Dec 5 Is using a third party a better way to
donate your charitable dollars?
Tax- and convenience-wise, perhaps. Yet there's always a
cost when intermediaries are involved, as they are with
so-called donor-advised funds. And you have to keep a close eye
on how the fund is managed to avoid abuses.
Generally, donor-advised funds receive contributions from
investors for distribution to nonprofits. Once you invest in
them - either with cash or securities - you qualify for a
charitable deduction on your federal income tax. You then
direct the managers to make grants to specific charities over
Donor funds have grown in popularity since Congress raised
the general exemption for the gift and estate tax this year to
$5 million. Those exemptions may not last since they are due to
expire at the end of 2012 - unless Congress acts to keep or
expand them. There's also been some discussion in Washington to
trim charitable write-offs for higher-income individuals.
Mutual funds, brokerage firms and banks run some of the
largest donor-advised funds, which hold more than $25 billion
in assets. They are run by major players such as Fidelity
(www.vanguardcharitable.org/) and Schwab
(). Naturally, since these entities
are in the money-management business, they charge fees for
How much of an annual management fee depends upon how much
you invest. The T. Rowe Price Program for Charitable Giving
for example, charges 0.5 percent annually on account balances
up to $500,000. The lowest fee - on balances of $15 million and
above - is 0.09 percent. Like the other donor funds, the T.
Rowe Price fund manages the money in pools before donation. It
has six different portfolios that range from conservative to
Your charitable tax write-off also may go farther in a
donor fund compared to other nonprofit vehicles. You garner a
deduction of up to 50 percent of your gross adjusted income
through a donor fund compared to a low as 20 percent for
certain other groups. There's also less paperwork if you work
with a mutual fund.
As you can imagine, the IRS has some strict rules on how
donor funds operate (see). There
have been abuses in the past (not with any connected to mutual
funds) and some have been denied their tax-exempt status. Here
are some red flags that will help you avoid trouble:
* You don't want to be involved with a donor fund that
contributes to organizations that are for-profit entities or
501(c)(4) groups that do lobbying. If the IRS finds out, your
deduction could be disallowed and you may be on the hook for
taxes. So you need to probe fund managers to see that they are
only donating to 501(c)(3) groups, which is the IRS designation
for nonprofits that don't do lobbying.
* Read the fine print of any donor-advised fund. If they are
paying for educational loans to members of a donor's family,
pay for goods or services not related to charitable activities,
those are signs that you should avoid the fund.
Beware of funds that place limits on how much money can be
donated. This could be a subtle indication that your funds may
not be used for charitable purposes.
* Definitely steer clear of funds that invest in
closely-held corporations, limited liability corporations or
partnerships. These are not charitable organizations.
* Look for money that may be spent on fund-raising, travel
or administrative items. This is a sure sign that you're money
is not reaching a charitable mission.
While they simplify the process of making donations over
time, donor-advised funds are ill suited for those who want
complete control over their money. They are also not viable for
political contributions, many private foundations, individuals
or other groups that don't qualify as charities under IRS
rules. Consult your tax adviser for more specifics.
Want to boost your contribution even more? Ask if your
employer has a matching grant program. They may be able to
contribute directly to your donor fund, according to T. Rowe
The author is a Reuters columnist. The opinions expressed
are his own.