The Art of Better Giving

Donor-advised funds provide an increasingly attractive and affordable alternative to private charitable foundations.

For the past 70 years, the PGA Tour, Champions Tour and Nationwide Tour events have donated more than $1 billion to help more than 2,000 charities, including Habitat for Humanity, Special Olympics and the American Cancer Society. While most of us cannot match that level of generosity, thanks to the increasing availability of donor-advised funds, most ordinary people can give more effectively.   

Relatively obscure until the past decade, donor-advised funds have become one of the fastest-growing forms of charitable giving. In fact, during 2006 more than $6 billion was given to donor-advised funds—an increase of 25 percent from $4.8 billion in 2005. And as of last year, the nation's largest donor-advised funds had $19.2 billion in investment assets, up more than 21 percent from 2005.

How They Work
As the name implies, a donor-advised fund is a charitable investment fund established by a donor through a sponsoring organization—usually a large financial institution or nonprofit entity. It functions like a mini-private foundation, allowing you to receive a tax deduction by donating cash or other assets into the fund, manage the fund’s assets—usually using a predefined group of mutual funds—and then make periodic distributions to your favorite charities, provided they are tax-exempt under Internal Revenue Code Section 501(c)(3) or similar statutes.

But unlike a private foundation, which can cost upwards of $15,000 just to set up, a donor-advised fund is free to set up and can be operated at a fraction of the cost of a typical private foundation. Moreover, donor-advised funds can be set up with as little as an initial $5,000 donation—unlike private foundations, which are usually cost-prohibitive under $500,000.

In addition to being inexpensive and easy to set up, donor-advised funds offer some additional benefits over private foundations, including grant-making support, screening services that help verify that the charities receiving grants are qualified, flexible distribution requirements, and enhanced tax benefits.
And because they are so inexpensive to establish and maintain, donor-advised funds can be a perfect vehicle for teaching children about financial and charitable issues. Including children in the asset management and distribution decisions serves as a wonderful educational tool.  

How to Find a Donor-Advised Fund
While thousands of charitable organizations sponsor donor-advised funds, a few large financial firms—notably Fidelity Investments, Vanguard and Charles Schwab—dominate the scene. In fact, the Fidelity Charitable Gift Fund has more than $3.5 billion in assets, making it bigger than its next three largest competitors—the Vanguard Charitable Endowment Program, Schwab Fund for Charitable Giving and The National Christian Foundation—combined.

For donors looking for something a bit smaller, community foundations can be a good alternative. There currently are more than 600 such organizations in the country—with almost every major metropolitan area included—established for the express purpose of providing local residents with a structure that makes it easy to give to community causes, either directly or through donor-advised funds. Colorado currently has 18 such community foundations, including the Denver Foundation, the Pikes Peak Community Foundation, the Rose Community Foundation and the Aspen Community Foundation.

Finally, many nonprofit organizations have also set up donor-advised funds to help them capture more charitable dollars. Unlike financial institutions and community foundations, though, these nonprofit organizations offer a narrow focus and may restrict the giving options to conform to their own charitable goals.


David A. Twibell is president of wealth management for Colorado Capital Bank in Denver, where he directs the bank’s portfolio-management and financial-planning practice. He can be reached at 303-814-5545 or dtwibell@coloradocapitalbank.com.