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.