Donor Advised Funds

Contents

1. What the account is
2. How it grew
3. What the critics say
4. Bunching and the standard deduction

Among the Omaha causes Brent O’Mara supports are PlaySmart, Angels Among Us and Susan G. Komen, and a donor advised fund is one of the accounts through which gifts to causes like those now arrive. The scene is a December. A couple in their fifties has had a year unlike any other: a property sold, a bonus paid, income several times what it will be next year. They give to the same half dozen organizations every year and intend to keep doing so, but the tax year that would reward a large gift is this one, and they have no wish to hand five years of support to anyone in a single check. An adviser mentions an account. They open it before the thirty first, deduct the contribution, and over the following years recommend the same gifts they always made.

What the account is

The Internal Revenue Service defines a donor advised fund as a separately identified fund or account maintained and operated by a section 501(c)(3) organization called a sponsoring organization. Once the donor contributes, the sponsor has legal control; the donor, or the donor’s representative, keeps advisory privileges over how the money is distributed and invested.¹ The Council on Foundations traces the statutory definition to Section 4966 of the tax code, in place since the Pension Protection Act of 2006, and stresses the words owned and controlled: the donor gets a deduction precisely because ownership passes to the sponsor, which must apply everything it holds to charitable purposes and must tell donors in writing that it has sole legal control.²

Figure

Three ways to give the same money

1. 01
   Give directlyThe donor chooses the charities, gives, takes a deduction, and the money is gone. One and done.
2. 02
   Start a private foundationThe donor and a board keep full control and must give away 5 percent of assets a year, while reporting to the IRS, managing investments and writing checks.
3. 03
   Open a donor advised fundThe donor contributes to an account at a community foundation or a financial institution's charity, takes the deduction, and recommends grants while the sponsor does the paperwork.

Candid’s explainer puts the same idea in ordinary words: a fund the donor still has a say in, a way to make ongoing gifts to favorite charities without starting a foundation.³ The account can be opened at a community foundation, through a financial adviser or at the charitable arm of a large investment house, and the people who manage it invest the money, handle the grants and send the checks while consulting the donor about where the money should go.³ The deduction itself follows the rules described in the charitable deduction.

How it grew

The Economist called the rise of these funds a quiet revolution in American philanthropy: in 2010 roughly 180,000 funds held about $34 billion, and by 2015 more than 270,000 held almost $80 billion, with six of the twenty largest charities by public donations providing funds at scale.⁴ Candid reported that grants from the funds to charities reached an estimated $45.74 billion in 2021, a 28.2 percent increase over 2020.³

The 2017 tax law accelerated the trend. The Wall Street Journal reported that Americans poured money into the funds in the last weeks of 2017 to lock in deductions before giving became less advantageous for many households under the new law, choosing funds run by local nonprofits or affiliated with large money managers and then deciding later when and where to disburse.⁶ By 2021 the Journal was citing a Giving USA Foundation report that contributions to and grants from the funds continued to grow at impressive rates and were likely to play an even larger role in philanthropy.⁷ On the receiving end, an Indiana University survey found that 70 percent of nonprofits had received at least one such grant in three years, that organizations which asked for them received them at a higher rate, and that many small nonprofits lacked basic knowledge of how the funds work.⁸

Figure

The growth of the funds

funds in 2010, holding about $34 billion

180,000

funds in 2015, holding almost $80 billion

270,000

of America's largest charities by public donations that provided funds at scale

6 of 20

Where the money goes differs from giving as a whole. Giving USA researchers who classified three million grants from 87 sponsors found that 29 percent of fund dollars from 2014 to 2018 went to education and 14 percent to religion, almost the reverse of overall giving, in which religion drew 31 percent and education 14, with arts and public society benefit organizations also taking larger shares than usual.⁹ Fund grants represented an estimated 7 percent of all charitable giving in 2020, a share the researchers expected to keep rising.⁹

What the critics say

The objection is timing. The deduction is taken when the money goes in; nothing in federal law requires it to come out. Marketplace quoted a Boston College law professor: there is no time limit at all, so the money can stay in the fund for a decade, a century or many centuries, and even a small fraction can be granted while the donor has deducted the full amount.⁵ One large sponsor insists that donors grant some part of a fund within seven years, which is a house rule rather than a legal one.⁵ The Journal reported in 2021 that some lawmakers were proposing restrictions, and noted that certain tax breaks for giving do not apply to contributions to the funds at all.⁷ The funds also stand in contrast to private foundations, which are required to distribute 5 percent of their assets annually.

Bunching and the standard deduction

The mechanism that made the account popular after 2017 is bunching. Kiplinger walked through the arithmetic for 2026, when the standard deduction is $32,200 for a married couple: a couple that gives $15,000 a year and has $8,000 of other deductions falls short of that threshold and gets no tax benefit from its giving, but if it contributes three years of gifts, $45,000, to a fund in one year, its itemized deductions reach $53,000, and the charities still receive $15,000 in each of the three years.¹⁰ The same article notes that the account works best in a year of unusually high income, and that giving appreciated stock to the fund rather than cash avoids the capital gains tax on the sale, a point developed in gifts of appreciated assets.¹⁰ Whether a fund of this kind fits a family’s giving depends on a family’s circumstances, a matter to settle with qualified professionals in finance, tax and law. The way such accounts can draw children and grandchildren into giving decisions is taken up in family philanthropy.

Figure

Where fund grants went, 2014 to 2018, percent of dollars

• Education29
• Religion14
• Public society benefit13
• Arts and culture9

A short glossary. A sponsoring organization is the public charity that owns and administers the accounts. Advisory privileges are the donor’s right to recommend, but not to direct, grants and investments. A grant is a distribution from the fund to a working charity. Bunching is the practice of concentrating several years of gifts into one tax year to clear the standard deduction. A payout requirement is the legal minimum a private foundation must distribute each year, which donor advised funds do not have.