After 2 Years of Tough Losses, Donor-Advised Funds Are Surging

Many donor-advised funds are back in growth mode after two years of bruising losses during the economic downturn—making them a potentially stronger source of funds for nonprofit groups seeking donations.

Seventeen groups, nearly all of which have a fiscal year that ends in June, said in response to a new Chronicle survey that gifts to their donor-advised funds had increased from the 2009 to 2010 fiscal years.

The Community Foundation of Louisville, in Ky., expected to conclude its best fiscal year ever in June with new gifts of approximately $40-million. The Schwab Charitable Fund expected about $900-million in new gifts when its fiscal year ended June 30, also its best year ever and 55 percent more than the fund took in during 2009. And the Fidelity Charitable Gift Fund, which raises more than any other charity in the United States except the United Way and the Salvation Army, received gifts worth $270-million during the first quarter of 2010. That is the best first quarter in its 19-year history and more than twice what it received during 2009’s first quarter.

Small Percentage Given

Donor-advised funds allow people to donate cash, stock, and other assets to special accounts, claim a charitable tax deduction on their federal income taxes, and then recommend how, when, and to which charities their money should be distributed. The funds are managed primarily by financial companies and community foundations, but other charities, such as Jewish federations and universities, also manage them.

While the growth in giving means more money is available in the funds to flow to charity, nonprofit groups might not see those dollars in the near future if donors follow the same pattern they did last year. In an analysis of giving at 97 funds, a median 16 percent was donated to charity, meaning half of the funds distributed more and half less. That is a significant decline from 2008, when the median percentage distributed was 22 percent. Despite the decline in 2009, donor-advised funds as a group still distribute far more of their assets annually than do large private foundations, which are required to give a minimum of 5 percent per year.

2009 Asset Drop

The asset losses during 2009 are starkly illustrated in the Chronicle’s survey, which is based on data provided by 100 of the nation’s biggest donor-advised funds. Total assets for the 97 organizations that provided two years of data dropped by 5 percent in 2009, on top of a 6-percent decline in 2008. The value of gifts to donor-advised funds dropped 30 percent in 2009, from $6.4-billion to $4.5-billion.

The year was especially challenging for those whose fiscal year ended in June 2009—just months after the worst bear market in two generations had abated. For example, the three largest funds—Fidelity, Schwab, and the Vanguard Charitable Endowment Program—each have a fiscal year that ends in June, and all three saw the number of new accounts opened drop by more than half in 2009.

Poised for ‘Explosion’?

Leaders of most donor-advised funds prefer to focus on the present rather than 2009.

The surge in donations to the funds this year marks an abrupt turnaround for community foundations and commercial funds, many of which were freezing salaries or laying off employees little more than a year ago.

National Philanthropic Trust, in Jenkintown, Pa., laid off four people—more than 15 percent of its staff—as its assets declined by 22 percent during the financial crisis. But by the end of 2009, the foundation had assets worth $780-million, eclipsing its for former high, set in 2007, by about $70-million.

“I was surprised,” says Eileen R. Heisman, National Philanthropic Trust’s president. “I thought that we would have had much more of a downturn than we did. Maybe we’re now poised for a big upward explosion.”

Saving on Expenses

One reason for the growth in assets is that an increasing number of private foundations are converting to donor-advised funds, or using donor-advised funds for a portion of their grant making. Executives at the funds say small private foundations often find they can save on expenses by converting to a donor-advised fund. Some foundations also use donor-advised funds for anonymous giving, which is difficult to do through a private foundation.

One third of Schwab Charitable Fund’s $900-million in new contributions in the 2010 fiscal year came from such conversions, or from very wealthy donors who weighed the creation of a private foundation before opening a donor-advised fund, according to Kim Wright-Violich, president of Schwab Charitable, in San Francisco. At Vanguard Charitable Endowment Program, in Malvern, Pa., 47 percent of the dollars that came in during May were from private foundations, says Benjamin Pierce, the fund’s executive director.

Mr. Pierce says he worries that the trend is slightly overstating the total amount of money that is newly available for charitable donations. “Some dollars can get counted twice,” he says. “It would be wonderful to be able to extract that and to know what are the truly new dollars.”

Levies on the Wealthy

Experts say many donors are waiting to make gifts until they have a clearer view of their tax situation. President Obama has announced plans to raise capital-gains taxes and income taxes on the wealthy.

Tax deductions on charitable gifts would probably offer greater savings if the gifts were made after such changes were enacted.

This is also the first year that wealthy individuals can convert traditional individual retirement accounts to Roth IRA’s, a move that many financial advisers are advocating. Such a conversion could result in a large tax bill unless it was offset by a deduction, such as a contribution to a donor-advised fund. Many providers of funds are advertising such a “charitable offset” strategy to their donors.

With so many tax factors to weigh—as well as the continued volatility in the stock market—more donors than usual are likely to put off decisions until December, says Sarah C. Libbey, president of Fidelity Charitable, in Boston.

“Donors are saying to themselves, ‘I’m going to wait until the last possible moment to make my decision,’” Ms. Libbey says.

Noelle Barton contributed to this article.

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