By Andrew Zashin*

Hundreds of billions of dollars have accumulated in donor-advised funds since this vehicle was created all the way back in the 1930s. In fact, an estimated $110 billion is sitting in these funds right now. All, or at least virtually all, of the biggest investment firms in the country now offer this type of philanthropic product to investors, and these funds have proven to be quite lucrative to firms given the volume of cash flowing into them.

What is a donor advised fund?

It is an alternative method of giving that provides tax benefits beyond simple direct giving, at far less cost and administration headache than the creation of a foundation.

While a small subset of donors may find that the creation of a foundation, or even a specific charitable organization, best suits their philanthropic goals, these things require a good amount of administrative oversight and cost. They are simply out of reach – or make little sense – for most donors.

Direct giving – that is, making the donation directly to the charitable organization – may make sense in the majority of cases. After all, it is relatively simple to write a check to a specified organization. Then the donor can simply keep track of donations and then itemize these donations as deductions at the end of the tax year.

But if you are going to have an unusually high-adjusted gross income in a specific tax year – maybe because you exercised some stock options or got a big cash payout –you might consider contributing to a donor advised fund in order to increase your tax deduction and offset the higher tax burden for that year. Or, you might opt to donate appreciated securities or other assets, at fair market value rather than the original cost basis, avoiding capital gains.

Once the money is invested in a donor advised fund, it grows tax-free and then is paid out tax-free to charitable causes. It sounds like a win-win. The donor gets additional tax benefits with minimal administrative headaches, and the charitable organizations get more money because the tax-free growth means there is simply more to give.

The reverse side of the coin is that you are giving up control of the money by placing it in a donor-advised fund. As the name implies, the “donor” is merely an “advisor” as to how and when funds should be allocated. Although, as a practical matter, account managers are unlikely to attract new dollars and investors by entirely disregarding the “advice” given by account holders.

Interestingly, this type of fund has recently come under some fire because of the suggestion that wealthy would-be donors are taking advantage of the tax benefits but then never actually directing funds to be paid out to charitable organizations. The assertion is that billions of dollars are simply sitting there, hopefully growing, but doing nothing to benefit any actual cause.

Hard data simply to support or refute this simply does not exist. However, earlier this year, the California legislature introduced a bill that is intended to provide more oversight into these accounts in order to determine if the “spirit” of these accounts is being routinely violated. It is unclear at this point if such legislation will pass, what new oversight might show, and if any strengthened oversight requirements will be ultimately adopted by other states or at the federal level.

This article originally appeared as a column for the Cleveland Jewish News.