Create Your Own Charitable Foundation

HOW’D YOU LIKE to have your own charitable foundation? Contrary to popular belief, you don’t have to be a big wheeler like Bill Gates to do so.

All you need is at least $5,000 that you’d like eventually to hand over to a good cause. With that, you can invest in a donor-advised fund at a major fund family like Fidelity or Vanguard. At minimal cost to you, you’ll have your own charitable account to allocate as you wish. You’ll get the deduction upfront, and the fund manager will (hopefully) increase the account’s value over time through savvy investing. (And unlike setting up a traditional private foundation, you won’t need to worry about tricky IRS filings or excise tax.)

Why is this better than just writing a check to your favorite charity? For starters, the account grows tax-free, which will generate more dollars to be donated. Also, as would be the case with any charitable donation, your contributions (in this case to the fund rather than a charity) are tax deductible, assuming you itemize your taxes. This makes these accounts great for some last-minute tax-cutting maneuvers, even if you aren’t sure yet how you’d like to allocate the money. Finally, using these funds is a simple way to keep organized. A donor-advised fund provides an investor with a single record for tax purposes, even if the investor instructs the fund to distribute dollars among various causes.

The donor-advised funds we’re focused on today are associated with major mutual-fund companies (others work directly with a specific charity), but they’re not actually part of the firms themselves. Instead, they’re separate entities — specifically tax-exempt, nonprofit organizations that are given the 501(c)(3) label by the IRS. It’s this status that enables donors to receive tax deductions in exchange for their contributions. Such contributions can take various forms, depending on the donor-advised fund, although typically it’s cash or appreciated stock or mutual-fund shares. Notably, donors who choose to give appreciated securities can avoid paying the capital-gains tax that would normally accompany a sale. (For more on this tax strategy, click here.)

Contributions to donor-advised funds grow via “investment pools” that typically are a combination of investment vehicles. For example, at the T. Rowe Price Program for Charitable Giving, donors can choose from four options ranging from a Gift Preservation pool that invests 80% of its assets in one of the company’s money-market funds and puts the remaining 20% in the T. Rowe Price Short-Term Bond fund (PRWBX), to a Growth Pool, which invests across a spectrum of stock funds, from the T. Rowe Price Equity Index 500 fund (PREIX) to the T. Rowe Price International Growth & Income fund (TRIGX). But even the latter isn’t racy. “They’re all fairly conservative,” says Ann Boyce, president of the program.

And while most of the investment options revolve around existing mutual funds, there are a few exceptions. The Calvert Giving Fund, for example, allows donors to invest in the Calvert Foundation’s Community Investment Note, which finances projects such as the creation of affordable housing. That provides a charitable double-whammy, says Shari Berenbach, executive director of the Calvert Social Investment Foundation. Donors who invest in the one-, three- and five-year notes begin helping communities immediately, and upon maturity, the principal and interest can be used to fund other charities.

Donors should understand upfront that their contributions are irrevocable. Monies are destined for the charities they choose, whenever they decide to make those grants. While some donor-advised funds require donors to grant 5% of their account’s assets each year, donors don’t have to make snap decisions about the entire amount. “It frees the donor from the time-clock pressure of having to make the granting decision,” says Calvert’s Berenbach. “It’s giving on their timetable.”

Choosing the right donor-advised fund requires research in a few areas. For starters, you need to keep an eye on fees. Every donor-advised fund has two layers of fees: those related to administration and those tied to the investment itself. Administration fees often decline sharply as an account’s assets rise, although the first breakpoint usually occurs only after an account reaches $500,000 in size. The fund’s investment fees, on the other hand, are directly correlated to the firm’s mutual-fund fees. It’s no surprise that the Vanguard Charitable Endowment Program sports the lowest fees in the pack.

Another potential issue is the minimum initial contribution. Calvert is at the low end with a $5,000 requirement, while Franklin Templeton and Vanguard demand $25,000.

Other considerations include the strength of a fund’s charity database, which can help donors find charities they’d like to fund. Donor-advised funds will only make grants to charities that are in good standing with the IRS, so that provides an extra layer of protection. Donors with little time on their hands may want a fund with strong online capabilities. Fidelity fits that bill, allowing investors to establish an account online, check the past three years of records and even make grants via the Web.

The donor-advised funds we’ve chosen to spotlight this week are all affiliated with major fund families. We’ve omitted the Schwab Fund for Charitable Giving from our chart because of recent revelations of dubious trading practices at Schwab. We’re taking a wait-and-see approach. Donors might want to investigate that option on their own.

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This is a really great article. Read on. I am amazed that I can start a foundation with so little. I plan to get busy on this in the next year. My goal: Start a Foundation!!!!

COOL!

Read on by clicking below…

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