Growing Assets and Concerns

Proposed rules could hurt popularity of advised funds

Spurred by a rising stock market, donor-advised funds grew rapidly for the second straight year in 2004,

according to The Chronicle’s sixth annual survey of gift funds. But dark clouds loom over the funds — one of the fastest-growing segments of philanthropy — as the stock market has fallen sharply in recent weeks and members of Congress are considering new rules that some nonprofit officials worry could reduce the popularity of the funds.

Assets of donor-advised funds at the 88 organizations that provided figures for both 2003 and 2004 to The Chronicle grew by a median of nearly 15 percent last year, meaning that the value of half of the funds increased more than that and half climbed less or decreased. The organizations that participated in the survey collectively held $13-billion in assets and distributed $2.6-billion to charities.

More than two-thirds of those organizations reported double- or triple-digit percentage increases in the money they accumulated during their fiscal 2004 year. Leading the way were the two largest, the Fidelity Charitable Gift Fund, in Boston, and the Vanguard Charitable Endowment Program, in Malvern, Pa., which together took in $500-million more last year than in 2003.

Donor-advised funds allow people to donate cash, stock, or other assets to special accounts, claim a tax deduction for the gifts, and recommend how, when, and to which charities money in the accounts should be distributed. The funds are offered primarily by community foundations and financial companies, but other charities also offer the accounts.

Few Groups Saw a Decline in Giving

Assets of donor-advised funds rose at most organizations in the survey, but nine groups saw a decline from fiscal 2003 to 2004. Officials at East Tennessee Foundation, in Knoxville, with the largest decrease, at 15.6 percent, said 2004 was an unusually busy grant-making year for the foundation, which now has about $30-million in donor-advised funds. One donor distributed $6-million last year, foundation officials said. In New York, assets decreased slightly at the Jewish Communal Fund, whose 2,011 donors give money to support organizations that focus on health, education, social services, the environment, religion, and the arts. Officials at the fund attributed the decline to investments that fared poorly.

But steady stock-market gains and aggressive marketing efforts at several commercial and other donor-advised funds helped persuade donors to set up more than 7,000 new accounts last year at the for-profit companies, community foundations, religious organizations, and other groups that provided data to The Chronicle.

The community foundations in the survey were selected from the 50 organizations that raised the most in 2003, based on an annual study conducted by the Columbus Foundation, in Ohio. More than 100 other commercial funds and other organizations that offer donor-advised funds were asked to participate in the survey.

80,000 Funds

More than 80,000 donor-advised funds are held by the organizations in The Chronicle’s survey — and many charity officials say that number has continued to grow in recent months.

Part of the appeal of donor-advised accounts — they are easy to set up, flexible to use, and not regulated by state or federal governments — has led to their increased popularity over the past decade. And many wealthy people use donor-advised funds in much the same way they would private foundations — to help organize their philanthropy, teach their children how to give to charity, and build what they view as their legacy.

But a lack of government oversight has contributed to allegations that some funds are not being used entirely for charitable purposes.

In two hearings during the past year, members of the Senate Finance Committee have heard testimony from Internal Revenue Service officials who contend that some people are using their accounts to pay for personal expenses, including first-class travel and college tuition for members of their families. This month, Mark W. Everson, commissioner of the Internal Revenue Service, sent the Senate Finance Committee a letter in which he described how some people who claim a tax deduction for charitable contributions they make to their donor-advised funds fail to distribute much or any of the money.

To prevent that and other problems from occurring, some members of Congress have proposed that donor-advised funds be required to distribute at least 5 percent of their assets every year to charities, in the same way that private foundations must.

Many donor-advised accounts already give considerably more than that. The Chronicle’s survey found that donors distributed a median 15.8 percent of their assets to charities last year — leading some nonprofit officials to complain that the government should not interfere where there is no proof of widespread abuse.

“I’m anxious about any kind of legislation because very often there is a lofty aim and an unfortunate result,” says Bob Edgar, vice president of donor relations at the New York Community Trust, in New York City, which has $631.1-million in donor-advised funds. “I’m not sure how broken the system is and how much we need to fix it.”

No Payout Requirement

With no government rules for donor-advised funds, groups that offer such accounts have the freedom to decide whether to require donors to distribute a minimum amount to charities every year. Many organizations require that the aggregate amount distributed to charities for all funds combined must be more than 5 percent of the total assets of all funds.

Other groups apply guidelines that govern individual account holders. At the Jewish Federation/Jewish United Fund of Metropolitan Chicago, the interest each fund earns on its assets must be awarded in the year it is earned.

Officials at U.S. Charitable Gift Trust, in Wilmington, Del., and the Rotary Foundation, in Evanston, Ill., require each account to distribute at least 5 percent of assets every year.

And if donors at the Jewish Communal Fund, in New York, fail to recommend grants over a five-year stretch, 5 percent of their account’s assets (based on the amount accumulated over the past five years) are transferred to the fund’s special gift fund to be distributed to charities chosen by the communal fund’s board. But because no donors have failed to give in five years, the charity has never had to use that approach, says Susan Dickman, executive vice president of the communal fund.

Officials at several organizations say it would be a problem for donors if Congress were to require them to give away a certain minimum amount.

Donors might want to delay giving so they can accumulate enough money to make a big contribution to a capital campaign, or they might believe their money is more likely to be needed by charities in the future than today, say nonprofit officials.

That is part of the philosophy at the Saint Paul Foundation, the Central Indiana Community Foundation, in Indianapolis, and the Norfolk Foundation, in Virginia. Those organizations treat many of their donor-advised funds like endowments.

Last year, the Norfolk Foundation’s donor-advised assets climbed 11 percent, to $39.4-million. But in part because the organization recently reduced to 4.5 percent from 5 percent the amount that donors are permitted to give to charity annually from the assets of their funds, the foundation’s donor-advised accounts gave 2.4 percent less to charity last year than they did in 2003, according to Angelica D. Light, the foundation’s president.

“Our goal is to maintain the spending power of those endowments,” Ms. Light says. “We’re not reducing the payout number to sit on the money. We’re trying to preserve the principal so future generations have it to use.”

Several Proposals

The possibility of payout requirements has not disturbed officials as much as a proposal lawmakers are considering that could limit the types of contributions that people make to their donor-advised funds or to any other kind of charitable organization.

Congress’s Joint Committee on Taxation has suggested that lawmakers reduce the deduction donors can take for noncash gifts to the amount they own outright. Now, donors are permitted to write off the fair market value of an item — often a much higher figure.

Many people donate land, real estate, artwork, and other noncash goods to their donor-advised funds. Lawmakers say they are concerned donors are deducting far more on their taxes for such gifts than the donations are worth.

But charity officials say that such abuses are not widespread — and new limits could lead many people to stop making big donations.

In some parts of California, where housing prices have more than doubled in the past five years, real estate represents a significant asset for many people, says Ash McNeely, vice president of philanthropic services at the Peninsula Community Foundation, in San Mateo, Calif. Last year, the assets in the foundation’s donor-advised funds grew by nearly 8 percent, to $370.6-million, and many of the largest gifts to those funds were contributions of undeveloped land and commercial real estate.

“We’re extremely concerned about the notion that gifts of real property would be restricted in any way,” she says. “We’re dismayed that that should even be considered.”

Even groups that do not depend heavily on real estate, artwork, or other such gifts are worried. Says Whitney Ball, executive director of Donors Trust, in Alexandria, Va., which receives mostly cash and stock gifts for its fund, now worth $37.7-million: “I worry that if you restrict giving real estate, it’s going to hurt philanthropy.”

No Legal Definition

While many officials who oversee donor-advised funds express concerns about potential new federal restrictions, others believe that any Congressional move to legally define donor-advised funds will only help legitimize their existence and encourage them to grow, says Benjamin R. Pierce, executive director of the Vanguard Charitable Endowment Program, which is operated by the Vanguard mutual-fund company.

No legal definition of donor-advised funds exists, nonprofit tax lawyers say. The Internal Revenue Service either approves or denies new donor-advised funds based on a set of ruling standards it has established.

“My hope is that, if, in fact, legislation does get enacted, it will be an incredible boon to donor-advised funds,” Mr. Pierce says. Vanguard’s program brought in 46.6 percent more money in 2004 than in the previous year — helping it jump to No. 2 in the survey, behind Fidelity. Vanguard, which had $695.5-million in charitable assets in 2004, attributes the increase in part to the 618 new accounts the company added last year and to the fast-growing stock market over the past few years. Mr. Pierce also believes that the total size of the fund is helping it attract larger gifts than it did in the past.

A bull market and the addition of 1,381 accounts helped Fidelity, the biggest donor-advised fund in the United States, gain even more distance on its nearest competitor. During the 2004 fiscal year, Fidelity’s assets climbed 11.7 percent, or more than $280-million, to $2.7-billion.

Part of the reason for the increase in Fidelity’s fund was the rising stock market in 2003. Donor-advised funds rely heavily on gifts of appreciated stock, which can create a boon to gift funds when economic conditions are healthy. But when the stock market declines, as it has recently, and individuals have fewer appreciated assets to give to charity, gifts to donor-advised funds often go down.

Jon J. Skillman, president of the Fidelity fund, estimates that at the present rate of growth, the number of accounts at his company will double in the next five years. Already, the company has about 33,000 accounts, representing 40 percent of the total in The Chronicle’s survey.

Fidelity’s donors are also among the most generous to charities. Fidelity accounts for one-third, or $693-million, of the amount that donor-advised funds in The Chronicle’s survey gave to charity last year. In January, just after the tsunamis struck South Asia, 17 percent of the grants — or $11-million — that Fidelity’s donors made from their funds were earmarked for relief efforts. “The fact that those assets are available to people allows them to be spontaneous and to give in a very meaningful way,” Mr. Skillman says.

The flexibility of donor-advised funds has also helped other individuals and organizations do work they say they could not have done as easily without the accounts.

The John S. and James L. Knight Foundation, in Miami, plans to make the final payments this year on a five-year, $50-million contribution to donor-advised funds the foundation set up at 26 community foundations across the country. The grants are designed to help community foundations make small grants that the Knight Foundation otherwise might not have the time or expertise to do, says Katherine T. Loflin, a Knight Foundation program officer.

Knight made the grants primarily to community foundations in the cities where the Knight Ridder newspaper chain operates.

The Blue Grass Community Foundation, in Lexington, Ky., which has received $1.5-million from the Knight Foundation, is using some of the money to help pay for a series of discussions designed to improve race relations in the city where the Lexington Herald-Leader newspaper is published. Last year, the newspaper apologized to its readers for ignoring the civil-rights struggles during the 1960s.

‘Scratched the Surface’

Despite worries from some fund officials that proposed new rules could make donor-advised accounts more confusing and less flexible tools to help charities, many nonprofit officials remain optimistic that they will continue to grow in popularity.

David Wills, president of the National Christian Foundation, in Atlanta, where donor-advised funds grew 18.9 percent last year, to $456.1-million, believes that Americans have plenty of money and other assets to give.

“We’re in an environment now where we’ve just scratched the surface. We rarely cross paths with others in this world,” he says. “It’ll be a great day when we actually start to saturate the market, when we start crossing paths. That just shows you how much potential there is still out there for the work we do.”