The Smart, Easy Way of Charitable Giving

Two refrains are quite common among taxpayers as the year draws toward its close. One, of course, is the inquiry for deductions and other strategies that will reduce their tax bills before the end of the year. The second refrain is to ask which charities should receive contributions for the year.

There’s a tax planning vehicle that is a great response to these questions. It allows you to take deductions this year for contributions, but you don’t have to decide which charities receive the money and how much each receives until the future. In the meantime, you can choose how the money is invested just like you can for an IRA or a mutual fund or brokerage account. Your contribution can compound to something more considerable.

The vehicle has been around a long time but is under used, though its popularity has steadily increased since the early 1990s. It’s called the donor-advised fund or charitable gift fund.

An organization sponsors and creates the fund. It might be a broker or mutual fund or it might be a charity or group of local charities. You open an account and make a contribution with either cash or an asset, such as shares of stock or a mutual fund. Once you make the contribution, you can’t retrieve the money. That makes it a permanent gift, so you receive an immediate charitable contribution tax deduction for the value of the gift.

You then have time to decide which charity or charities ultimately receive gifts. There’s no schedule on which you’re required to make the gifts. While waiting for you to make gifts, the account is invested however you decide from the options offered by the fund sponsor. When you decide to make a specific charitable gift, you recommend a contribution to the sponsor. Technically, the sponsor isn’t required to follow your recommendation, but they do.

It’s fairly simple in concept and operation. The charitable gift fund comes in handy in several situations.

– You suddenly have more income or higher taxes this year than anticipated. The year is drawing to a close, and you don’t have much time to act. You can make a sizeable gift to a charitable gift fund to secure a tax deduction. Later you can take the time to decide which charities benefit from your contribution.

– You believe it is time to close or trim your holdings in a stock or mutual fund that has appreciated a lot. But you don’t want to incur the capital gains taxes. Instead of selling, you transfer the shares to your account at the charitable gift fund.

Of course, in either of these situations you could give directly to a charity. But not all charities are set up to accept gifts of property instead of cash, and you might not have time to select the right charity or charities for you.

– There are one or two charities you want to benefit over the long term, but you don’t want to give relatively small gifts over the years. You want the gifts to be meaningful and perhaps qualify for a special giving level or be enough for a special purpose, such as a student award or endowed professorship at your alma mater. But you want the tax deductions immediately. You can make regular gifts to the charitable gift fund and have that money invested. Then, after a few years, you’ll have enough money accumulated to make a large gift or two.

– You want to be charitable and also want the tax breaks today. But you don’t have time to select charitable interests that are meaningful to you. Begin making contributions to a charitable gift fund and take your time to search for the charities that eventually will receive the money.

Donor-advised funds have been a mainstay for a long time, but they usually were local funds designed to benefit charities in the community. They also might not accept all types of assets or be set up so that it is easy to transfer money from your financial accounts to them. Also the investment options might be limited or not in your discretion.

In the 1990s Fidelity and then Charles Schwab & Co. set up charitable gift funds. Since then, other financial services firms have set up their versions. You generally can choose from the same investment options available to your taxable account or IRA at these firms. When it’s time to make a contribution to the charitable fund, you can transfer money or shares easily from your personal account. Then, when you want to recommend a charitable contribution, you can do so easily through a telephone call, web site, or by writing a check from a checkbook that comes with the account.

To maximize the impact of your charitable gifts, consider these recommendations.

» Study the charitable gift funds available. You could opt for the one affiliated with a broker or fund company at which you already have accounts. Or if you know your gifts will focus on a particular locality or type of charity, look into donor-advised funds with that same focus. The staff at donor-advised funds that are affiliated with charities rather than financial firms often is more able and willing to provide information and advice about the individual charities. That makes it more likely you’ll find the right charities for you.

» Examine account minimums and fees. Follow the same steps you would when choosing a financial services account. Minimums to open accounts at the major financial services firms range from $5,000 to $25,000. Fees include an annual administrative fee that is likely to be a percentage of assets (the greater your contributions, the higher the fees deducted), the management fees on the investment funds, and fees for some transactions.

» A fund might limit the number of gifts you can recommend each year and could require gifts be of a minimum amount, usually $50 or $100.

» Determine the types of gifts the fund will accept. Can you transfer mutual fund shares from your investment account? What if your account is at another financial services firm? Are there fees for these or other types of contributions? Some of the funds will accept assets that aren’t publicly traded, even shares in a private business.

» Can you move the account to another charitable gift fund? If so, is there a fee?

» What happens to the account after your death? Some funds allow you to designate a successor person to make the gifts. Others say the account reverts to the sponsor to distribute to charities of its choice.

The donor-advised fund is a low-cost, flexible alternative to the private foundations the very wealthy have set up for years. Those are expensive to create and maintain, requiring a base of at least $5 million to make sense. But the donor-advised funds are so flexible these days that some very high net worth people are opting to use them instead of dealing with the hassles of a private foundation.

RW November 2014.