two or three pages of an open-account form, and you are done.” When those assets “hit the books” of the DAF, “that triggers a charitable deduction,” says Wright-Violich.

Grants out of the newly formed DAF account can be made immediately after the assets clear. Remaining assets are invested in a broad array of mutual fund portfolios, or investment pools, and growth is “tax free” in DAFs, according to Ann Boyce, president of the T. Rowe Price Program for Charitable Giving, in Baltimore. With that tax-free growth, grants made over a period of years could exceed the donations into the DAF.

Fidelity Charitable Gift Program

Of the total $10.1 billion donated into Fidelity’s Gift Fund, more than $7.4 billion has been granted out to 501(c)(3) charities since inception, including $950 million in grants made last year. On average, the fund grants about 27% of total assets annually, and the average grant is $4,200. Over the past three years, the Gift Fund has made an average of 190,000 grants each year, and they “expect to process more than 250,000 grants in 2007,” says Fidelity spokeswoman Jennifer Engle.

In addition to publicly traded, appreciated securities, and cash, the Gift Fund can also take non-public assets such as C-Corporations, S-Corporations, or limited partnerships. “This year, about 77% of our overall contributions are coming in the form of non-cash assets,” says Giunta. Remember: all donations used to establish DAFs are irrevocable.

The minimum required to establish a DAF at Gift Fund is $5,000. Donors can select from 13 investment pools, three asset allocation pools, and three index pools. “Some of them have just Fidelity funds in them and some of them have Fidelity and non-Fidelity funds mixed in together,” says Giunta. “For higher balance accounts we have a Charitable Investment Advisor Program,” he explains. “Donors who give $1 million or more can recommend a registered investment advisor to manage the balance in the account,” he says. “Charitable Gift Fund will conduct a due diligence process, and if everything goes well, we’ll hire that RIA to manage that balance.”

Vanguard Charitable Endowment Program

Vanguard’s Charitable Endowment Program celebrates its first decade on December 8, Benjamin Pierce, the executive director of the Valley Forge, Pennsylvania-based program, proudly declares. Over those ten years, donors have funded the program with $2.8 billion in assets, and granted out $1.4 billion, including $370 million in the fiscal year ended June 30. The program has $1.7 billion in assets remaining. Vanguard Charitable’s focus is on “personalized service…low fees…and transparency,” Pierce says.

Pierce tries to keep the special value of a DAF in front of advisors, with ideas to help them “look smart with their clients.” IRAs are a good example, from an estate planning point of view. When a person dies, “60% to 70% of that IRA is going to end up in Uncle Sam’s coffers unless the client does something about that,” he says. “If they give it to donor advised fund, then those funds come out of the estate, it all goes to the donor advised fund, the client’s family members become the advisors to that account [directing gifts and investments], and they can be really good philanthropists. It’s a very tax effective solution and it continues a family legacy.”

Schwab Charitable Fund

While appreciated securities “represent more than 70% of all contributions,” says Wright-Violich, Schwab will take other kinds of assets, too. “You can use almost any asset. If the market value is hard to determine, it’s more complex to give, and if it’s something you can move physically–a piece of artwork, a horse, a yacht–it gets even more complicated.” When someone donates “an asset that is difficult to value,” the fund uses “experts that specialize in that kind of asset liquidation and valuation. They’re pretty inexpensive but they do charge a fee for that.” The most unusual donation Schwab Charitable has received to fund a DAF is “a piece of the Vikings [NFL pro] football team,” says Wright-Violich, with a chuckle. Schwab Charitable has accepted artwork, a seat on the New York Mercantile Exchange, and other unusual assets.