Vanguard and Fidelity recently announced that they distributed a combined total of $4.2 billion dollars from donor advised funds. Donor advised funds have been around for a while but over the past few years have grown exponentially. We will examine just what is a donor advised fund and how organizations can deal with them.
A donor advised fund is an individual fund within a larger 501(c)(3) organization, which can distribute to any established 501(c)(3) organization. Schwab, Fidelity and Vanguard all have 501(c)(3) organizations which provide donor advised fund services.
Donor advised funds are a simpler alternative to a private foundation. Donor advised funds do not have any reporting requirements. Family foundations need to file a form 990 – PF, and larger foundations may require audited financial statements. The regulations are far more complicated for a family foundation.
The donor can contribute cash and a variety of other assets to the fund and take a charitable deduction at the time they contribute to the fund. They do not have to distribute the assets within the same calendar year.
The donor does not own the assets once they are contributed. The donor, and other individuals that the donor may name, become advisors who can advise the 501(c)(3) on how to distribute the money. While the larger organization does not have to follow the recommendations, they will, as a practical matter, do so unless it is something clearly illegal.
I mentioned earlier that donors can contribute a wide variety of assets to a donor advised fund. Assets can include life insurance, marketable securities, real estate, retirement funds and shares of a closely held business. The donor will need to be familiar with the agreement, which is usually a simple 1-2-page agreement, at the time they set up the fund.
Many commentators and organizations believe that donor advised funds need to be changed so that distributions are required, similar to the way private foundations must distribute 5% of their assets each year. They complain that donors can accumulate substantial assets in a fund and have no obligation to distribute them. It is true that there is no obligation to distribute the funds immediately but it is also true that a donor advised fund cannot last forever.
How can organizations handle soliciting contributions from a donor advised fund? The 501(c)(3) organization will not disclose the names of funds to organizations. Organizations that contributions from donor advised funds can do several things to help the situation:
First, they need to put on their website, on the donations page, that they accept contributions from donor advised funds.
Second, they can put into their solicitation materials, and especially into the response card, a sentence that says: I will advise my donor advised fund to distribute funds to your organization.
You should consider donor advised funds as a potential source of donations rather than a problem. Donor advised funds continue to grow and will likely grow more popular as time goes on.
If you have questions about donor advised funds, please give us a call.
