As donor-advised funds grow in popularity, they may draw more scrutiny

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An increasingly popular way to make charitable donations while maintaining the tax benefits of philanthropy could face greater regulatory scrutiny.

The tax reform law of 2017 eliminated many deductions, including those for charitable contributions, while increasing the standard deduction to $24,000 for couples. In response, so-called donor-advised funds have become a hit.

“They’re in the process of taking over the philanthropic landscape,” said Ray Madoff, professor at Boston College Law School. “There’s no end in sight to their growth.”

A donor-advised fund allows benefactors to group donations into one contribution that would make it worthwhile to itemize one year versus taking the standard deduction. Such a fund — which can be set up at Fidelity Charitable, Schwab Charitable and similar platforms — can then distribute gifts for years thereafter to various causes with input from the donor.

Unlike a private foundation, gifts from a donor-advised fund are anonymous. Although the fund is independent from the donor, it usually follows his or her advice on where to direct contributions. There’s also no time limit on how quickly money must be distributed or how much must be distributed each year.

The opacity of the vehicles was highlighted in a recent Guardian story about billionaire and serial entrepreneur Elon Musk’s $37.8 million gift to Vanguard Charitable in 2016.

Shortly after the tax-reform law was passed in 2017, the IRS issued a request for comment on donor-advised funds, mostly seeking input on excise tax questions surrounding distributions.

“I expect we’ll see more regulation because they’re becoming much more popular,” said Jennifer Abelaj, senior counsel at Davidoff Hutcher & Citron. “The rules on donor-advised funds are pretty vague.”

Ms. Madoff, who also is director of the Forum on Philanthropy and the Public Good at Boston College, agrees that increased regulatory oversight is likely.

“The more people learn about the lack of rules governing donor-advised funds, the more they’re going to think there is a need for more regulation of funds to ensure the money goes to charitable purposes within a reasonable period of time,” Ms. Madoff said.

One of the most attractive features of a donor-advised fund is benefactors “get the upfront charitable deduction and ongoing functional control,” she said.

If the donor had set up a private foundation, that entity would have to file an IRS Form 990 annually and provide much more transparency about its operations.

But in a statement, Schwab Charitable said approximately 97% of grants from its accounts include donor names.

“Annual payout rates for national DAF providers and for Schwab Charitable average about 20% of assests, which is 4 to 5 times that of private foundations,” said Schwab Charitable, which works with more than 1,800 investment advisers. “At Schwab Charitable, roughly 80% of contributions have been fully distributed to charity within 10 years.”

A donor-advised fund gives the donor more latitude and efficiency in making larger gifts, said Tim Steffen, director of advanced planning at Baird Private Wealth Management.

“One of the benefits of a donor-advised fund is the flexibility you have with it,” Mr. Steffen said. “We may be at the point where Congress may feel that people are taking advantage of that flexibility and they may feel the need to step in and regulate. That would be unfortunate.”

Even if regulations increase, Mr. Steffen will continue to recommend donor-advised funds to clients.

“They’re still likely to be more cost-effective than a foundation,” he said.