To understand why a way of giving money to charity could be so controversial, it helps to understand how exactly it works. Donor-advised funds could best be described as a waiting room for charitable donations. People who wish to give money to charity deposit the money in an account with a donor-advised fund, where they can elect a way to invest it, or, if they place enough money in the account (at Schwab Charitable, for instance, it’s $250,000), they can choose instead to have an investment advisor manage their portfolio. In return, they receive an immediate deduction on their taxes for the amount they have “donated” by depositing into the fund, and when they are ready to make their donation (which could be years in the future), they alert the fund, and their money is disbursed to the cause of their choosing. Once the money’s in the account, it can’t be returned to the donor—it then technically belongs to the donor-advised fund.
So why use donor-advised funds instead of giving to a charity directly? For one thing, they allow ordinary people to grow their money over time, and give it to charity as a philanthropist would, like a DIY Bill Gates. Another reason: Perhaps the account holder just wants the tax deduction, and doesn’t feel like selecting a charity at the moment. These funds allow people who earn more money in one year than another to time their deduction, depositing money in the donor-advised fund in years when their earnings permit them to receive a greater tax benefit, and then donating the money to charities over a period of years. Those who are in favor of donor-advised funds suggest this incentivizes people to donate more than they otherwise would; detractors say it’s just another tax advantage for the wealthy.
While donor-advised funds date back to the Great Depression, they weren’t widely promoted by brokerage houses until the early 1990s, when Fidelity sought and obtained a ruling from the Internal Revenue Service that gave it permission to set up Fidelity Charitable. Soon, other financial services firms established similar funds.
According to the nonprofit National Philanthropic Trust, givers put $23.27 billion in donor-advised funds in 2016, a 7 percent increase from 2015 and an 18 percent increase from 2014. That money is spread out among a variety of funds: The Chronicle of Philanthropy’s 2016 survey listed six donor-advised funds in the top 10 charities ranked by donations, including Schwab Charitable, the Vanguard Charitable Endowment Program, and the Goldman Sachs Philanthropy Fund. (Such funds are more popular in the United States than in some other wealthy countries, perhaps because Americans give a greater percentage of their income to charity.)
Another appeal of these funds is that they allow aspiring philanthropists to get started with relatively small amounts of money. Schwab Charitable, for example, requires an initial donation of only $5,000; after that, future deposits (if there are any) can be as low as $500. This allows champions of donor-advised funds to argue that they result in a quasi-democratization of nonprofit foundations. Foundations are expensive to set up and administer, and experts generally say that unless donors are starting with at least $250,000, most would be better off putting money into a donor-advised fund. Since people can deposit more into those funds over time, they offer people who aren’t extremely wealthy a way to build up money in a tax-advantaged way, allowing them to give larger sums when they do finally sign the money over to charity.