Not everyone can shell out millions to a good cause like Bill Gates, Warren Buffett, and Mark Zuckerberg. But that's changing, thanks to the explosive growth of donor-based funds, a kind of personal foundation for the average person.
Last year, 44 wealthy donors gave gifts to charities of $50 million or more. But Fidelity Charitable, the largest donor-based fund, granted $2.6 billion to 92,000 charities. That's an impressive chunk of change, and an impressive impact, from givers who aren't famous millionaires. Contributions to donor-advised funds topped $17 billion in 2013, an all-time high.
Donor-advised funds allow ordinary people to set aside money and get immediate tax benefits. The money can't be taken back, but it can be doled out when and where the giver chooses, similar to the way that large foundations work for the super rich, according to Time Money.
“An easy way to think about a donor-advised fund is like a charitable savings account,” according to the National Philanthropic Trust. “A donor contributes to the fund as frequently as they like and then recommends grants to their favorite charity when they are ready.”
An individual can open a donor-advised account for $5,000 at Fidelity Charitable or Schwab. The account owner immediately receives the maximum IRS deduction, but can shell out the money at his or her discretion. In the meantime, the account accrues interest tax-free. Most of these accounts are modest by millionaire standards, with balances below $25,000, and 90 percent, are gifted within a decade to charity, according to Fidelity.
“For regular givers like me, a donor-advised fund is a planning tool that makes my giving more cost-efficient,” Pam Friedman, a partner at Silicon Hills Wealth Management in Austin, Texas, told U.S. News.
“And of course, everyone knows that a donor-advised fund is a tool to offset taxes, especially if you have a significant tax liability but don’t yet know which charities you want to support.”
The funds are usually used as planned giving, but the donors can also respond to a crisis if it arises, like the Ebola epidemic, or hurricane relief. Fidelity Charitable shelled out $5.5 million to Ebola relief last year.
Critics say that donor-advised funds can allow a giver to sit on a fund indefinitely, without dispensing any money during their lifetime. Meanwhile, charities assigned those funds sit and wait.
“To me, the best way to (donate money) is to pick a charity you like and give it directly to that charity,” philanthropist Lewis Cullman, a critic of such funds, told U.S. News. “Why do you need a middle man?”
Cynthia Strauss, Fidelity Charitable’s director of research, told U.S. News that 64 percent of contributions to Fidelity donor-advised funds have gone out since 1991, totaling $17 billion.
“When we look at the landscape, we are passionate about helping our donors give,” Strauss said. “That’s why we exist. We see that typically, 90 percent of incoming contributions are extended as grants within a decade. It’s money in motion.”