Getting Help with Your Giving
Two years ago, Bill and Connie Danko faced a looming tax bill from a mutual fund that no longer suited their portfolio, and which had ballooned with the bull market. So they decided to look into an idea Bill had seen in a newspaper ad: a donor-advised charitable fund on offer from mutual-fund giant Vanguard Group.
A donor-advised fund lets you give a gift of cash or an appreciated investment like stocks or mutual funds, take an immediate income tax deduction, and parcel out the money to your charities of choice. The more he looked into it, the more Danko liked it. The co-author of The Millionaire Next Door and chair of the marketing department at the State University of New York at Albany business school, Bill wanted to give to causes he believed in, but he also wanted to do so in an efficient way.
STRUCTURE. Another goal was to involve his three children, all in their early 20s, and get them in the habit of giving. He had looked into setting up a private foundation, but the paperwork seemed oppressive. He had always given directly to charity, but now he wanted something more structured, which would outlive him and Connie. The donor-advised fund was a way to do all that and get money to the hungry and homeless. Plus, "it's hassle-free," says Danko.
Danko is just one of thousands of charity-givers who have fueled a move into the philanthropic world by giant Wall Street investment houses. It began in 1992, when Fidelity Investments started a charity consisting of donor-advised funds that has grown into the second-largest charity in the U.S., according to the Chronicle of Philanthropy, with more than $2.3 billion in assets. In recent years, Charles Schwab, Vanguard, and other investment firms have followed suit. While 2001 figures aren't yet available, the funds continued to attract new donors this year despite the recession and slumping stock market. "These have been among the fastest-growing areas of giving," says Eugene Tempel, executive director of Indiana University's Center on Philanthropy.
Still, such funds aren't for everyone. Most have stiff minimum investments, typically $10,000. In addition, if you know the charities you want to support, you're better off just giving the money directly. That's because donor-advised funds charge administrative and management fees of around 1% to 2% of assets, which reduce the amount of your contribution. Another drawback: The Wall Street funds offer limited help in choosing which charities need your money. "We don't give a lot of advice," says Kim Wright-Violich, president of The Schwab Fund for Charitable Giving.
MERITS. Nonetheless, the funds' advantages can be significant. Donor-advised funds take care of all the paperwork. They also allow you to donate money now and get the tax break, then take as long as you want, even years, before deciding which charities to help. And a fund lets you donate anonymously if you choose to, thus avoiding subsequent dinnertime solicitations. The only restrictions: Donations must go to a philanthropy certified by the Internal Revenue Service, and the gift can't in any way benefit the donor.
The first donor-advised funds go back to the 1930s. They were an attempt to let people be active philanthropists during their lifetime, as opposed to leaving a sum to charity in their will. Until Fidelity came along, donor-advised funds had been largely the province of the nation's 400-odd local nonprofit community foundations. These groups, and national umbrella organizations such as the United Jewish Communities fund--the nation's No. 2 overseer of donor-advised funds--still account for 70% of the $10 billion in assets held by major donor-advised funds, according to the Chronicle of Philanthropy.
The funds really took off when the Wall Street firms put their marketing muscle behind the idea. Initially, many in the philanthropic world were concerned about the ethics of for-profit firms running nonprofit charitable funds. In fact, the Wall Street-backed funds aren't all that different from ones managed by foundations. Both charge an administrative fee to the donor, plus a second fee that goes to the money manager investing the balance in the donor's account. The Wall Street funds haven't charged more than their nonprofit brethren.
Nor have the Fidelity-type funds sat on their assets, as some had feared. Because fees are calculated as a percentage of the assets in the accounts, critics worried that managers would be tempted to hoard the money by discouraging donors from doling out the funds to charities. Federal law requires that only 5% of any nonprofit foundation's assets must be dispersed in any given year. But this concern has faded. Indeed, the Wall Street funds typically distribute 18% to 30% of their assets a year, vs. 5% or so by the average foundation fund, says Wright-Violich of the Schwab Fund.
Many have been won over as well by the belief that the Wall Street funds have attracted new money, rather than simply diverting donations that would have gone to charity anyway. By providing a service and taking away some of the hassles, the funds have stimulated people to give more than they otherwise would have, experts say.
In a recent study, Schwab found 57% of donors expected to give more to charities than they would have without the fund. Neil and Sandie Bernstein of Wayland, Mass., opened a donor-advised fund with Fidelity a few years ago to get the tax break on stock that had appreciated. They since have made contributions they may not otherwise have made. "It greases the wheels" by making donations easier, says Sandie. The higher philanthropic profile also has helped to attract donors to funds run by community foundations, universities, and other nonprofits.
Even so, for someone who wants convenience but has little idea what charities to support, a donor-advised fund run by a community trust might be a better idea. Unlike the Wall Street ones, most have full-time staff to assess the community's needs and the effectiveness of different charities. Either way, for those who don't know what charity to support, a donor-advised fund buys you some time. That's no small thing for the many Americans who wait until the last weeks of December to do their giving.
By Nanette Byrnes