Source of Funding Grows

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Evidence of a post-recession turnaround in contributions to nonprofits continues to slowly emerge, with the latest good news coming from a source that helps countless youth-serving organizations each year – even when they don't expect it.

Three of the nation’s largest donor-advised funds, through which people set up accounts to make donations to specified nonprofits, reported in recent weeks large increases in both contributions to the accounts and distributions from the accounts to charities.

Those charities include national behemoths like the Oklahoma City-based Feed the Children, place-based services for troubled youth like the Tennessee-based Youth Villages, and local after-school programs like the Gifford Youth Activity Center in Vero Beach, Fla.

The largest fund, Fidelity Charitable Gift Fund, reported last week that its donors made more gifts in the first half of this year than during any first half in its 19-year history. Fidelity said its donors made 27 percent more grants (152,000) and gave away 16 percent more money ($531 million) in the first half of this year than during the same period last year.

Another fund, Vanguard Charitable, said last week that its donors recommended a record $468.5 million in grants in fiscal 2010 (which ended June 30) and that its number of grants awarded (33,292) exceeded the annual record that was set just before the recent recession.

Those announcements came on the heels of Schwab Charitable's report in July that contributions from its donors in fiscal 2010 (which also ended June 30) “reached the highest level” in its 10-year history” – over $925 million.

The funds attributed the growth to a surge in gains among investors, which gave affluent people more money to donate and more reason to do so. The contributions to the funds are tax-deductable. Some think the growth will continue: In July, Fidelity released a survey of financial advisers that predicted such investor-fueled growth for the next 12 to 18 months.

How they work

The gift funds are basically stock market accounts to which someone contributes and are actually owned by the gift fund, an independent charity.  The money can stay in the account as long as a donor wishes and is distributed when and almost always to what the donor specifies. In the meantime, the donation is invested. Contributors can get the tax deduction when they make their donations to the accounts, even though the charitable institutions may not receive the gift for years.

The funds are also a way to donate appreciated securities and receive full credit for the donation at current value, rather than liquidating the stock holdings to make a contribution, which would entail paying capital gains taxes.

Even though such funds give out hundreds of thousands of donations each year, many youth groups don’t know about them because they cannot actually seek the money. That’s why Angelia Perry, executive director of the Gifford Youth Center, initially said, “I’m unaware of having received a grant from this organization [Fidelity],” but then found records for several.

The funds do not say what percentage of donations go to youth-serving organizations, but the largest identified areas for donations at Fidelity in fiscal 2009 were community and human services (24.9 percent) and education (23.6 percent). The list of grantees who got more than $5,000 in fiscal 2009 is here, but be warned: the 7,721-page attachment to the fund’s federal tax return downloads in about the time it takes to go out for lunch.

Nonprofits need not be completely passive in hoping for the money to land in their laps. Some organizations persuade their wealthier prospects to set up donor-advised accounts, said Fidelity spokesperson Teri Ginsburg. Fidelity’s website includes advice on how to go about it.

Some funds, such as Vanguard, have said they will accept materials from nonprofits to give to donors who ask about making contributions to specific sectors.

Why would someone set up such a fund?

“These are people who are, typically, more affluent, that are making long-term philanthropy part of the course of their financial planning,” Ginsburg said. They can build up an account during boom years for their investments, getting the tax write-off without having to decide yet where the money goes, and allowing it to accrue interest (for the fund). The fund keeps records of all their charitable giving. The process is less complex than, say, setting up a family foundation.

Because the money that people contribute to the funds belongs to the funds, the individuals (and sometimes corporations) actually “advise” the funds where to donate the money. But  “99 percent of the time your wishes will be honored,” Ginsburg said. She said that if the fund rejects a selected charity (perhaps because it is not a nonprofit or is in legal trouble), it simply asks the donor to choose another recipient.