Small foundations eye donor-advised funds

By Liz Skinner

Jul 17, 2011 @ 12:01 am (Updated 9:13 am) EST

Donor-advised funds are benefiting from small family foundations' closing or suffering drops in endowment assets as the costs and administrative burden of running the foundations have become too great.

“Families with private foundations are increasingly deciding to unwind foundations into donor-advised funds,” said Laura Solomon, an attorney at Laura Solomon & Associates who works with a few hundred charities and foundations. “The funds offer a cheaper solution with less administrative hassle and still allow families to further their charitable mission.”

Fidelity Investments' Charitable Gift Fund, the largest donor-advised fund, with $5.6 billion in assets, said that private foundations contributed about $30 million to funds in the one-year period ended June 30, up from $16 million a year earlier.

Schwab Charitable, the philanthropic-services division of Charles Schwab & Co. Inc. that has the second-largest donor-advised fund, with $3.1 billion in assets, saw about $28 million converted from foundations to donor-advised funds during that period, double the amount of the previous year. Before last year, the annual amount was between $3 million and $4 million.

The Vanguard Charitable Endowment Program, the third-largest donor-advised fund, with $2.3 billion in assets, said that 82 private foundations contributed $34 million in assets to a fund in the 12-month period ended June 30, and 51 foundations transferred $15 million in the comparable period a year earlier. From 2003-09, the annual average was 28 transfers, with assets coming in at about $15 million a year.

A donor-advised fund is one solution for a small foundation that faces declining assets, a founder without the time to devote to it or even a family member who has ascended to the helm who may not be excited about the foundation's charitable mission.

Some foundations try to cut back on staff expenses by enlisting a foundation management company that charges less for administration. Others declare bankruptcy or become inactive.

With a donor-advised fund, an account is operated by a community foundation or non-profit affiliate of an investment firm. Sponsors have legal control of the assets, and the donor makes recommendations on whether the money should be distributed.

Sometimes the donor also can still have a say in how the money is invested.

The funds generally cost thousands of dollars less a year than maintaining a foundation, which has to meet burdensome administrative rules such as state and federal agency information-reporting requirements, as well as responsibilities to report details of grants awarded and even meeting anti-terrorism guidelines, Ms. Solomon said.

The 2008 unraveling of Bernard Madoff's giant Ponzi scheme, in which at least 147 private foundations were invested, also caused some foundation heads to consider a change.

“Post-Madoff, some foundations had concerns about their fiduciary responsibilities and asked themselves, "Do I really want to do this?'” Ms. Solomon said.

TAX ADVANTAGE

There is also a tax benefit to a switch, as cash gifts into donor-advised funds can be deducted up to 50% of adjusted gross income, compared with 30% for private foundations, she said.

Financial advisers who help families decide how to give to charities said foundations still have some advantages because they are more flexible about who can receive funds and in what form.

“The salient difference is that with private foundations, there is no third-party review of grants,” said John Goodwin, a founding and managing member of Filament LLC, an advisory firm with nearly $1 billion in assets.

BUILT-IN FLEXIBILITY

Also, foundations are more flexible in terms of awarding assets, such as giving an endowed scholarship to a school, he said.

Apart from the control side, much of the debate centers on whether the donor wants to build the fund, in which case a foundation is probably the best move, or whether the donor wants to disperse the money to other organizations, Mr. Goodwin said.

Rockefeller Philanthropy Advisors, which helps wealthy clients develop and implement philanthropic plans and runs its own small donor-advised fund, has seen two foundations make the switch to funds and many more contemplating a move.

“In one case, the current generation involved in the governance of the foundation had diverse interests among the trustees and difficulties arriving at a shared giving strategy with a small pool of money,” said Rockefeller senior vice president Chris Page.

Donor-advised funds themselves also vary, with some community foundation sponsors providing customized services such as helping with family retreats and identifying potential grantees, he said.

His firm is “agnostic” in terms of the philanthropic vehicle, Mr. Page said.

Sarah Libbey, president of the Fidelity Charitable Gift Fund, said that it allows givers to donate anonymously, which is more difficult to do with a foundation.

The donor also can select his or her own investment adviser to manage the assets.

Additionally, accounts can be named like foundations. For instance, a donor-advised fund could be called the Libbey Family Foundation.

The Vanguard Charitable Endowment Program doesn't allow the fund names to contain the words “foundation” or “trust,” because it would be misleading, said Benjamin Pierce, president of Vanguard Charitable. The firm also doesn't allow outside investment management.

MADOFF FEARS

“There are terrific investment managers out there, but we do not want to risk another Bernie Madoff,” Mr. Pierce said.

The median size of the gift from private foundations to Vanguard Charitable has been about $100,000, though one foundation transferred $68 million several years ago. Over the past year, more of the $500,000 to $1 million family foundations are folding into donor-advised funds, he said.

“Particularly the smaller foundations are beginning to understand it's uneconomical to run a foundation at that size,” Mr. Pierce said.

At Schwab, foundations in the $2 million to $3 million range are switching to donor-advised funds, said Kim Laughton, acting president of Schwab Charitable. Schwab developed a “conversion service” to help foundations make the change, including an online tool that helps them decide whether they would be better served through a fund, she said.

There are solutions for small foundations that don't want to become funds.

Firms such as Foundation Source Philanthropic Services Inc. help manage the administrative burdens for foundations and save them some of the costs.

Page Snow, Foundation Source's chief philanthropic officer, said that her 10-year-old firm makes a foundation “virtually as easy to manage as a donor-advised fund.”

E-mail Liz Skinner at lskinner@investmentnews.com.