Growing Concerns and Assets

Donor-advised funds gain in popularity as economy softens

The struggling economy and the possibility of new Congressional regulations pose concerns to organizations

that offer donor-advised funds, one of the fastest-growing types of philanthropy.

Some organizations say they already see signs that donations have slowed, especially after the record surge in assets the funds achieved last year.

According to a new Chronicle survey, assets of 103 of the nation’s biggest donor-advised funds grew 25 percent in 2007, reaching $23.3-billion. Twenty-three organizations increased their assets by 30 percent or more.

The amount of money distributed to charities from donor-advised funds also jumped significantly last year, leaping 24 percent to $4.2-billion in 2007.

The median total amount awarded that year was $15.7-million, meaning that half the funds distributed more and half a smaller amount. The median increase in grants awarded by donor-advised funds was 24 percent, and the number of gifts from the funds grew to 646,600 in 2007, compared with 488,300 in 2006.

Donor-advised funds have long been rising more quickly than other forms of charitable giving. Assets of 47 organizations that have provided data to The Chronicle since 2003 grew from $7.6-billion in 2003 to $16.2-billion in 2007, and the median asset level nearly doubled, from $69.6-million in 2003 to $131.7-million in 2007.

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 the money in the account should be distributed. The funds are offered primarily by financial companies and community foundations, but other charities, such as Jewish federations and universities, also offer them.

Ominous Signs

At some of the nation’s biggest funds, signs that the economy — especially the rollercoaster stock market — could dampen years of growth are already apparent.

Fidelity Charitable Gift Fund, in Boston — the biggest fund, with $4.6-billion in assets — reported an 8-percent drop in contributions in the first quarter of 2008 compared with the first quarter of 2007. That comes after Fidelity’s strong growth in 2007, when assets rose by 31 percent. Donations to the Schwab Charitable Fund, in San Francisco, which last year had assets worth $1.8-billion, fell by 10 percent in the first three months of the year, compared with the same time a year ago.

Smaller gift funds are also facing difficulties. The Communities Foundation of Texas, in Dallas, with $307-million in assets, says gifts in the first three months of this year total about the same as those received during the same period a year ago.

“We’re not hurting, but we’re not growing this year,” says Brent E. Christopher, the foundation’s president.

The Christian Legacy Foundation, in Tampa, Fla., lost an expected $10-million real-estate gift late last year, says the organization’s executive director, Bob Collins, and this year donors, including a mortgage broker and a construction-company owner, are holding back on gifts.

Economic Impact

Even if the economy doesn’t recover, charities probably don’t need to worry about a drop in donations from the funds anytime soon. Giving to charities from donor-advised funds grew by 5 percent during the 2002 recession, according to The Chronicle’s survey that year.

“During tough economic times, people are less willing to replenish their own funds, but they direct their funds out because they see the need and they know nonprofits are struggling,” says Steven D. Maislin, president of the Greater Houston Community Foundation, where the amount of money donors distributed to charity increased by 77 percent in the first quarter of this year.

But the effects of the economic downturn could be felt in coming years. The economy’s tailspin after the 2001 terrorist attacks caused the assets of donor-advised funds to drop by 2 percent, and if that happens in 2008, less money will be available over the long haul.

Still, it is not clear that the economic slump will be as bad or last as long as some experts initially predicted. One sign that some donors already feel more optimistic: Gifts to the T. Rowe Price Program for Charitable Giving, in Baltimore, fell in the first three months of this year, but they grew by 25 percent last month.

Ann Alston Boyce, president of T. Rowe Price’s giving program, says that is probably the result of improvements in the stock market. She says she thinks people have been putting off their giving, not halting it, and that the real growth will come at year’s end.

“When you’re in a slower market, people delay their decisions,” she says. “They still need charitable tax deductions, but they’ll make decisions later in the year.”

Watching Congress

Officials of donor-advised funds say the economy is only one concern. They are closely watching the Treasury Department, which is expected to submit soon a report on donor-advised funds to Congress.

Depending on the findings, lawmakers might choose to impose new regulations on donor-advised funds. Managers of these accounts say they are especially worried that Congress might require everyone with a donor-advised fund to spend 5 percent of his or her fund each year, in the same way that it requires all private foundations to make an annual payout.

Many donors prefer not to make grants every year but instead make gifts representing 10 or 25 percent of their assets less frequently, fund officials say. Managers fear that requiring a donor to spend a certain amount each year might discourage some people from creating funds.

Others say that with so much money at stake, Congress needs to make sure that the billions of dollars sitting in the funds reach charities in a timely way. Some lawmakers remain concerned that donors could abuse the law by taking a huge charitable deduction for putting their assets in the funds but then failing to give any of the money to charities, says Dean Zerbe, a former aide to Sen. Charles E. Grassley, the senior Republican on the Senate Finance Committee.

Stiff Competition

While donor-advised funds have grown in popularity, competition to attract donors continues to be intense. To reach new donors, Schwab last year dropped the minimum required donations to $5,000, as opposed to $10,000. Fidelity did the same a year earlier.

Fidelity has for a long time far outranked its competitors — its donor-advised fund is bigger than the combined assets of the next three largest funds in the survey: Schwab, Vanguard, and the National Christian Foundation, in Atlanta.

But Schwab outpaced Vanguard for the first time in five years, its $1.8-billion representing a 72-percent rise in assets, compared with Vanguard’s $1.7-billion, a 41-percent increase. Schwab says it believes the lower donation minimum helped prompt the growth.

However, the financial companies that offer donor-advised funds may face a tougher time in the struggling economy than community foundations and other nonprofit organizations that oversee donor-advised funds.

Robert F. Sharpe Jr., a planned-giving consultant in Memphis, says community foundations may do better in tough times because they have the staff members to work more closely with both investment advisers and donors.

Commercial funds, he says, take an entirely different tack: “They’ve pitched donor-advised funds as a way to avoid capital-gains taxes rather than a way to set aside money for giving. You live by the taxes, you die by the taxes.”

New Types of Donors

Taxes and the economy are key factors in determining how much people give, but leaders of donor-advised funds say that in the past year they have continued to benefit from the growing interest in philanthropy prompted by supersize gifts from donors such as the billionaire investor Warren E. Buffett, who pledged $43.5-billion to five groups in 2006.

What’s more, several managers of the funds say they believe they see the beginning of the long-awaited transfer of wealth. (Some researchers predict that as much as $6-trillion will flow to charities through bequests as members of the World War II and baby-boomer generations die.) Bequests to the Lutheran Community Foundation, in Minneapolis, more than doubled last year, to $12-million.

“This is a signal of what’s coming,” says Chris Andersen, the foundation’s executive director.

Beyond those trends, however, officials of donor-advised funds say that wealthy people are increasingly looking for alternatives to setting up foundations.

Fidelity’s investors frequently ask the company for advice on whether to set up a donor-advised fund or a private foundation, says Sarah Libbey, Fidelity’s interim president. She tells investment advisers that donors with less than $5-million should probably opt for a donor-advised fund.

“For $1-million to $5-million, the individual can get all the benefits of what they might be seeking without some of the burdensome record keeping, and there’s more anonymity with the donor-advised fund,” something donors often prefer, she says.

Some gift funds are courting such donors. After noticing that more funds had the word “family” in their titles, the Lutheran Community Foundation last year invited several families to visit the foundation to learn about donor-advised funds as an alternative to family foundations, Mr. Andersen says. “We’re trying to get ahead of the transition rather than waiting for it to occur,” he says.

As funds like Schwab and Fidelity lower their account minimums, more donors are giving relatively small sums to start a fund.

To encourage such giving, Jeffery D. Hildebrand, an oilman, set up funds at the Greater Houston Community Foundation for 459 of his employees, putting $2,500 into each fund.

‘Hands-On Philanthropists’

The appeal of donor-advised funds is overturning some traditional giving patterns. For example, some donors with private foundations also opened donor-advised funds last year. The funds provide them with greater tax write-offs for some assets than they can obtain through their foundations, says Don Greene, a top official of the Bank of America Charitable Gift Fund, in Charlotte, N.C.

“We’re seeing a much more aggressive use of donor-advised funds by high-net-worth donors in conjunction with private foundations,” he says. “They are making use of their gift funds to complement the other giving they do.”

Some established foundations are simply converting into donor-advised funds.

The Procter & Gamble Fund, the giving arm of the consumer-product maker, in January transferred its assets to the Greater Cincinnati Community Foundation. Procter & Gamble officials still decide how to distribute about $25-million a year in grants, says Amy L. Cheney, the foundation’s vice president for giving strategies, but the foundation handles the administration.

Ms. Cheney says the company worked with the foundation after Hurricane Katrina to collect donations online and distribute funds and realized how much faster the community fund worked.

“Their process for getting checks out was pretty cumbersome,” she says. “We were a pretty speedy alternative.”

Meanwhile, the Cincinnati fund and other foundations are helping some private foundations and holders of large donor-advised funds make giving decisions. For example, the Community Foundation for the National Capital Region is advising the William G. McGowan Charitable Fund, whose headquarters are in Chicago, on its Washington-area grants.

“They closed their Washington office, but they wanted to continue to do grant making here,” says Terri Lee Freeman, president of the community foundation.

Ms. Freeman says she also sees donors working together. Her group started a program called the Spirit of Giving, through which donors give $10,000 to the program and then jointly decide which charities to support with their pooled dollars. Every three months, 40 donors meet and study four charities before choosing two that will receive donations.

The Rochester Area Community Foundation, in New York, created a similar club for donors but has also seen people organizing themselves into giving circles or even creating new funds together based on shared interests, says Jennifer Leonard, the foundation’s president.

“The concept of donors working with other donors helps propel giving circles. You find a number of donor-advised funds made up of donors deciding together,” Ms. Leonard says. “It’s a natural offshoot of the younger generation of hands-on philanthropists.”