(Washington Post illustration; iStock)

For the first time ever, an entity called a donor-advised fund has topped the list of the United States' largest charities, signaling a shift in how wealthy people are donating that critics say could obstruct the flow of charitable money to those who need it most.

In an annual ranking of the nation's largest charities, Fidelity Charitable Gift Fund surpassed United Way Worldwide in private contributions given last year as its private contributions surged nearly 20 percent over the past year, according to the Chronicle of Philanthropy.

Donor-advised funds, which act as a sort of middleman between the donor and the charity that ultimately receives the money, have rapidly gained in prominence in recent years. These funds, which often serve wealthier clientele, are legally considered charities, but some say they are more akin to a charitable savings account.

When a person gives to a donor-advised fund, the donor receives the tax benefit for their donation right away, just as if they had given to the Red Cross. However, the fund can then hold the money on behalf of the client indefinitely, dispensing it to different charities over time as the client requests. The donor can't withdraw their money; it legally belongs to the fund. However, they can keep the money in the account for years, even bequeathing control of the fund to their children.

The result, critics say, is that money that previously would have gone directly to the needy has been waylaid in a kind of charitable limbo. In the meantime, funds often pay out fees to wealth management companies, such as Fidelity Investments, for managing the money.

“I think it’s been terrible for charities,” says Ray Madoff, a law professor at Boston College. Before the rise of donor-advised funds, charities had a monopoly on offering the generous tax benefits that the United States gives donors. “Now, there’s this ready alternative that is pulling assets away from the charities that are seeking traditional donations.”

Donor-advised funds and some more traditional charities reject these claims, saying that the money still goes to charity eventually, and that by offering greater flexibility, these funds actually encourage more giving.

It's prudent to check out any charity before donating money. Here are five tips to remember before you decide to give. (The Washington Post)

Pam Norley, president of Fidelity Charitable, says donor-advised funds have grown so quickly because they have made giving more accessible for many people. She also says that Fidelity Charitable has practices to monitor accounts and encourage regular contributions from those who have not made donations in recent years.

Brian Gallagher, president of United Way Worldwide, whose private contributions shrank by 4 percent from the previous year, says his organization has no problem with donor-advised funds and is not concerned with being ranked number one or number two on the list.

“If it’s a convenient vehicle for individuals to give to charitable causes, and we’re a recipient of that, we’re good with that,” he said of the funds. “We don’t see ourselves as competitive with Fidelity.”

Gallagher said the rise of donor-advised funds is a result in part of the fact that high-net-worth donors are driving charitable giving in the United States. He points out that the average donation for United Way is about $360 a year. For a donor-advised fund like Fidelity Charitable, an individual must give $5,000 to open an account.

But Madoff and other critics of the funds say charities can’t object publicly to these practices without putting at risk the substantial donations they receive from these funds. Fidelity Charitable responded by saying that its donors decide whom to give grants to, and it's incredibly unlikely that criticism of a donor-advised fund would change their minds.

Madoff doesn’t argue with giving donors the ability to save their money and give over time, but she says that these funds should be taxed as what they really are – charitable saving accounts. She also recommends placing a limit, such as 10 years, on the time the money can be held in the account before it has to be dispensed for charitable causes.

Three of the 10 largest charities in the nation are now donor-advised funds, including Schwab Charitable Fund and the National Christian Foundation. The Vanguard Charitable Endowment Program, also a donor-advised fund, ranks 11th.

Fidelity Charitable Gift Fund is only 25 years old, but it took in more than $4.6 billion in private donations last year. The nonprofit spinoff of Fidelity Investments has risen quickly up the annual ranking of charities in past years, eclipsing the Salvation Army, the American Red Cross and Harvard University.

Overall, giving to the 400 largest charities rose 7 percent last year. But giving to “social service organizations” – what are more traditionally thought of as charities, such as the Red Cross, Goodwill Industries International and the Salvation Army – increased just 2 percent.

Note: A previous version of this post said that Fidelity Investments is the parent company of Fidelity Charitable. It is a separate entity and a service provider for Fidelity Charitable. The post has been updated. 

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