How you can deduct now, give later
Want to share the wealth, but don't know where? Financial experts point to donor-advised funds as a good choice.
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Yet for others, the concept can make a lot of sense. Say, for example, a would-be donor has seen a stock position appreciate from $10,000 to $30,000 over the past 10 years. A sale would trigger a $3,000 tax on the $20,000 capital gain. But if the giver turns over the stock to a donor-advised fund, he or she receives a $30,000 write-off instead. If reinvested at 5 percent, the principal would remain intact and generate a $1,500-per-year income stream for a series of yet-to-be-named charities.Skip to next paragraph
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A generation ago, those who created charitable endowments often did so through private foundations. While that is still an option, foundations cost more to manage than donor-advised funds because they require administration on a small scale. They also come with a raft of restrictions, such as no anonymous giving and limits on where the funds can be invested. Unless a person is endowing more than $1 million, the better bet is usually a donor-advised fund, says Penny Marlin, a financial planner in Delray Beach, Fla.
Choosing the best place to house the fund, once again, depends on the donor's needs and goals. Universities increasingly offer donor-advised funds, but they tend to limit a donor's options. The University of Nebraska, for instance, insists that at least half of the assets be donated eventually to the institution. Beyond that, donors may steer the funds wherever they please.
Across the country, more than 700 local community foundations serve as custodians for donor-advised funds. These generally charge higher fees than commercial funds do, according to a 2006 Chronicle of Philanthropy report, largely because they operate on a small scale and must contract with commercial firms to provide investing services. "You've got to work at it if you're going to open up an account at a community foundation," Bauer says, because distributing funds involves coordinating among multiple entities. Still, these systems may get more efficient and somewhat cheaper, Bauer notes, as community foundations increasingly partner with brokerages such as Merrill Lynch to compete with the likes of Fidelity and Schwab.
Meanwhile, the higher fees at community foundations may be cost-effective for donors who want knowledgeable advice from foundation officers on how to remedy local problems. That's according to Bruce Bigelow, founding partner of Charitable Development Consulting in Frederick, Md., who says community foundations also provide cachet that commercial funds headquartered far away can't touch.
"The people I see doing this are people who ... want to see their name in the annual report of the community foundation as a community philanthropic leader," Mr. Bigelow says. "You're being a community leader and you're supporting the Y, or the shelter, or whatever you want to do."
Still, commercial funds are aggressively working to make theirs the most desirable destination for charity-earmarked assets. Having seen Fidelity drop its minimum threshold to $5,000, Schwab is weighing the possibility of doing the same.
"We're looking at it," says Kim Wright-Violich, president of Schwab Charitable. Schwab founder Charles Schwab "is putting pressure on me to do that because he wants to make philanthropy accessible."
That's the primary reason for cutting fees, too, she says, although she admits "Schwab may make money and probably does" by using these funds to expand its customer base.