The bull market, booming mergers and acquisitions, and
possible changes to the tax laws all signal that it is a good time to open a
charitable-gift fund—or add to one that already exists. Also called
donor-advised funds, the accounts offer charitably-minded investors an easy,
low-cost and tax-favored way to manage their giving—and even to maximize it.
Charitable-gift funds enable investors to earmark funds for
gifts and get an immediate tax deduction, while allowing them to postpone
making decisions about specific recipients. Meanwhile, the money is invested
and grows tax-free until it's disbursed.
While other charitable vehicles have waxed and waned,
charitable-gift funds have grown in popularity ever since Fidelity Investments
Chairman Edward C. "Ned" Johnson III recast an old charitable arrangement
in the early 1990s. The move enabled investors whose donations range from
several thousand to several hundred thousand dollars a year to reap many of the
benefits of a private foundation without their high costs and hassles.
Now, more than 200,000 donors have accounts with more than
1,000 sponsors of charitable-gift funds. For people who are charitably inclined, the
advantages of donor-advised funds boil down to their ease of use, especially in
capturing tax benefits.
Here's how they work: A person opens an account with a fund
sponsor and makes an irrevocable gift of an asset, which can range from cash to
stock to a "complex" asset such as shares of a private business or an
ownership interest in a racehorse. Because the donor can't get the asset back,
he gets an immediate tax deduction for the gift.
The cash or proceeds from an asset's sale go into the
donor's account, where the money is invested as he directs. There it grows
tax-free until the donor "recommends" one or more tax-exempt
charities to receive grants of specified amounts, there isn't any additional
tax deduction, even if the account has grown in value. The ability to postpone
decisions about specific gifts enables many donors to concentrate on boosting
the value of their gifts with smart tax planning.
Many donors to charitable funds are already aware of the tax
benefit of giving appreciated assets. In addition, people with these funds
dispense with onerous paperwork, because the sponsor is responsible for getting
proper acknowledgment from charities for specific grants. This is a good
feature for people who tend to lose their letters from charities before
tax-filing time, say experts.
If you are thinking of opening or adding to a donor-advised
fund, here are other points to consider.
Consider donating
before tax laws change. Tax changes are difficult to handicap, and
charities are formidable advocates. But some proposals in play would curtail
charitable deductions—increasing the incentives to make donations under current
law. The Obama administration has several times proposed limiting the value of
charitable write-offs for upper-bracket taxpayers.
The sweeping reforms proposed by outgoing House Ways &
Means Committee Chairman Dave Camp would lower the value of charitable write-offs,
or deny them, for millions of taxpayers. The plan would also allow full
deductions for appreciated assets only if they are publicly traded securities,
so it could make sense give other types of assets before a change.
Conversely, a different provision in Rep. Camp's plan would
require assets in donor-advised funds to be distributed within five years of
their contribution, though so far it has attracted little support.
Know the different
types of sponsors. The sponsor is the umbrella group holding the donor-advised
funds, and there are distinct types. Investors looking for a charitable-gift
fund need to determine which type best suits their needs.
Among the oldest are "community" trusts or
foundations, which focus on a geographic area such as a city or region. Often
they work closely with local nonprofits and offer extensive hand-holding and
advice to donors who want to give locally.
The fastest-growing providers are the charitable funds
affiliated with financial firms such as Vanguard Group, Fidelity, Charles
Schwab and T. Rowe Price Group. Typically they impose fewer restrictions
on donors and may offer lower fees, but donors often have to do more of their
own research.
Keep an eye on
account minimums, fees and other terms. They vary widely. For purposes
of comparison, the minimum to open an account is $5,000 at Fidelity and Schwab,
$10,000 at T. Rowe Price and $25,000 at Vanguard.
Annual fees typically include a basic administrative fee of
about 0.6% of assets, plus an investment fee that can range from 0.1% for index
funds to many times that. As with other investments, fees often decrease as
account size increases; a common breakpoint is $500,000.
Also determine the maximum number of grants to charities
allowed each year and the minimum for grants to specific charities and consider
what assets the sponsor can accept as donations. In addition, find out whether
the account is "portable"—meaning it can be moved to another sponsor
if the donor should want to. Several of the largest funds allow such moves, and
they have made good on this promise.
Consider a private
foundation. Although such vehicles can be burdensome and expensive to
administer, they do allow donors to do things that charitable funds can't—such as
hire family members, make grants to individuals (as opposed to charities) and
have a greater say in investing the foundation's funds.
Understand the
endgame. What happens to a donor-advised fund if the person who set it
up dies or becomes unable to advise it? Some sponsors allow the original owner
to name one or more people to make grants if the account holder is unable to,
while others ask for remaining funds to revert to the sponsor's general
charitable account for it to dispense. If you name a successor, be sure to
communicate your wishes.
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