Giving Back Isn’t Only for Billionaires

Giving Back Isn’t Only for Billionaires
Giving Back Isn’t Only for Billionaires

Amir Lakhani and his wife Dilshad Sumar grew up in East Africa and moved to the U.S. as young adults. Both had witnessed the poverty of the developing world—and the potential for the right kind of charity to lift people up. By the late 1990s they knew they wanted to engage in serious philanthropic efforts abroad, but they had demanding careers and two children. The couple lacked the time and resources to make much of a difference.

That’s why they started a donor-advised fund, or DAF, which works like a charitable savings account. Donors make contributions annually and receive an immediate federal-tax deduction. The funds’ value appreciates tax-free. Contributors then decide how to donate the money whenever they want. Mr. Lakhani and Ms. Sumar planned to start donating once they had enough saved—and enough time to determine how to best spend their money.

The couple is part of a growing number of Americans setting up such funds. The number of DAFs in the U.S. grew to 238,293 in 2014, up from 184,364 in 2010, according to a November report from the Manhattan Institute. During the same period, charitable assets in DAFs grew to $70.7 billion from $33.6 billion. It’s not only older donors who are attracted to this method of giving. Millennials give on average $1,000 a year to Fidelity Charitable donor-advised funds.

The Chronicle of Philanthropy announced in October that Fidelity Charitable, the biggest sponsor of donor-advised funds, had topped its list of the 400 largest charities. Not everyone was thrilled. Boston College law professor Ray Madoff wrote in the same publication that “DAFs undermine fundamental principles of what it means to give.” She criticized the funds because they do not require a minimum amount to be paid out each year and they have less rigorous reporting requirements than private foundations.

But these funds aren’t becoming so popular because their donors are greedily trying to keep their money and avoid taxes. It’s more simple: Donor-advised funds have made giving much easier, particularly for those with modest resources. Mr. Lakhani and his wife debated several platforms for their giving. “We’re not billionaires,” he explained in a recent interview, “where we could hire a bunch of lawyers and set up a foundation.” They simply needed a long-term and well-organized vehicle.

As American philanthropy has grown, so has the bureaucracy that sustains it. Foundation budgets have ballooned to $55 billion in 2013, up from $30 billion in 2003, according to the Foundation Center. Also growing are the regulations that govern these foundations and the staffs that support them. The Sarbanes-Oxley Act of 2002 requires foundations to complete paperwork regarding whistleblower protection and conflicts of interest. Trustees are often urged by auditors and the IRS to set up compensation and audit committees to set staff salaries and monitor the finances of their organizations. Many wealthy Americans now feel it is too burdensome and expensive to start a charity.

Donor-advised funds allow donors of all levels—the minimum amount required to start a fund with Fidelity is $5,000—to put away money for charitable causes without having to worry about exactly how much is being granted each year. These contributors disburse money at a higher rate than private foundations—21.9% of assets, compared with 5.8% for private foundations in 2013-14, according to the Manhattan Institute report.

These funds also provide an opportunity for people who want resources ready in case immediate opportunities arise. Pam Norley, who heads Fidelity Charitable, reports that donors have directed significant funds this year to Syrian refugee charities, as well as to victims of Hurricane Matthew. “People are doing an average of nine grants a year. That’s a lot of record keeping and information to keep track of,” she told us. With a donor-advised fund, reporting requirements are limited to a single tax deduction.

Donors Trust, another DAF, offers other services, such as monitoring charities to ensure that money is actually going to the causes the donor designates. Lawson Bader, the president and CEO, said in an interview that “older philanthropists, especially conservative or libertarian ones, have grown disillusioned with foundations. They tend to drift from the original intent to causes that are contrary to desire of the founder.” All Donors Trust accounts sunset over time, which means they will not be available for multiple generations to redirect.

Donor-advised funds have some competition. Last month the Bill & Melinda Gates Foundation announced the creation of Gates Philanthropy Partners, a nonprofit to receive donor contributions. According to the Chronicle of Philanthropy, it would allow donors to “piggyback on the foundation’s work of supporting global health, international development, and American education.” Robert Rosen, one of the foundation’s directors, argues that donors with limited resources should give to large foundations with staffs to vet applicants.

It is tempting to suggest that large foundations might be smarter about where to spend money than the average Americans, but this is not always the case. Plenty of small foundations have made a big difference, and large foundations like MacArthur and Ford have made their share of costly mistakes.

In recent years Mr. Lakhani and Ms. Sumar have retired and started to disburse the money from their funds, sometimes with the help of their children. In Cambodia they have spent about $3,000 to provide sewing machines to young women who were trained to be seamstresses. These women earn money from sewing school uniforms in their villages, and then pay back the cost of the sewing machine. That money is then used to buy machines for others.

These are not large sums when compared with the expenditures of organizations like the Gates Foundation, but they mean a great deal to the donors who establish personal relationships with the people they support. Donors can see firsthand how their funds improve lives. As Ms. Norley argues, donor-advised funds have “democratized giving,” which is no small thing in an increasingly bureaucratized world.

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