Revealed: Tax-Saving Secrets Of The Rich

Few things indicate wealth, success, and good works like having your own charity. For generations, the super wealthy have had their own charitable foundations. Foundations come with a lot of restrictive rules and are expensive to maintain. Now, innovations make it possible for anyone to have a charitable foundation at very low cost and with a minimal amount of work.

There are two advantages to having a charitable foundation.

You get an immediate tax deduction for the money you put into the foundation. You can give either cash or appreciated property, taking a current itemized deduction. For cash contributions, you can deduct up to 50% of your adjusted gross income or up to 30% of AGI for donations of appreciated real estate or securities. (With a private charitable foundation, such as the wealthy use, the contribution limits are lower.) Any excess amount can be carried forward and deducted in future years.

Another advantage is flexibility. You make the contribution and get the deduction when you have the cash, need the tax deduction, or are in a high tax bracket. Then you can wait to designate which charities get the money. You decide which charities get the money, when they get it, and how much they get. You can take the tax deduction now and string the actual contributions to charities over the years. You can give charity a fairly large amount one year, and give different charities smaller amounts in other years. While you are making up your mind, the money is invested. That increases you eventual contributions.
There are two vehicles, both known as donor-advised funds, that let virtually anyone get these advantages that the rich have had for decades.

The first organization has been around for years and is known as the community foundation. These often are established for a geographical area, but more recently have been established by universities and major charities. The community foundation is a public charity that takes contributions from anyone. Each donor essentially has a separate account within the foundation. The account earns money as it is invested by the foundation. Gifts to individual charities are made on the recommendation of the account donor. Legally, the donor doesn’t have the right to stipulate how the account is disbursed. But it is rare for a foundation not to follow the recommendation of the donor as long as the charity is on the approved list.

Most community foundations (there are over 500) have some limit on the ultimate recipients of the gifts. A community foundation for a geographic area usually has a list of all the charities in its area that are eligible for contributions. A university or national charity might require that at least 25% of your account ultimately goes to the sponsoring organization, while the rest can be contributed to any qualified charity around the country.

In the last few years, financial organizations have established their version of community foundations, known as public gift funds. About 10 years ago I was among the first to discuss the Fidelity Charitable Gift Fund. This now is among the 10 largest charities and gets more annual contributions than any charity except the Red Cross and YMCA. Versions are available from Vanguard, Charles Schwab & Co., Eaton Vance, and a few others.

These private sector versions have minimum donations of $10,000 ($25,000 for Vanguard) and lower subsequent contributions. Recommended distributions usually must be $250 or more. You get to choose how your account is invested from among three or four mutual fund options chosen by the sponsor. If you invest well, your eventual donations can grow to far more than the cash you contributed. (Income and gains are not taxed once the money is in the charitable trust.)

You can name the account after whomever you want. Thus you are able to memorialize a loved one, your family, or someone else. You even can produce your own stationary so that it appears to the outside world that you have a private foundation the same as Bill Gates.

You don’t have to donate all the account during your lifetime. If you die with a balance in the account, the account is out of your estate, and you can name a successor to decide which charities get the money.

Keep an eye on the fees. Both the community foundations and the private sector versions charge management fees on the mutual funds plus an annual administrative fee of about 0.25% of assets. These fees reduce the amounts you eventually give to charity. Some also charge loads or other sales fees that go to brokers who convince individuals to donate to the accounts. Vanguard, as usual, has the lowest fees. Schwab is next, followed by Fidelity. Most community foundations charge about 1% of assets.

If you have a need for a big tax deduction or want to set up a charitable giving program, look into the donor-advised funds available. Check with your local government or Chamber of Commerce for community foundations in your area. You also might contact your alma mater. On the web, check www.guidestar.org. Then check the options from financial services firms. Choose the vehicle that works best for you.