Donor Advised Funds Are Huge. Here’s What You Need to Know.

Even as the nonprofit sector slowly regains momentum after the Great Recession, one type of philanthropy is booming. Donor advised funds are taking off — the amount of money in those funds was estimated to be around $45 billion in 2012. That amount has been growing steadily.

Despite the popularity of donor advised funds with America’s philanthropists, few nonprofits know what they are or how they work. Here’s a quick breakdown.

What are they?

Donor advised funds are a way for donors to give their money to charities. They’re pretty simple: a donor opens an account with a sponsoring organization, then they deposit money and other assets. The sponsoring organization is a public charity, so donors get maximum tax benefits when they deposit anything in the account. After they open the account, the money is no longer theirs — the deposit is irrevocable, so they can’t change their mind and get their money back. Although it’s no longer theirs, donors are able to direct where that money goes.

Why are they so popular?

The amount of money being poured into donor advised funds is pretty amazing, and there are a few reasons that they’re so popular with donors. First, accounts can be opened with as little as a couple thousand dollars — they’re not just for the ultra rich. People get tax deductions for their money once it’s been put into the account, even if the money isn’t distributed to other charities right away. Once donors do advise the sponsoring organization to disperse money, the sponsoring organization takes care of all the paperwork. Donors get immediate tax benefits even without making a donation to a specific charity and, when they do advise the sponsoring organization to make a gift, they don’t have the manage the details.

Are there any downsides?

There are a few limitations associated with donor advised funds. One is that the types of assets that can be used are relatively limited. Cash, securities, and other assets can be deposited, but things like property, ownership in businesses, and other non-liquid assets can’t be used in a donor-advised fund. Donor advised funds can usually only make gifts to 501(c)(3) organizations, which means that giving money to individuals in the form of scholarships or other gifts is usually not allowed. There’s also the (very slim) chance that the sponsoring organization may use deposited money in a way that donors don’t approve. Because gifts to the fund are irrevocable, anything deposited in one of those accounts can be used by the sponsoring charity without approval. That rarely (if ever) happens, but it’s possible.

Why should charities care?

Charities should keep an eye on donor advised funds’ growing popularity. From 2011 to 2012, the number of donor advised accounts increased by 7%, and the assets held by those accounts grew a whopping 18.9%. The growth in donor advised funds outstripped growth in traditional charitable donations, which is an interesting development. It’s especially interesting when one considers that there’s really no timeline for most donors to make disbursements from their accounts. Money is going into those accounts, but not as quickly as money is being distributed from them.

Donor advised funds’ growing popularity is still pretty recent. Will it mean that more money will be given to charities through grants instead of traditional checks? Should nonprofits start developing strategies to raise money through non-traditional gifts? Will soliciting major gifts change at all? Maybe. Maybe not. But any major trend like this is definitely worthy of extra attention!