Yale Levey advises high net worth families on effective ways to contribute to charitable causes, but one of his most enthusiastic clients has few assets with which to indulge his philanthropic passions. Levey's nephew was about 7 years old when the financial advisor offered him a deal: find some cause, make a case for why it deserves funding, and Levey would make the contribution from a charitable account he had set up. His nephew, in the modest fashion of someone just learning to write, produced a paper praising the work of groups that protect bald eagles. Levey, owner of Next Generation Wealth Planning in Roseland, NJ, happily cut the promised check. The exercise is now an annual event that brings the family closer together, Levey says, while sharpening his nephew's mind and broadening his world view. This year's project is already on the agenda; his nephew told him, “We have to help the kids in Haiti!”

Even in bad economic times, Americans like to help out. Charitable giving in the United States reached $307.7 billion in 2008, down 2 percent from the previous year but still topping $300 billion for the second year in a row, according to GivingUSA Foundation. Private foundations hold the lion's share of wealth dedicated to philanthropy, with an estimated $579.9 billion in assets in 2008, according to the National Philanthropic Trust.

But a lesser-known charitable-giving vehicle is catching on. It's called the donor-advised fund, and it's the same device that Levey used to accommodate his nephew's wishes. The funds are basically accounts set up by donors that remain under the control of an IRS-sanctioned charity, usually a community foundation or an independent charitable affiliate of a national brokerage. Those charities will write checks drawn from the donor's fund to beneficiaries selected by the donor, provided the beneficiaries are legally-recognized charities in good standing. In some funds, the money can be invested in portfolios managed by the donor's financial advisor.

The vehicle isn't new; community foundations have worked with advised funds for decades, while national brokerages started entering the market about 20 years ago. What's changing is the pace at which the public is embracing them. The number of donor advised funds grew by 64 percent between 2004 and 2008, to 149,000; total assets in that time grew from $17.5 billion to $28.7 billion, the National Philanthropic Trust says.

Part of what's driving the growth is the cachet of participating in philanthropic activities that once were limited to big donors. People of even modest means can set up an advised fund for as little as $5,000 and still enjoy the sense of accomplishment that accompanies a far larger undertaking. Nearly 55 percent of the donor advised funds that work with community foundations have assets of $50,000 or less, according to the Council on Foundations.

“You can feel like you're a Rockefeller or a DuPont, but you don't have to be one. All you need is to put ten grand into a donor advised fund and get your family together to talk about how we're going to make grants out of this, and to whom,” says Johnne D. Syverson of Syverson Strege & Co., a wealth management firm in West Des Moines, Iowa, and a director at the International Association of Advisors in Philanthropy.

Indeed, many advisors who work closely with clients on their charitable interests talk about the “democratization” of philanthropy in America. Advancing technology has made it easier for national brokerages to set up advised funds. The Fidelity Charitable Gift Fund, the third largest public charity in the country with assets last year of $4.4 billion, lowered its minimum grant to $50 from $100, and reduced the minimum balance for advised funds that are managed by advisors from $1 million to $250,000. The Schwab Charitable Fund, with assets last year of $1.83 billion, has made similar moves.

“One of the things that's happened with scale is we've been able to bring the minimums down,” says fund President Kimberly Wright-Violich. “Now you can open a donor advised fund for $5,000. When we started it was $10,000. The minimum grant was $500 when we started. Now it's $100. The fees have dropped 40 percent because we got enough scale to do that. Even within the models where you're limited to mutual fund offerings, the choices have expanded tremendously.”

The upheavals in the economy also have contributed to the growth of advised funds. Organizers of private foundations, whose assets have been hammered by falling equity values, are casting around for less expensive ways of carrying out their mission, according to some national brokerages and advisors to high net worth individuals. In some cases, they say, smaller foundations are closing up shop and migrating their assets to donor advised funds. Wright-Violich says her fund has closed about 15 private foundations since August and moved the money to advised funds; that figure is larger than Schwab had seen over previous 12-month periods.

At Vanguard Charitable Endowment Program, $40 million in foundation money was transferred to donor advised funds between September 2009 and last January, with more expected to come, Executive Director Benjamin Pierce says. “There are real conversations going on that we're having with some foundations, talking about some very significant dollars, hundreds of millions of dollars,” Pierce says. “But as you would well imagine with those types of conversations, it's not a fast decision by the foundations. They have boards they have to deal with.”

Advisors say some smaller family foundations are finding management is more burdensome. “I think people have been pulled back into their careers in ways they may not have expected,” Wright-Violich says. “I've had conversations with executives where they thought they were in a phase of their career where they could work less, and then the market turned down, and all of a sudden they're back to working as hard as they did when they launched their companies. They don't have as much time to spend on their philanthropy.”

And foundations can be time-consuming; some advisors compare it to running a small business. The family has more control over the direction that their giving takes, but there are tradeoffs: board meetings, mandatory audits, and public filings that include a list of who's getting the foundation's money. By contrast, the charity overseeing the donor advised funds can protect the identity of the giver.

One key advantage that advised funds have over foundations is the larger tax deductions that accompany contributions to the funds. This is linked to the control over the money that donors surrender when they turn it over to the charity. Donors may deduct cash gifts of up to 50 percent of adjusted gross income, compared to 30 percent for donations to private foundations. Gifts of stock or real property, up to 30 percent of adjusted gross income, may be deducted by donors to advised funds; the comparable deduction for foundations is 20 percent.

Some advisors say the advantage can be particularly compelling for clients who are converting their IRA accounts to Roth IRAs, and are facing the sizable tax assessment that accompanies the conversion. Clients who make annual contributions to a favorite cause can bundle future contributions into one large payment to an advised fund this year to reduce the tax liability from the Roth conversion. Once the money's in the fund, donors can resume their scheduled payments to their cause.

As the Baby Boomer generation starts moving into retirement, advisors in the philanthropic market say they're seeing attitudinal changes among their clients. “The World War 2 generation simply wrote checks to the American Red Cross and said, ‘Have at it, have a nice day, because we trust what you're going to do,’” Syverson says. “I don't think the boomers go with that philosophy. They're a lot more entrepreneurial, and they want to take control of their philanthropy.”

That means working more closely with financial advisors on strategies for charitable giving. “Advisors need to make the first move,” says Sarah Libbey, president of the Fidelity Charitable Gift Fund. “They shouldn't wait for their clients to act. Because philanthropy can mean more to clients than they realize. And it allows advisors to really broaden their value to the client.”