These orphan funds need your help

Donor advised funds are the fastest growing part of the charity landscape, and with reason: They offer an immediate tax benefit, they make it easy to donate appreciated stock, and donors have unlimited time to allocate the monies to charities.

That's all well and good for charities when the funds actually leave the accounts and go to good causes, and in many accounts, they do. But with no deadline for disbursing contributions, the money in some donor advised fund accounts stays for years.

That's why the matter of orphan donor advised fund accounts is coming into focus. While still only a tiny fraction of the assets in donor advised funds, the money in these accounts — left behind when a donor dies without naming beneficiaries or setting up a clear plan for the assets — has nowhere obvious to go.

The fund companies that administer donor advised funds "say it's a relatively small issue," said Stacy Palmer, editor of the Chronicle on Philanthropy. But they are not required to disclose anything about the number or size of such accounts, she said. "It's one of those unknown things."

Absent detailed instructions, donor advised fund administrators have to decide how to deal with orphan accounts. At fund companies offering donor advised funds, like Fidelity, Vanguard and Schwab, the money may be directed to the company's philanthropic trust.

That is the approach at Fidelity, where in 2014 just under $1 million from orphan donor advised fund accounts was moved to the Trustee Philanthropy Fund, said Matt Nash, senior vice president of donor engagement at Fidelity Charitable. That fund distributes a minimum of 5 percent of its assets every year, he said, and in 2014 it granted $2.3 million, equivalent to 6.3 percent of its assets.

The Trustee Philanthropy Fund focuses its giving on what Nash called "capacity building" philanthropy, funding things like computer systems or distribution systems for charities. "It takes time and effort to do that intelligently," he said.

But the rate at which the fund distributes money may not be in line with what a contributor to a donor advised funds had in mind, and its philanthropic focus may not be theirs either.

"What's very troubling to me is when these financial houses have the orphan accounts, instead of distributing them, they use an endowment model and distribute 5 percent. "Why are they not distributing that money?" said Ray Madoff, a professor at Boston College Law School and a frequent critic of donor advised funds. "It's not like there is a lack of need out there."

Last will and testament
Cristian Batig | Getty Images

Some other providers of donor advised funds may feel obligated to try and find out what donors would have wanted with their money. At the American Endowment Fund, an independent donor advised fund administrator, top executives looked through previous donations by a deceased account holder to determine how to donate the balance left in the account.

"Some of them have really had to do a lot of sleuthing to find relatives and checks that have been written," Palmer said.

Luckily for donors, it is not hard to protect a donor advised fund account from orphan status. Nash said Fidelity offers account holders three options: They can name an individual or several people as beneficiaries; name a charity as a beneficiary; or allocate part of the assets to a charity and part to individual beneficiaries.

The firm does not send an annual notice to account holders without beneficiaries, but, he said, they will receive email reminders.

"We very much encourage people to put beneficiaries on their accounts," Nash said. "It's in everybody's best interest to have a successor named."

Madoff points to another option that avoids the matter of beneficiaries altogether and ensures the money winds up where donors want it to go.

Instead of stretching out their giving over a period of years, she said, "the thing they should do is spend it more currently."