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Donor-Advised Charitable Mutual Funds

by Cara Scatizzi

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Giving to charity is important to many individuals for a variety of reasons. But an added incentive is the tax benefits.

Donor-advised funds are mutual fund-sponsored programs that administer charitable-giving programs on behalf of individual participants, who can direct which charities should receive their contributions. The funds offer one way for you to maximize your charitable deductions, allowing you the opportunity to take a deduction upfront before choosing specific charities, as well as the opportunity to donate appreciated securities rather than cash to sidestep capital gains taxes.

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Cara Scatizzi is a former associate financial analyst at AAII.
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How It Works

In a donor-advised charitable program, investors make an irrevocable contribution to the donor-advised account and receive an immediate tax deduction. Typically, the money in the account is invested in various mutual funds that are selected by the donor. The money in the account grows tax-free, and is distributed to charities that are requested by the donor, under a donation-granting program determined by the donor.

Most large mutual fund companies have these types of funds. You can also find religious organizations and smaller companies that offer donor-advised funds as well. The typical minimum initial investment ranges among fund companies (typically from $5,000 to $25,000). Minimum additional contributions range from $500 to $5,000.

Contributions to the accounts can be made with cash or with individual stock shares or mutual fund shares. Donating stock and mutual fund shares that have appreciated allows you to sidestep any capital gains taxes, since you can take a deduction for the entire appreciated amount.

Most donor-advised programs will allow you to invest money at any time, while giving you the freedom to distribute the charitable grants as you see fit. This allows you to donate when it is more beneficial to you, even if you are not ready to commit to a particular charity at that time.

Typically, investors can choose among different mutual funds of each fund company to allocate the investment of their contributions. Most offer index mutual funds as well as fixed-income and growth funds. Any income earned from the funds is reinvested back into the charitable account. However, the investor will never receive payments of capital gains or dividends outside of the account.

Some companies offer customized investment pools with different investment objectives. The investments are allocated among various funds.

Making Grants

Each fund family has different rules regarding the money that is granted to charities from your account. Minimums range from $50 to $500 per grant. Some also require a minimum amount of grants be made over a set time period, for example, at least 5% of the account’s value every seven years.

In terms of the charities that receive the grants, the investor is free to request specific charities and foundations, but the donor-advised fund has final say over which ones are accepted. All programs require that the entity be properly tax qualified, and typically the program administrator will check the tax status of each request. Each fund family also has its own rules and restrictions on grants. For example, some do not allow grants to international charities.

GuideStar offers a searchable charity database and most fund companies are linked to their database. You can access it at www.guidestar.org.

Fees

As with any mutual fund, expenses are incurred and paid for by investors in the form of fees. Fund companies charge an administrative fee for the donor-advised funds. Most have a sliding scale fee schedule that ranges from less than 0.10% to just less than 1.0%, depending on the amount of funds invested.

In addition to the administrative fees, there are investment fees that cover the net expenses of the underlying mutual funds. Some companies will roll both the administrative fees and other fund related expenses into one fee.

How to Invest

The fund companies that offer these programs have paperwork that can be submitted on-line for all account applicants. After approval, you can transfer money or assets via wire transfer, or if you are donating stock or mutual fund shares from the same fund family, a simple transfer can be made. Most allow for donations of securities outside of their own fund families.

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Investor Suitability

Any investor who donates money to charity can use and benefit from donor-advised charitable funds. Opening an account is simple and most large fund companies offer such funds.

Tax Implications

Tax deductions are made at the time of contribution to the account, not at the time of the grant. In addition, donating shares of stock or mutual funds that have appreciated in value allows for additional tax savings: You can deduct as a charitable contribution the full value of the appreciated securities and give the shares with no capital gains taxes due, allowing you to donate more to the charity of your choice.

You can make contributions and take deductions every year up to the amount allowed by the tax code.

The Pros

Ease

Once an account has been opened, it’s very easy to add money and gift it to charities. You can choose as many different charities as you wish, or change contribution and grant amounts. All of this can be done on-line. The details, including the recordkeeping and paperwork, are handled by the donor-advised fund.

Donate Now, Decide Later

Donations can be made at any time and charitable gifting can occur at any time after the donation is accepted. You can wait to decide how the funds will be used.

Appreciation of Funds

Funds in the account grow tax-free, giving you more money to donate to charities.

Additional Tax Benefits

If you add stock and mutual fund shares that have appreciated to a donor-advised fund, you can reap additional tax benefits.

The Cons

Control

Once a donor makes a contribution, the donation is irrevocable, and the money cannot be withdrawn for the individual’s use. In addition, the fund does have final approval over specific charities; if you want to make a donation to a specific charity that is not approved by the fund, you would not be able to do so through the program.

Depreciation of Funds

Investor dollars are put into mutual funds and the value of those funds can fall. If the underlying funds lose money, the value of the account will also fall and the amount the donor intended to give to the charity may not materialize.

Additional Information

The following are a few of the major mutual fund companies that offer donor-advised funds. The Web sites listed provide detailed information on each fund company’s rules and policies. The funds vary greatly in minimum investment amounts, fees and other account maintenance issues. Read each site carefully to evaluate the best option for you.

Charles Schwab
www.schwabcharitable.org

Fidelity
www.charitablegift.org

T. Rowe Price
www.programforgiving.org

Vanguard
www.vanguardcharitable.org

 

Cara Scatizzi is a former associate financial analyst at AAII.


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