Donor-Advised Funds: How to Unlock the Money and Avoid Abuses

To the Editor:

Alan Cantor’s article (“A New Sleight-of-Hand for Skirting Foundation Giving Rules,” Opinion. May 31) raised concerns about private foundations funding donor-advised funds held by community foundations (and other public charities) and suggested that such arrangements avoid transparency and potentially slow the process of money reaching charities providing direct services.

Community foundations’ commitment to transparency and their own philanthropic missions often make them ideal partners for private foundations in a variety of situations wholly unrelated to a private foundation maintaining anonymity.

Here are just a few examples:

• A private foundation may establish a donor-advised fund when engaging in collaborative efforts with other private foundations, community foundations, and public charities. The private foundation makes recommendations from the fund toward the collaborative project as the project progresses.
• A private foundation may establish donor-advised funds at one or more community foundations for funding in localities that may be important to the foundation but geographically distant. In such cases, the community foundation can provide the local expertise important to informed grant making.
• A private foundation considering shutting its doors often begins by establishing a donor-advised fund with the plan of transferring all of the private foundation’s assets to the fund over time.

In addition to these examples, a community foundation’s programs and staff add value by offering expertise, suggestions, and oversight throughout the grant-making process.

This includes making sure that distributions come from advised funds. Many community foundations have adopted policies that essentially prohibit funds from remaining dormant. As Mr. Cantor points out, the average donor-advised fund distributes quite generously. A study released by the Treasury Department in December of last year found that, on average, donor-advised funds had a payout rate of 9.3 percent, almost twice the minimum required of private foundations.

In terms of transparency, Mr. Cantor is correct that a community foundation—like any other public charity—is not required to disclose which donor’s funds were used for a specific project or grantee. However, since many donor-advised funds are named after a specific donor, the public and potential grantees can look at a listing of funds and get a sense of a community foundation’s donors.

Further, while community foundations offer the option of anonymity to their donors, grantees receiving support from a donor-advised fund frequently are provided with the names of the fund from which the grants are made.

Finally, the concern regarding transparency overlooks community foundations’ commitment to transparency as evidenced by the more than 500 community foundations compliant with the voluntary standards devised by a group of foundation leaders nationwide.

Community foundations disclose their grants not only on their Form 990 but also through annual reports, Web sites, press releases, and, increasingly, social media.

For the grant seeker, this means a potential grantee could look at the types of grants made by the community foundation and approach the foundation’s staff to learn about funding opportunities.

While this does not provide a potential grantee with a direct connection to the private foundation, the benefit is that the community foundation not only has donor-advised funds established by a variety of donors but many other types of funds, such as unrestricted and field of interest funds that may be additional sources of funding.

There are certainly trade-offs in the funding strategies used by private foundations. However, the value added by a community foundation holds the potential to benefit not only donors but potential grantees.

Janne G. Gallagher
Senior Vice President and General Counsel
Council on Foundations
Arlington, Va.

In his essay, Alan Cantor homes in on one aspect of donor-advised funds (without giving a single example of malfeasance), while ignoring other more important and positive aspects of those funds.

Moreover, he fails to make the case for his “biggest concern of all,” that donor-advised funds don’t have to distribute anything in grants in a given year.

In the same issue of the Chronicle as Mr. Cantor’s essay is a chart demonstrating that the aggregate giving of the largest donor-advised funds are double, triple, up to seven times more than private foundations. Comparing those figures makes Mr. Cantor’s “biggest concern” ring hollow.

Mr. Cantor fails to mention that small foundations are chewed to pieces by administrative costs and that by becoming donor-advised funds they receive highly professional and cost-efficient financial and administrative services at a fraction of the cost they would pay if they were standing alone. This efficiency in management increases money available for grant making.

Donor-advised funds aren’t the problem—they are the solution.

Jack Shakely
President Emeritus
California Community Foundation
Los Angeles

After reading the story, “Donor-Advised Funds Show Robust Growth, Chronicle Study Finds,” it is no wonder that Congress continues to threaten an income tax deduction for charitable gifts.

Do we really believe that “charities” named Fidelity, Schwab, and Vanguard are totally focused on distributions from these funds to nonprofit agencies?

The real intended purpose of a donor-advised fund is to hold contributed dollars for a short period of time while a donor advises on distribution to nonprofit corporations and agencies.

Unlike private foundations that are required to distribute 5 percent annually, donor-advised funds, by their very existence, should be distributing the principal amount on an active basis. While a 20-percent distribution rate is clearly much higher than the private foundations, this suggests that billions of dollars are invested in brokerage accounts that are paying millions in fees to the fund managers. These dollars could be supporting many nonprofits that are important safety net organizations throughout our country.

The opinion article in the same issue by Alan Cantor raises additional questions about the integrity of the brokerage donor-advised funds and some of the “donors” who use this option to avoid private foundation regulations.

If Fidelity, Schwab and Vanguard truly want to make a difference, they would begin immediately on a course to distribute the entire $7-billion they are now holding. And if the donors who created these funds truly believe that donor-advised funds are the best way for them to support charities, then in a short time the funds would have another $7-billion to distribute.

Borrowing a line from “Saturday Night Live,” Fidelity, Schwab and Vanguard are “charities.” Really? Think about it.

Ronald D. Guziak
Chief Executive Officer
Sun Health Services
Sun City, Ariz.