Updated: May 3, 2013 12:14PM
Originally published: Decemeber 26, 2002
It’s the day after Christmas, and there’s never a better time to remember that it is better to give than to receive. In fact, you have one more week to both give and get a tax deduction. So if you’re still in the holiday spirit, you might consider making a contribution to the charity of your choice. Or to go one step further, you could consider setting up your own charitable foundation.
Creating your own charitable foundation is not as formidable task as it might seem. Several well-known mutual fund companies will do all the paperwork for you, allowing you to make a contribution now, and then spread the giving over the coming years, allowing the money to grow in the interim.
It all started with the Fidelity Charitable Gift Fund, which was created in 1992 to help individuals avoid the hassle and legal expense of setting up a private foundation. Instead of making contributions to different charities, you make one large contribution-- minimum $10,000--to your own personal foundation account in this fund.
Donations begin at $250
The money can be left to grow inside the fund in a choice of several different investment pools. All the future growth or income earned on your contribution is tax-free. Then, at any time and at your discretion, the money can be distributed to registered charities of your choice, with a minimum distribution of $250.
Opening an account is easy because the fund has done all the legal work. All you have to do is make an irrevocable contribution of cash or securities. You get an immediate tax deduction, and your money starts growing, waiting for instructions to disburse gifts to the registered charities you name.
In the past, I’ve advised donating appreciated stock to these funds, avoiding capital gains taxes as well as getting a tax break on your contribution. This year, fewer people have stocks with gains. But you can take a tax loss on stock that has declined, and then a tax deduction for your contribution.
Fidelity is not alone in offering this type of “donor-advised gift fund.” You can find similar programs at Charles Schwab, Vanguard, T. Rowe Price, Eaton Vance and Oppenheimer. Donor-advised funds now are counted among the top 10 philanthropic foundations in America.
All basically work the same way:
* Minimum donation for most funds is $10,000, with additions of $1,000 at any time. Donations are irrevocable.
* Distributions can be made from the fund to any registered 50l(c)(3) charity, with a minimum distribution of $250 or $500, depending on the fund.
* Donations can be made in cash or in securities. (Donating appreciated securities--if you still have any--allows you to avoid the capital gains tax on your profits.)
* The donor gets an immediate tax deduction for the contribution.
* Cash contributions are deductible up to 50 percent of adjusted gross income. Contributions of securities are deductible up to 30 percent of adjusted gross income. Unused deductions can be carried forward to future years.
* Money left inside the fund in a choice of investment options continues to grow tax-free for future distribution.
You can find specific details, and tax-savings calculators, at the Web sites of these mutual fund companies. All have very low annual maintenance costs, and they provide an annual recordkeeping statement of the distributions you have made.
Remember, no matter when the distribution is made, you get the tax write-off only at the time you make your donation to the fund.
The name of the game
There’s one more interesting twist to this concept: You get to name your own fund account, and you can make it as impressive as you want.
So when your gift is distributed, the recipient charity will receive a letter saying the gift comes from the “Susan Smith Charitable Foundation” or the “John Jones Trust for Preserving the Earth” or whatever suits your fancy. (Contributions also can be sent anonymously, if you request.) Your ego gets a reward as well as your tax return!
In this season of giving--and before you miss out on a year-end tax deduction--you might want to investigate these donor-advised funds. You can easily create a gift that keeps on giving. And that’s The Savage Truth.
Terry Savage is a registered investment adviser and is on the board of directors of McDonald’s Corp. Send questions via e-mail to email@example.com. She appears weekly on WMAQ-Channel 5’s 4:30 p.m. newscast.