Donor Advised Funds Replacing Family Foundations: Less Control But Lower Costs?

by Robert I. Evans & Avrum D. Lapin

The new “economic reality” has impacted non-profits and donors in many ways. One of the little-discussed but very important aspects addresses how donors can pay for their generous pledges. A trend that has emerged within the past few months is a significant shifting of the ways donors satisfy their pledges.

Of course the most common method of paying for charitable gifts is by writing checks. Until very recently, some donors consistently and frequently used appreciated securities, thereby taking advantage of various tax benefits. With the stock market moving up and down, and the recession projected to last at least through 2009, appreciated securities are hardly the most often used giving or payment option. Other donors – especially some of the wealthiest members of the Jewish community – created (and funded) family foundations and used them to make significant charitable gifts.

But as we deal in the “new normal,” some Jewish donors are changing their thinking and charitable practices. Recently, The Wall Street Journal and a prominent financially-oriented web site reported that Fidelity Investments and its Charitable Gift Fund, the largest donor advised fund in the United States, has experienced a 43 percent increase in charitable foundations switching to donor advised funds. Vanguard Fund, too, reported that they converted twice as many foundations to donor advised funds in 2008 as 2007. These and other funds are now flush with $27 billion in assets and that figure is expected to rise in the next year.

There is no doubt that this approach resonates well with some donors for a number of practical reasons. One real perk in the eyes of donors is that donor advised funds, unlike their own family foundations, do not have to donate a mandatory percentage of their assets. The work of foundations is usually published in annual reports or placed on websites; there are concomitant expenses that require decision-making and oversight as well as staffing issues. Using donor advised funds allows donors to stay somewhat under the radar until the situation stabilizes and continues to sort out.

Most Jewish federations across North America have been offering the option of donor advised funds through their endowment programs for many years. While we do not have updated statistics, we have learned that many Jewish federations have experienced some of the same shifts that Fidelity has reported. And many federations have recently embarked on some aggressive marketing programs designed to attract the funds that they could manage and hopefully direct for Jewish priorities.

But what motivates donors is the chance to lower their direct costs, even though they give up some decision-making and oversight responsibilities.

There are some other drawbacks to converting a family foundation to a donor-advised fund. While having donations funneled through a donor advised fund instead of a family foundation may not be as prestigious as having one’s own foundation, donors do retain some options in controlling how their funds are managed and ultimately distributed. The thrust today, however, focuses on maximizing giving, reducing overhead, and continuing to support causes that are truly impactful.

Another note, too, regarding donor advised funds: recipient non-profits need to check with their accountants regarding how they can “book” pledges that are made by donors who may choose to pay through donor advised funds. DAF’s cannot make pledges and individuals who have these funds are only able to recommend to the funds that gifts be made. Formally, the trustees of the funds make the determination and the allocation of dollars. This may especially impact on organizations that are seeking multi-year gifts for specific campaigns.

We welcome donors responding with their stories about giving through donor advised funds as compared with their own family foundations and what has motivated their thinking with regard to either (or another) approach. But regardless of which avenue donors take, non-profits across the globe may see a major change in the coming months as they start receiving more and more checks from donor advised funds and fewer from family foundations.

(Final and optimistic thought: hopefully again we will see appreciated securities as a useful method, too, for donors to satisfy their pledges!)

Robert I. Evans, Managing Director, and Avrum D. Lapin, Director, are principals of The EHL Consulting Group, of suburban Philadelphia, and are frequent contributors to EHL Consulting works with dozens of non-profits on fundraising, strategic planning, and non-profit business practices. Become a fan of The EHL Consulting Group on Facebook.