For any college or university, receiving $200 million is a dream come true. So when the University of California, Los Angeles, received that amount from casino mogul Kirk Kerkorian in 2011, officials named the new entity in charge of those assets—you guessed it—the Dream Fund.

The gift was made possible when Kerkorian shut down his Lincy Foundation and transferred its assets to UCLA. The entity he set up to administer the $200 million? A donor-advised fund, or DAF. As the name implies, the donor who establishes one becomes an adviser who can recommend but doesn't control disbursements from the fund, which colleges manage like their endowments.

"We certainly garnered a lot of attention when that very large DAF came to us," says Rhea Turteltaub, UCLA's vice chancellor of external affairs.

An increasing number of institutions large and small—Cornell, Johns Hopkins, and Ball State universities, and Wheaton College in Illinois—run DAFs on behalf of their supporters. Between fiscal years 2007 and 2012, the number of university-administered DAFs quadrupled from 248 to 1,069, according to the National Philanthropic Trust, a public charity dedicated to providing philanthropic expertise to donors, foundations, and financial institutions.

University-run DAFs require that a minimum percentage of disbursements go to the institution, often 50 percent. The remainder goes to other, unrelated charities—separate 501(c)(3)s approved by the IRS—with the university overseeing those donations as well.

DAFs aren't just popular with universities: NPT identified more than 217,300 funds in 2013 (up from 160,415 in 2007) with $53.7 billion in assets. Investment firms like Fidelity, Charles Schwab, Vanguard, and Goldman Sachs have seen an explosion in DAFs over the last decade. That's in part because of the large, upfront tax deductions the funds offer donors. Also, the charities created by investment firms, often called gift funds, heavily market DAFs as an easy alternative to setting up charitable foundations.

Yet DAFs are controversial. A giver can let the money sit in a DAF indefinitely—even though those funds must ultimately be spent on charitable programs and services. While donors lose control of the assets, they can take as long as they like to advise where the funds should be distributed. In 2013, the Boston Globe called DAFs the place "where charity goes to wait."

Big on benefits

Why are donor-advised funds so attractive? The tax deduction limit for DAFs is higher (50 percent of adjusted gross income for cash, 30 percent for stock) than it is for foundations (30 percent of AGI for cash, 20 percent for stock). So a donor may contribute to a DAF in a high-income year to maximize his or her charitable deduction while waiting to recommend charitable grants when they have a better idea of how much money should go where.

DAFs are also simpler to create. Establishing a foundation can take months—it's like "building a whole new business enterprise," says Andrew Hastings, chief development officer at the National Philanthropic Trust—but DAFs can be established in one or two days. Some programs allow donors to start a fund with as little as $5,000, although at UCLA the minimum is $250,000.

Offering DAFs, Turteltaub says, can strengthen bonds with longtime donors interested in alternative giving vehicles, and the funds have broad impact.

"What's exciting for me is that this has helped all parts of the campus, from arts to athletics, from scholarships to medicine," she says. "Some donors have grown in the scope of their giving before they set up their DAF." (Kerkorian, 97, had a history of giving to UCLA.)

The UCLA Foundation administers nine funds, including the $200 million Dream Fund, that total close to $249 million. Of the amount the foundation has distributed in grants, approximately 60 percent went to UCLA and 40 percent to outside charities. Turteltaub says the waiting factor helps the majority of these people. Donors typically opt for a DAF when they look to make multiple gifts across campus and need time to consider their options.

A DAF provider since 2002, UCLA doesn't broadly market the option because "we look at it as a way for longstanding donors to make and extend their commitments," Turteltaub says. A four-page PDF for the foundation explains what DAFs are, how they work, and their advantages.

Ball State University recently created a new charitable organization called Cardinal Funds, named for the Indiana institution's mascot. It took two to three years to set up. "DAFs are extremely popular," says Philip M. Purcell, vice president of planned giving and endowment stewardship at the Ball State University Foundation. (He's also the Cardinal Funds' secretary.) "The challenge is whether you want to get into the administrative side of it," which includes making disbursements to charities other than the university.

The main costs: staff time, technology investments for online access by donors, and direct mail marketing materials. Although he declined to give an exact dollar figure, Purcell says the costs are considered an investment in future development. Many donors track their DAF's investments and can also get information from the recipient about how grants are used.

The Cardinal Funds' endowed DAFs are already in the six figures. The fund's investment strategy focuses on a mix of equities and fixed-income investments. "The donor might favor a particular investment, for example, but that's only a recommendation. The board of the organization that owns the DAF ultimately decides how to invest," he says. Cardinal's board members are not paid; some have investment expertise.

DAFs are not hanging on to money as some might suggest, Purcell says, citing a Congressional Research Service study that concluded that "stockpiling was not a national problem." That said, Ball State's program is structured so the money eventually goes to the institution. The donor-adviser must recommend that at least 50 percent of any disbursed assets go to the university, though he or she is not obligated by law to grant money in a given year.

Like Cardinal Funds, the DAF program at Johns Hopkins University is relatively new, about three years old. The Maryland university uses Kaspick & Company, run by TIAA-CREF, for its DAF investment management. Johns Hopkins' investment office, which manages the institution's endowment, oversees Kaspick & Company's work.

"We never set up to compete with either community foundations or the very large commercial DAFs such as Fidelity's or Vanguard's," says Lawrence C. Norford, senior director of gift planning and senior philanthropic adviser. "We have a small number of donors for whom our DAF offered an ideal solution." While he declined to reveal how many, he said that "we anticipate modest growth in the number of DAF donors. We have watched other universities build large, successful DAF programs, and we see few downsides."

Neither does Wheaton College, an interdenominational Christian liberal arts institution in suburban Chicago with an enrollment of about 2,400 undergraduates and 480 graduate students. Wheaton started its DAF program in 2004, says David Teune, the colleges's director of gift planning services.

"Ours has served as a good tool," Teune says. "We don't have a lot of funds set up right now—I would be surprised if it's more than 20. But it only enhances the charitable relationship because donors are more inclined to give to Wheaton to begin with. We're not finding abuse where people just let the funds sit there. They're interested in charity and giving that money away for charitable purposes."

Dubious about DAFS

But DAFs do put institutions in a tricky place in terms of how they relate to their supporters.

"It's risky for a nonprofit to offer DAFs," says Denny Moller, vice president for advancement at Florida's Saint Leo University. "The nonprofit moves from a personal and philanthropic relationship with an individual to being their money manager. The conversation could turn from one of engagement in the cause, and how a gift can make a difference, to discussions regarding rates of return and predictions on the stock market."

Dennis Alexander, director of foundation relations at Texas Christian University, says the funding vehicles aren't well understood by donors who want control over how they give.

"The cautionary tale is that they've been oversold a bit," Alexander says. "DAFs are a great option for people who don't have lavish resources and don't know how to go about giving." But if you have the financial means and time to create a charitable foundation, "there's no question that you have more options and flexibility."

Foundations, for example, can receive gifts of all kinds, but DAFs cannot accept illiquid assets that would be slow to sell. These include real estate; certain tangible personal property (ranging from works of art to livestock); restricted, unregistered, or "control" securities; and shares in a partnership, limited partnership, or a closely held company. So if a donor wants to use such assets to make a gift to a university, he or she is better off establishing a foundation to facilitate it.

Some DAFs get around this through holding organizations that accept these gifts, liquidate them, and then funnel the cash to a charitable fund. The downside: The gift's charitable value is diminished once brokerage fees and other charges are deducted. In fact, most DAF holding companies charge donors a regular administrative fee to cover overhead.

"Foundations may draw on their own charitable assets to pay their operating costs; DAFs may not," Alexander says. "Those expenses come out of the donor's pocket in the form of fees assessed to each DAF."

And foundations are usually permanent funds that can last for generations. DAFs often are not because they are usually liquidated at the time of the donor's passing. Ball State, for example, requires that when the donor dies, all of the residuals in the DAF must go to the university, Purcell says. That's not an unusual policy with university-run DAFs.

Then there's the issue of whether DAFs can legally be used to fulfill pledges to an institution. "If I make a pledge to Indiana University Foundation, I can't have Fidelity or Schwab make my pledge payment," says John Keith, associate vice president of individual giving at Indiana University.

He adds: "Most donors don't think in those terms—why does it matter? We need to remind them that the IRS has those requirements so they are not surprised later. If we get a check for a DAF that is going to a purpose that it really shouldn't go to, we have a responsibility to notify them." But donor-advisers can designate gifts to scholarships, athletics, academic programs, even music performances.

Neither Indiana University nor Texas Christian have plans to start a DAF, though both accept gifts from someone with a DAF: "It broadens your donor base," Alexander says.

Perhaps the loudest DAF naysayer is philanthropist Lewis B. Cullman, who savaged such funds in The New York Review of Books last September. At 95, Cullman is about the same age as Kerkorian and has given close to $500 million over the past 20 years. "To me, the best way to [donate money] is to pick a charity you like and give it directly to that charity," he wrote. "Why do you need a middle man? The main motivation is to get a tax deduction, and that's perfectly OK. But it makes a mockery of an innovative, constructive thing we have in the U.S. that the whole world envies: We have a tax incentive to give money away."

Despite the tax advantage afforded by DAFs, Cullman maintains that the big beneficiaries are investment firms motivated to keep that money because of the administrative fees they collect. He mentions the Fidelity Charitable Gift Fund, currently the nation's largest DAF program with more than $10 billion in funds in 2013, according to Barron's.

But Cullman's claim that DAFs hold money for as long as possible simply isn't true, says Cynthia Strauss, Fidelity Charitable's director of research. "Our donors make their own decisions where the money goes," she says. "We look at each [requested] grant and make sure that it's going to a 501(c)(3) and that no one's getting some personal benefit from it. We're very, very passionate about getting donations out quickly."

According to Strauss, Fidelity donors in the first half of 2014 gave $341 million to education through nearly 40,000 grants, making it the largest sector to which they donate. Additionally, 64 percent of contributions to Fidelity DAFs have gone out since 1991, totaling $17 billion.

And if DAFs have their issues, so do some private foundations—which can generously spend assets on administrative costs. The Otto Bremer Foundation, for example, paid its three board trustees more than $1.2 million—versus spending $38 million in grants—during 2013, The Chronicle of Philanthropy reported in July 2014.

To DAF or not

Although colleges and universities are relative newcomers to DAFs, the growth of college-administered funds is remarkable:

Between 2007 and 2012, such funds more than doubled in assets (from $405 million to $839 million), and grants more than tripled (from $38 million to $137 million), the National Philanthropic Trust reports. NPT has identified 41 institutions that sponsor DAFs, according to 2012 data.

Yet in a 2014 CASE survey of institutionally related foundations and advancement services professionals, 80 percent of the 74 institutions and organizations that participated did not offer a donor-advised funds giving option. While some noted that they were planning a DAF program, others said that "it would take away from our mission to provide support to the university" or that "we do not want to accept the responsibility for donor funds that will ultimately end up with a different charitable organization."

"Ultimately, it's a charitable giving vehicle, not a fundraising vehicle," Hastings says. "It's a rare individual who's focused on one charity, so the challenge for an organization that sponsors a DAF is that the person who gives has more than one charity in mind," including their place of worship, or public charities such as the American Cancer Society.

That's what concerns Keith of Indiana University. "If you start designating $50 to this place or $50 to the animal shelter in your town, what's the legal structure? You can get into a lot of verification of the status of those nonprofits, and that's not an area where we have that kind of expertise."

This may explain why some institutions are taking contributions from DAFs without actually setting them up. Web pages created by the University of Minnesota Foundation, Indiana University, and the University of Puget Sound walk people through the ins and outs of the funds.

"Sometimes the topic comes up with certain donors, and in those cases we've shared factors they might want to consider if they are interested in starting one, [such as] the tax benefits," says Rebecca Harrison, Puget Sound's director of donor relations and campaign programs.

The success stories of DAFs at colleges will likely encourage more to make the leap. Cornell University's DAF program has been around since 1986, and in fiscal year 2014, the New York institution received $28 million in DAF contributions. There have been no administrative challenges or significant costs.

Wendell L. (Chip) Bryce, Cornell's director of the Office of Trusts, Estates and Gift Planning, is a vocal supporter of DAFs, as is Carrie J. Corbin, the Ivy League institution's trust officer. "One of our favorite things is how small in [the number of] donors we have stayed, which underscores the benefit of strengthening connections to your best donors," Corbin says. "We're also providing a service to our alumni and friends as a trusted partner in helping them fulfill their charitable goals—both for Cornell and other charities they wish to support. We haven't really encountered any challenges."