Saving Money to Save the World: Donor-Advised Funds
by Ann C. Logue
For most individuals, investing is a way of putting money away now to spend in the future, whether it be for retirement, a down payment on a house or a college education. But investing can also be a way to put money away today (with a tax deduction, natch) in order to make charitable contributions in the future. Those with over $5 million might find it cost effective to set up their own foundations, but what about those who are rich enough to have money to give, but who aren’t rich enough to support lawyers and accountants at the same time? These investors might be interested in donor-advised funds, which are charitable funds that can be set up with several mutual fund companies.
Of course, anyone can write a check today, supporting a worthy cause and getting a tax deduction in real time. That might work for most people in most circumstances, but some would like a bit of disconnect. For example, suppose you owned stock in the company that employs you, which was sold this year for quite a bit of money. You want to give some of your windfall to charity, but you don’t feel that you have enough time to research your options. You also don’t want to deal with fundraising officers who figure that if you can make a big donation this year, you can make big donations forever. The donor-advised fund solves your problem. Get a donation now, and then make donations until the cash runs out, knowing that your investment company is helping you stretch those dollars further.
With a donor advised fund, the IRS will give you a tax deduction subject to certain limits. Cash is fully deductible as long as you donate no more than 50% of your adjusted gross income. Shares of stock and mutual funds are also fully deductible at current market value, but only up to 30% of your adjusted gross income. That tax deduction is good for the year that you fund the account, but the subsequent donations that you make will not be deductible. However, any income and capital gains earned will not be taxed.
Several mutual fund and discount brokerage firms offer donor-advised fund programs. Legally, these funds are not mutual funds, although they are offered by mutual fund companies and often invest their money in funds that the fund company offers. These funds have their own restrictions. By law, these funds, like all charitable foundations, must distribute at least 5% of their assets each year. If accountholders aren’t being generous enough, the donor-advised fund operators have the right to start making distributions whether you like it or not. There may also be limits on the minimum and maximum amount that can be donated at a time, as well as a minimum or maximum number of donations that must be made each year.
Among the options are:
• Fidelity Charitable Gift Fund (www.charitablegift.org/)
• Vanguard Charitable Endowment (www.vanguardcharitable.org/)
• Charles Schwab Charitable Fund (http://schwabcharitable.org/)
• Eaton-Vance US Charitable Gift Trust (www.uscharitablegifttrust.org)
• T. Rowe Price Program for Giving (www.programforgiving.org)
• OppenheimerFunds Legacy Program (www.opplegacy.org)
These differ on their minimum investments, the frequency and amount of charitable grants required, fee structures, and the investment options available. Donors who plan to spend their money over years and who make ongoing contributions to their account often, want to be in riskier assets than for example, those who plan to disburse all of their funds in a few short years, so a little research is in order.
The fund companies aren’t the only donor-advised fund offerings out there. Many donor-advised fund programs are set up by different charitable and community organizations that may help donors select grants, although these organizations may also have limits on where the donations can go. For example, some donor-advised programs are offered by religious organizations that restrict donations to charities tied to the denomination, while others may be sponsored by community funds that only allow donations to charities within a geographic region. If you are comfortable with that, you might find that these funds have lower fees and offer more donor education than the mutual fund company offerings.
It’s a great blessing to have a surplus to give away, but many donors want to be as careful in their philanthropy as they were in earning the money in the first place. Just as mutual funds offer the advantages of investing without the hassle involved in trying to do it all yourself, donor-advised funds have the advantages of a foundation without the costs or paperwork.
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