Updated: May 3, 2013 12:14PM
Originally published: Jan. 6, 2002
The holiday season brings out the spirit of giving, and--in spite of the recession--Americans are proving again that they are the most generous people in the world. But there’s a way to take that charitable spirit a step further to leverage your giving. Wealthy people create their own charitable foundations. And now, so can you. It’s easy--and free--if you take advantage of the donor-advised funds set up by many mutual fund companies.
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.
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.
This fund has received about $4.5 billion in contributions from more than 28,000 people and has already distributed more than $2.6 billion to 55,000 recognized charities. 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.
All basically work the same way:
* The 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, and contributions of securities are deductible up to 30 percent.
* 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 record keeping 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 Vanguard Charitable Endowment Program has just created an additional form of leverage for your charitable giving. Its program now offers as one of its investment choices a pool that holds 70 percent of its investments in the Calvert Social Index Fund. Thus, your undistributed funds can grow in a socially responsible way.
There’s one more interesting twist to this concept. You get to name your own fund account, and you can make the name 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 can also 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. and Pennzoil-Quaker State Co. Send questions via e-mail to firstname.lastname@example.org. She appears weekly on WMAQ-Channel 5’s 4:30 p.m. newscast.