Updated November 2016 — Philanthropy takes many forms. A donor advised fund offers a middle ground between participating in simple "checkbook charity" and starting a nonprofit foundation.
Often considered smaller and nimbler cousins of private foundations, donor advised funds offer many of the perks of foundations — the ability to research and advise on potential recipients — without the volume of legal and financial paperwork that starting and managing a foundation requires.
"Donor advised funds allow people to offload the busywork of charitable giving, like tax reporting and operations," says Henri Fitzgerald, Philanthropic Planning Manager for Wells Fargo Philanthropic Services. "I'm confident that they will play a huge role in the future of philanthropy."
How do donor advised funds work?
To set up a donor advised fund, donors contribute funds — which may include cash, stock, real estate, or other assets — to whatever 501(c)(3) organization they select. The 501(c)(3) serves as a sponsoring organization of the fund. The sponsor may be run by a financial institution, such as Wells Fargo Bank, or by a community, educational, or religious institution.
At Wells Fargo Bank, for example, clients may opt to start a fund through The Wells Fargo Philanthropy Fund for as little as $100,000.
Most sponsoring organizations set a minimum contribution to participate in a donor advised fund, and these minimums vary widely.
Over time, the money from the fund is distributed to charitable organizations with the guidance of the donor advisors or other advisors appointed by the original donors. The sponsoring organization also handles the legal, tax, and governance issues related to the fund.
What are the benefits of a donor advised fund?
The benefits of a donor advised fund are myriad. In addition to the immediate tax deduction that they may receive, donors can use these funds to give to charitable organizations anonymously and spread out their gifts over time. They can involve family members as grant advisors, and even continue the fund for future generations.
Although donor advised funds offer great flexibility and donor participation, they remain far simpler and less expensive than foundations.
According to Fitzgerald, donor advised funds can be an ideal solution for a charitably minded person in specific financial situations. "For people who have a spike in income — because of a large bonus, for example, or because they've sold a business — a donor advised fund may give them the tax deduction now, even if they don't give most of the original contribution to the eventual charity in the future."
"Donor advised funds allow people to offload the busywork of charitable giving, like tax reporting and operations," — Henri Fitzgerald, Wells Fargo Philanthropic Services
How do donors choose a sponsoring organization?
Choosing the right sponsoring organization for a donor advised fund is important, because the type of expertise and the variety of financial options that the organization offers can vary significantly. Community foundations, for example, tend to have their deepest knowledge and interest in local and regional charitable organizations, and they usually encourage contributors to donor advised funds to keep donations local.
For donors who would like their giving to have a broader impact, a regional or national organization may be a better choice. The Wells Fargo Philanthropy Fund is designed so that it makes it easy to make gifts nationally and, in some cases, internationally. This can be valuable, for example, for donors who are interested in helping out after a national disaster, even if they don’t live nearby.
In addition, working with institutions with deep financial experience, such as Wells Fargo Philanthropic Services, can be useful for givers who plan to donate an asset that may be difficult to sell or value. "We can bring to bear all of the resources we have at Wells Fargo Bank to help turn that asset into cash, and we can help with the valuation," says Fitzgerald.
For people who are eager to make real change through their gifts, donor advised funds are often the perfect solution, says Fitzgerald. "According to a study published in November 2014 by the National Philanthropic Trust, donor advised funds typically distribute a higher percentage [of their assets] than most foundations," he says. "These aren't places to park your money. You’re actually going to use the money to shape the world."