The Economist and Nonprofit Quarterly recently published articles, mildly critical, on the topic of donor advised funds.
A donor advised fund is a gift by an individual to a charitable foundation (typically community foundations, or foundations created by financial institutions) to establish a fund to express the donors personal philanthropy. Money or securities are contributed to an endowment, which is held and invested to create income which is disbursed to one or more charities.
Benefits for the donor and charity
The donor benefits by receiving an immediate tax receipt. The donor can then advise on the selection of charities who will receive a distribution each year from the fund. For the donor, it is a fairly simple means of achieving part of their estate plan. They can identify charities to support, and achieve a tax credit now versus a future bequest through their estate. The charitable foundation handles all administrative details, communications with charities, and issues the cheques.
For financial institutions, donor advised funds represent an additional investment product generating investment management fees. The charitable foundation administering funds earns fee revenue for administering the funds.
If a donor, as they establish a new fund, immediately identifies one or more fixed charities to receive fund distributions, the charities benefit from the knowledge that a donor has made the irrevocable decision to donate a part of their personal wealth to philanthropic goals that support their mission. While they may or may not know the identity of the donor, it is helpful to know a source of revenue will be recurring.
Criticism
The critical commentaries of the articles focus on the grey areas in donor advised funds. There is little transparency or public accountability around how funds are disbursed. Questions may be raised about where the money is going. Charitable foundations often report at the macro or sector level, but not typically to the level where individual charities or communities are identified.
The beneficiary charity also loses the personal relationship with the donor. They may not know if a grant is one-time or recurring – something a direct conversation with a donor could have affirmed.
Questions are also raised over the degree of fiduciary oversight being applied with respect to advice and recommendations received from donors or their family. So long as the recipient entity is an eligible charitable organization, charitable foundations give great flexibility to the donor to identify donation recipients.
There is nothing inherently wrong with the concept of donor advised funds. The fund can either be a permanent endowment (annual payouts in perpetuity) or a fixed-term fund (capital and income are intended to be fully distributed over a period of time).
What perhaps doesn’t get effectively communicated, and some donors overlook, is that they have made a legal transfer of ownership of property from themselves to the charitable foundation. The donor no longer has ownership rights. The legal agreement establishing the fund provides for the donor to offer advice on distributions, but the final decision and legal responsibility rests with the charitable foundation.
Fiduciary responsibility
At the Ontario Arts Foundation, we spend much time in conversation with our donors to ensure they understand the reality that once the donation is made, the ownership and control of the fund has passed to the Foundation. Our fiduciary responsibility is to ensure the fund is administered in a way that is consistent with its objectives. We may receive recommendations from a donor on disbursements, and if consistent with the charitable purpose of the fund, we will respond positively.
Charitable foundations must retain the right to decline a recommendation if it is contrary to:
the charitable purpose of the fund (eg. the fund objective is to fund music organizations, and a recommendation is received for a distribution to a health care organization – laudable but contrary to the fund purpose)
public policy (Canadian courts have ruled against trustees disbursing funds for purposes that support racism, ethnic orientation or political purposes not considered charitable under our tax laws.)
the recipient’s eligibility (A donation cannot be made to a non-charitable organization.)
the charitable foundation’s mission (Some foundations have a particular viewpoint on charitable or social issues as part of their mission. If a donor recommends a disbursement contrary to that mission, the foundation may respond by declining to follow the recommendation.)
It can take some time to develop comfort and trust between the donor and a charitable foundation about the distribution of funds from a donor advised fund. It is important that donors and the charitable foundation have a clear understanding of how decisions will be made, so that there are no future surprises….or disappointments.