Lawsuit Could Cool a Fast-Growing Way of Giving to Charities

Because that sponsor is considered a public charity in its own right, donors get the tax deduction when they donate to the fund. When the money is doled out to other public charities, donors do not get a second deduction.

By law, the donors have given up control of their donation when they put the money into the fund. But in practice, their grant requests generally go through a cursory review to ensure the money will go to a public charity — and not pay for trips, gala tickets or a job for a child.

This lack of control becomes crucial when donations include less-traditional assets that can be sold, like stock, private equity or hedge fund holdings or even shares of a private business.

Donor-advised funds “generally sell off most any type of salable investment, be it a long-term capital asset, real estate, jewelry, privately held stock,” said Page Snow, chief philanthropic officer of Foundation Source, which helps private foundations with administration.

Donors would have more control if they set up a private foundation to handle their charitable giving, but they would also have to deal with the administration costs and burdens, or find someone to oversee those tasks.

“In a private foundation, you can hold jewelry, art work, maps,” Ms. Snow said. “We had a client who had a helicopter, and somebody who donated a saddle.”

Still, the tax deduction is always greater if the donation goes to a public charity, like a university, hospital or, yes, a donor-advised fund, Ms. Snow said.