You can be your own charitable foundation

By Terry Savage

Americans are the most generous people on earth. And with more attention focused on giving since the terror attacks of Sept. 11, 2001, you might decide to make an ongoing commitment to philanthropy in your golden years.

You don't have to be rich to get such a program started. In fact, several major mutual fund companies have made the process easy. Not only do you get a tax deduction to reward you for giving, but there's also a good feeling about growing and sharing your good fortune with those that are in need.

Americans who give face two challenges. The first is assuring that the charity is well run; the second is distributing your gifts in a planned and sensible strategy that leverages your generosity. The combination of the Internet and the introduction of donor-advised mutual funds has made both challenges a lot easier to master.

To learn how easy it is to set up your own "private foundation" and become a real philanthropist, even on a small budget, read on.

A foundation for everyone

There's a big reason that wealthy people set up their own private foundations, often donating appreciated stock in their companies. They avoid paying capital-gains taxes on the value of the gift and get an immediate -- but potentially limited -- tax deduction. They also benefit because the invested assets of the foundation will continue to grow tax-free. That enhances their ability to give generously in the future.

You and I can do much the same thing -- without going through the legal expense and hassle of setting up a private foundation. In 1992, Fidelity Investments created the Fidelity Charitable Gift Fund. It allows individuals to make an irrevocable contribution of cash or securities and get an immediate tax deduction. But the money can be invested for tax-free growth or income, then distributed to one or many charities in the future at the donor's discretion.

Since the Fidelity Charitable Gift Fund was started, it has received more than $4.5 billion in contributions from more than 28,000 people and 200 corporations. It has distributed more than $2.6 billion to more than 55,000 recognized charities. Grants have ranged from more than $55,000 to help control pollution and help protect forests in Appalachia, to less than $5,000 to help maintain Little League baseball fields.

And there's still $2.5 billion growing in the fund's four targeted investment pools. In fact, Fidelity notes that it has historically distributed 20% of the fund every year at the instruction of the individual donors, who can direct grants to charities that they choose.

"It's a model whose time has come," says Cynthia Egan, president of the Charitable Gift Fund. "People have become very astute in financial planning. They have investment accounts and retirement accounts. So, a giving account is the logical next step." A survey of donors who have opened accounts in the Fidelity fund shows that the tax deduction is low on the list of reasons for signing up, Egan says. Many say they do it just to "give back" to a society that has treated them well. And a full two thirds of donors say they give more now than before they opened their Charitable Gift Fund accounts.

The fund industry has noticed. Many financial-services firms, including Vanguard, Charles Schwab, Eaton Vance, T. Rowe Price and Oppenheimer, have started similar programs.

All work in much the same way, though with some differing limitations on gift timing and amount, and, of course, with different investment options. Your investment choices within each plan determine how your money grows – and therefore how much you have to distribute to your favorite charities in the future.

How the programs work

Initial investment. Most require an initial investment of at least $10,000 to open an account in their gift funds -- officially known as "donor-advised" funds. (Vanguard is the exception, with a $25,000 minimum.) Subsequent contributions can typically be made with a minimum of $1,000.

Distributions. Future distributions may be made at any time -- usually with a minimum of $250 or $500, depending on the fund. Distributions may only be made to a registered 501(c)(3) public charity. (This means the charity has registered with the Internal Revenue Service.) In the meantime, the contribution is invested in the donor's choice of three or four funds. These investment choices typically range from growth, growth and income, income or money market-type accounts. Most limit the number of times a donor may switch among the pools during the year.

Tax consequences. If you make a donation to one of these funds, you may take an immediate tax deduction -- even though the gift may not be distributed until some time in the future. Gifts of appreciated stocks, bonds or mutual funds that have been held for one year are deductible at full market value, and are not subject to capital-gains taxes. Future gains in the investments are not subject to taxes. And contributions are permanently excluded from the donor's estate.

There are some limitations on tax deductibility. If your gift is cash, it is fully deductible to a public charity as long as it doesn't exceed 50% of your adjusted gross income (AGI), or up to 30% of AGI if the gift is appreciated securities. (That's a more generous deduction than is available to those who set up private foundations.) So, if your adjusted gross income is $100,000, you can give as much as $50,000 in cash or $30,000 in marketable securities and fully deduct the gift. Unused deductions for larger contributions can be carried forward against income for the rest your life.

Calculating tax benefits. Most of the programs' Web sites have calculators to help you assess the tax benefits of your contribution. That is, you can determine the tax break you'll get by contributing securities compared with selling the securities, paying the taxes and contributing the cash.

Costs. Two advantages of these funds are the low cost and low paperwork. Each program's administrative fees are typically less than 1% per year, based on assets. There's also an investment management fee that should be about one-half of 1%.

Benefits. After year-end, you'll receive a consolidated statement of distributions. But since you probably made only one or two contributions to the fund each year, you no longer will have to track receipts from all the charities you supported during the year.

But the key benefit of opening an account in one of these programs is the ability to leverage your giving. The investments inside the account allow you to give once -- and replenish your assets through growth if the investment funds do well.

There's one last advantage to these donor-advised programs -- and it's difficult to measure in financial terms. In fact, it's really sort of an ego advantage. You see, when you open the account, you get to name the account. And that name is on the donation your individual charities receive, unless you specify that your gifts be made anonymously. So you may simply title the account in your own name -- or you could do something slightly more grandiose, such as "The Susan Smith Charitable Foundation."

That should certainly inspire some additional respect -- or maybe just make you a target for a request to give a larger contribution next year.