Imagine that you're a wealthy person who wants to give money away. You can write checks out of your personal account, of course, but it might be more effective to set up a separate foundation to handle your charitable gifts. That strategy permits you to plunk a big sum in the foundation, then distribute it gradually. But creating a foundation requires money and attention.
That's why many philanthropists have been opting to use donor-advised funds, sometimes even shuttering their foundations in order to do so. These funds accept the philanthropists' money, then allow the donors to recommend (but not dictate) where and how the money will be donated. In some cases, they offer greater tax benefits and more privacy.
The outsourcing trend
Philanthropists are borrowing a tip from the business world by effectively outsourcing the organizational hassles of major giving. After all, companies such as Automatic Data Processing (NYSE: ADP ) and Paychex (Nasdaq: PAYX ) profit by handling employers' payrolls for them. In information technology, Infosys (Nasdaq: INFY ) , Wipro (NYSE: WIT ) , and Cognizant Technologies (Nasdaq: CTSH ) are available to help other businesses manage their IT needs.
Similarly, many regular investors have looked to target-date mutual funds that rebalance themselves automatically, with a given retirement date in mind. While investors are young, they'll allocate funds heavily in stocks -- typically with large allocations to big companies like ExxonMobil (NYSE: XOM ) and AT&T (NYSE: T ) -- and gradually shift more into bonds as their clients age.
From that viewpoint, having a donor-advised fund take care of all the paperwork and legal requirements of maintaining a gift-giving program makes sense. After all, why reinvent the wheel, when a centralized fund can handle much of the work for you and thousands of other clients?
Big growth in giving
As a result, donor-advised funds now hold more than $27 billion in assets -- and counting. Fidelity projects that it will convert 43% more foundations to donor-advised funds this year than it did last year, while Vanguard converted twice as many foundations last year than in 2007.
Donor-advised funds serve as a reminder that sometimes, getting someone else to do part of the work for you is a smart move. Finding resources to help you at a reasonable fee can free you up to do more of what you want to do with your time.