Donor Advised Funds offer the charitably inclined new flexibility for managing gifts to charity. By funding an account, donors receive an immediate tax deduction for their contribution and gain the flexibility to direct payouts to charity on their own timetable.

However, donor advised accounts are not for everyone. Before funding an account of your own, consider the cost. Using a donor advised fund to manage your charitable donations may actually diminish the tax benefits of giving.

The growing popularity of donor advised accounts is due, in part, to the hassle-free gifting solutions they offer givers. The Chronicle of Philanthropy reported donor advised funds topped out at $15.5 billion in assets and over $3 billion in grants to charities in 2005, both figures up nearly 20% from the previous year.

One of the biggest benefits donor advised funds offer is the chance to step away from so called “checkbook philanthropy.” Instead of the hassle of writing checks and keeping up with gift receipts, a donor advised fund manages the gifting process from beginning to end. From checking the authenticity of each charity to check-writing and accounting, donor advised funds simplify the gifting process. And, for donors who prefer to make anonymous donations, donor advised funds also offer much-valued privacy.

Here’s how they work: Donor advised funds are themselves public charities, and are typically run by community foundations, independent organizations or corporate sponsors. Among the 88 or so donor advised funds, Fidelity, Vanguard and Schwab rank as the biggest corporate sponsors, having each established a charitable arm to manage the new accounts. With more than $3 billion in assets in 2005, the Fidelity Charitable Gift Fund ranks as America’s sixth largest charity.

To open an account, donors are required to make an initial contribution, usually of $10,000 (but as little as $5,000 at Fidelity Charitable Gift Fund). Accounts can be funded with cash or securities. Some donor advised funds accept real estate, pass through securities and closely held stock.

Donors who itemize can take a deduction for contributions to a donor advised fund come tax time. Best of all, donors can then make “grant recommendations” (gifts) to their favorite charities on their own timetable. Some programs allow donors to delay grant making almost indefinitely.

In the mean time, donor advised accounts can be invested for growth, allowing the donor to make larger payouts to charities in the future. Donor advised fund sponsors like the American Endowment Foundation even allow donors the freedom to tailor their portfolio using stocks, bonds, and the universe of mutual fund options. Most, however, offer donors a menu of investment “pools,” or fund options, based on the donor’s risk tolerance.

Making gifts to a favorite charity can be as easy as calling the sponsoring organization or completing a grant recommendation form online. Minimum gift amounts typically range from $100 to $300 per gift. So, donor advised funds aren’t a solution for those who like to give in smaller denominations.

But convenience comes with its own price tag. Account holders are hit with layers of fees including administration fees, investment management fees, and annual fees. This is, of course, on top of the fees associated with the underlying funds in their investment pools.

Corporate sponsored funds such as Fidelity, Vanguard, and Schwab have all slashed fees in the hope of capturing more of America’s philanthropic dollars. Nevertheless, fees at Fidelity and Schwab hover around 2% annually for accounts less than $500,000.

Fees aside, donor advised funds have other drawbacks. Donors surrender ownership of their contribution and act only as an “advisor” to his or her separate account. Sponsoring organizations like Schwab’s Charitable Fund are quick to add that grant recommendations by the account advisor are almost always accepted, providing that the receiving organization is a qualified charity. Legally, though, the assets become the property of the donor advised fund.

If donors have no immediate plans to make payouts to charity, a donor advised fund may not be the best option. For those who enjoy the tax benefits of gifting highly appreciated stock, donor advised funds may shortchange givers from a making the most of their charitable gift deductions.

Here’s why: Let’s say Jane Doe transferred stock worth $10,000 to a donor advised fund. After five years, the stock was valued at $13,000. By gifting through a donor advised fund, Jane Doe received a $10,000 charitable deduction up-front. However, had she kept the stock in a regular investment account and later transferred it directly to her favorite charity, she could have taken a bigger deduction of $13,000.

Although these accounts may not be ideal for managing charitable gifts, they may offer an attractive alternative to setting up a private family foundation.

Donor advised funds allow donors to deduct contributions up to 50% of their adjusted gross income, instead of the 30% allowed for donations to private family foundations. Furthermore, donor advised funds do not impose a 5% spending requirement on investment income like the one required of family foundations. Donor advised funds also allow for multiple “advisors” to the fund, meaning a group of family members can participate in the grant-making process. And, donor advised funds also free trustees from the burden of preparing tax documents on an annual basis.

Determining whether a donor advised fund is a good “fit” with your financial goals, ask your financial advisor. To find a fee-only financial advisor in your area, visit www.napfa.org .

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