The Wall Street Journal recently published an interesting article on donor-advised funds, the fastest growing charitable vehicle at this time. The article focuses on current circumstances—including a bull market and potential changes to tax law that would make charitable giving less attractive—that it argues make now a great time to open a donor-advised fund (or add to an existing one).

Donor-advised funds allow an individual to make a charitable contribution to a 501(c)(3) public charity (known as a sponsoring organization) and take an immediate tax deduction. The donor has the right to make ongoing advisory recommendations on organizations to receive grants from the fund, which allows the donor to delay decisions about specific recipients or causes they’d like to benefit. Meanwhile, these funds are invested and can grow quite nicely, which allows the donor ultimately to make more overall distributions to charities.

A couple of high points from the article:

• Gifts of stock. Donor advised funds are a great way for donors to take advantage of the tax code’s generous treatment for donations of appreciated stock, for which the donor generally will be able to take a deduction for its full fair market value while avoiding capital gains tax. The article aptly points out that, while a donor could get the same benefit from donating the appreciated stock to the charity that is the ultimate desired beneficiary, many small and medium-sized organizations may not be well equipped to deal with non-cash gifts.
• Reduced paperwork. Giving to a donor-advised fund, rather than to a variety of charities, can mean an easier task for a donor come tax time. The donor will have substantiation receipts from the sponsoring charity only, but won’t have to worry about substantiation from the charities that receive grants from the fund.
• Variety of choices. Donors looking to set up a donor-advised fund can select from several different types of sponsoring organizations. For donors who are very tied to their community and local giving, a community foundation may be the best choice. Some may choose a sponsor based on a special focus or charitable mission, such as faith-based organizations. And others may go with the fastest-growing providers, which are affiliated with financial firms like Vanguard Group and Fidelity. The article points out that fees, account minimums and other terms can vary widely between these different organizations.

While donor-advised funds do come with many benefits, they aren’t the perfect vehicle for everyone. For example, donors looking to provide more individualized grants like scholarships will find donor-advised funds very limiting. In addition, they carry additional restrictions for making international grants (which ordinarily a public charity is not subject to). And they have historically been the subject of abuse and as a result continue to be somewhat in the crosshairs for charitable reform. For example, one recent suggested change is that donor-advised funds would need to distribute all funds within five years—which would significantly reduce their appeal for individuals looking to grow their charitable “investment” and make more specific distributions over time.