As Donor-Advised Funds Take Off, Five Potential Pitfalls to Consider

I found this recent Wall Street Journal article helpful in understanding the pitfalls of donor-advised funds. ENJOY!

By Veronica Dagher

Donor-advised funds have become the hot thing for philanthropists who have grown weary of foundations.Picture of money, donor-advised fund

These setups promise a number of advantages over foundations, such as lower annual costs, more privacy and no required minimum payout each year. A big difference between the two is control. In a foundation, the philanthropist calls all the shots about where the money goes and tackles all of the administrative duties of running the operation. With a donor-advised fund, the fund’s managers do all of the back-office work—and have final say about distributing the charitable dollars.

As the name implies, donors can give guidance about donations, and very often their wishes are carried out, but there’s ultimately no guarantee that the chosen recipients will get the money if they don’t meet the fund managers’ standards.

That’s just one of the challenges that donors face when shifting a foundation’s assets to one of these funds, or “collapsing” it. Here are some of the biggest to consider.

State Regulations

Foundations are required to notify the state in which they reside when they have an impending status change, says Ben Pierce, president of Vanguard Charitable. Each state will have regulations for filing procedures, and some may require regulatory approval for the dissolution, he says.

Leave Enough Money

People often grant the full balance of the foundation to the new donor-advised fund. But that may mean there isn’t enough money in the foundation to wind it down, says William Sternberg, vice president of philanthrophic services at the Minneapolis Foundation. Wind-down costs typically include a final tax return, excise tax and grant obligations outstanding, he says.

Remember Illiquid Assets

Some assets in a foundation, such as a hedge fund or real estate, may be hard to sell quickly, says Mr. Sternberg. That could lead to problems while collapsing the foundation if all of the liquid assets are in the donor-advised fund and “the private foundation ends up with a minimum distribution requirement and may not have sufficient liquidity,” he says. Philanthropists might be forced to sell assets at a loss to make the distribution.

Look at Obligations

Givers should pay careful attention to the relationships their foundations have with charities—because all of that may change with a donor-advised fund. Remember, there’s no guarantee that the charities will still be able to get funds under the new setup. So, donors should give charities plenty of notice when collapsing a foundation, in case they aren’t able to provide funding anymore.

Beware Family Dynamics

Unlike a foundation, donor-advised funds aren’t allowed to pay the donor’s family salaries for the personal services they provide, financial advisers say. Families can also get tripped up if some members have a strong emotional attachment to the foundation, says Henri Cancio-Fitzgerald, philanthrophic-services specialist at Wells Fargo Private Bank.

Source: Ms. Dagher is a columnist for Wealth Adviser at She can be reached at


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