How Donor Advised Funds are Changing the Giving Industry

Donor advised funds are making the news. An October 3, 2018, Bloomberg article chronicles their rise. More than half of the top ten charities in the country are donor advised fund sponsors. It is now an industry eclipsing more than $85 billion in assets.

The industry has added commercial players like Fidelity, Vanguard and Schwab. Critics contend that these commercial players’ motives are less charitable and more about fees to manage assets. Some even contend that donor advised funds are about stockpiling assets.

But in reality, the majority of donor advised fund entities are community foundations or faith-based entities with no commercial motive. They are focused on community good or doing good in general, not money management.
By comparison, the private foundation world represents $800 billion in assets compared to the $85 billion in donor advised funds. Private foundations only require a minimum distribution of 5% annually. In contrast, the National Philanthropic Trust in its 2017 report on donor advised funds noted that donor advised funds on average distribute 20% of their assets each year—far beyond what private foundations are required to do.

Further, in 1998, the IRS paved the way for S corporations to donate shares to public charities. Prior to that enactment, the majority of contributions were in the form of cash or publicly traded stock. By opening the door for closely held stock to be contributed, the IRS essentially acknowledged the need to tap into one of America’s vast storehouses of wealth.

The majority of corporations in the country are closely held. With the aging of the Boomer generation, many of those corporations are for sale. By allowing for the donation of closely held corporations to public charities an entire new stream of charitable giving is being opened up.

Donor advised funds have been the leaders in receiving and monetizing those gifts. As their payout rates of 20% attest, the money doesn’t just sit in waiting.

In the coming years, as more and more corporations sell, donor advised funds will continue to be the leader in charitable giving.