October 22, 2000|By EILEEN AMBROSE
It's approaching that time of year when people start weighing two different, but compatible, financial goals: giving to charity and lowering their tax bill.
For a growing number of people, the solution to both objectives is a "donor-advised fund."
With these funds, donors make an irrevocable contribution to an account, where the money is invested. Donors get a tax deduction that year for the contribution. From then on, the money is out of donors' hands, but they can recommend when, how much and to what charity donations are made.
Community foundations have long offered donor-advised funds. But the funds have gained widespread popularity since investment companies, such as Fidelity Investments, Charles Schwab & Co. and the Vanguard Group, began setting up their own charitable organizations that offer them. Baltimore's T. Rowe Price Associates launched its own version this month, the T. Rowe Price Program for Charitable Giving.
Fidelity led the pack when it opened its Charitable Gift Fund in 1992. Based on 1998 contributions of $571.9 million, the Gift Fund became the third-largest charity in the country last year behind No. 1 Salvation Army and the YMCA, according to the Chronicle of Philanthropy. The Gift Fund has more than 24,000 donors now, and contributions in the first nine months of this year reached $627 million.
"It's a model whose time has come. People have retirement accounts and investment accounts," said Cynthia Egan, Gift Fund president. "Giving accounts are important in the overall picture."
Donor-advised funds attract those who don't have the $1 million or more to start a private foundation or who don't want the cost and administrative hassles of running one, experts said. The funds also appeal to those who want a tax deduction now but don't know where to donate their money yet or don't want to distribute it all at once, said James S. Riepe, Price vice chairman.
Here's how they work:
A donor contributes cash, stock or mutual fund shares into the fund. Fidelity and Price, for instance, require a $10,000 minimum initial contribution; Vanguard requires $25,000. Donors can add to the funds, which can remain open for generations.
Donors recommend a pool of mutual funds in which to invest the money. For instance, Price offers four pools of its funds, each pool with a different investment objective ranging from principal preservation to long-term growth.
Donors get a tax deduction based on the contribution only, and not on any future gains in the account. An advantage of donating appreciated securities is that the deduction will be based on their current market value, although they may have been purchased for much less, experts said. And donors won't be hit by capital gains taxes as they would if they sold the securities before donating them.
Once money is contributed, donors can't touch it. But they can advise where and when gifts are made. Donations must go to qualified charities and cannot benefit donors or their families, such as donors getting free tickets to a charity ball in exchange for a donation. The charitable organization overseeing donor-advised funds can reject donors' recommendations, although organizations try to follow donors' wishes.
The funds may not be suited for everyone, Riepe said. A donor who wants to give to a single charity or wants to help a charity pay for an immediate need may be better off giving directly to the charity.
If you're considering a donor-advised fund affiliated with an investment firm, be aware that terms and fees vary. Donors pay an administrative fee plus investment-management fees with the mutual funds. Fidelity's Gift Fund, for instance, charges an administrative fee of 0.25 percent to 1 percent, depending on the size of the account, and money-management fees of 0.45 percent to 0.69 percent.
Donor-advised funds are not without controversy.
Some community foundations have worried that charitable programs started by investment firms will mean less money for these foundations and the local charities they support. Baltimore Community Foundation President Tom Wilcox, though, foresees community foundations working with these programs to determine where donor dollars are needed.
Donor-advised funds also don't appear in the tax code. To clarify rules on the funds and to prevent misuse of them, the Clinton administration proposed several regulations this year. Under the proposals, charitable organizations overseeing the funds must distribute at least 5 percent of total assets each year to public charities, private operating foundations or government-related entities. Some fund programs voluntarily have set that limit. Fidelity's Gift Fund said it has surpassed that goal, giving away 20 percent or more a year. In the first nine months of this year, it distributed $455 million, or 18.2 percent of assets.
Charities have mixed reactions.
