(Reuters) - 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 time.
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.fidelitycharitable.org/), Vanguard (www.vanguardcharitable.org/) and Schwab (schwabcharitable.org/). Naturally, since these entities are in the money-management business, they charge fees for their services.
How much of an annual management fee depends upon how much you invest. The T. Rowe Price Program for Charitable Giving (here), 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 growth-oriented.
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 link.reuters.com/jen45s). 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 Price.
The author is a Reuters columnist. The opinions expressed are his own.
Editing by Lauren Young and Jilian Mincer