Following charitable example of a billionaire

PERSONAL FINANCE

July 02, 2006|By EILEEN AMBROSE | EILEEN AMBROSE,SUN COLUMNIST

You can be like Warren Buffett, even without his billions.

The world's second-richest man this month will begin to turn over the bulk of his fortune to charity, with most of it going to a foundation established by the only person wealthier than he is, Bill Gates. Many in the philanthropic community expect Buffett's magnanimous gesture to rub off on others -- even those of modest means.

"No question," says Tom Wilcox, president of the Baltimore Community Foundation. "Every time people hear about other people being philanthropic it inspires them to do the same thing. ... The capacity for people to be generous is limitless once they're shown how to do it."

Sure, Buffett might have made the largest charitable pledge in history, but small gifts have an enormous impact, too. About 1 in 12 people who die each year leave money to charity, adding up to about $20 billion annually, said Robert Sharpe, a nonprofit consultant in Memphis, Tenn. "Most of it comes from people who are not wealthy," he said.

Those with generous hearts but without deep pockets have a variety of giving options. Some allow donors to start a small gift program that can grow over time and span generations.

Others provide an income stream or other benefit during a donor's lifetime.

Here are a few options:

Outright donations. The simplest way to give is to donate directly to a charity. The nonprofit gets the use of the money immediately, and you can take an upfront tax deduction when filing an itemized return.

You can give cash, but some suggest donating appreciated stocks or mutual funds held for more than a year.

"You can give the stock and take a tax deduction on the full amount and never have to pay taxes on the gains, nor does the charity," said Columbia financial planner Michael Kitces.

The size of the tax deduction depends on the type of charity and donation.

When giving cash to most charities, you generally can't deduct more than half of your adjusted gross income for the year, said Mark Luscombe, a principal with CCH Inc., a tax information provider in Illinois. For appreciated securities, the deduction can't exceed 30 percent of income.

If donations exceed these limits, you can carry over your deductions for up to five years, Luscombe said.

Donor-advised funds. Community foundations, investment companies, universities and other organizations offer these.

Essentially, a person donates cash or appreciated securities to the donor-advised fund and gets an upfront tax deduction. The gift is irrevocable. However, donors can recommend which charities receive donations and how much. Donor-advised funds follow gift recommendations as long as the charity is legitimate.

Donors also advise on how the money should be invested, usually choosing among several portfolios. As their account grows over time, so can donations. But donors won't get additional tax deductions for gifts made with investment gains.

The funds typically have a minimum initial contribution. For example, Fidelity Investments, which runs the largest donor-advised fund, and T. Rowe Price Associates require at least $10,000. Vanguard Group requires $25,000.

Donors also can name their successors when they die. "Many parents name their children," says Ann Boyce, president of Price's program for charitable giving. Or, the donor might elect to have all the money disbursed at death to qualified nonprofits, she said.

Fees among donor-advised funds vary, so check them out. The more you pay in fees, the less left for charities.

Donor-advised funds are a simple alternative to million-dollar private foundations that are more complicated to run. Private foundations also must give away at least 5 percent of their assets annually. Donor-advised funds don't have that requirement, although many typically give away much more.

Charitable gift annuity. With this, a donor makes a contribution -- usually at least $10,000 -- and the nonprofit in return promises an annual income stream for the rest of the donor's life, said Kathleen Rehl, a financial planner in Land O'Lakes, Fla. "It's a combination of a gift to a charity and an annuity," she said.

The donor's gift is added to a large investment pool. An individual's promised payout is based upon life expectancy. "The older they are, the bigger the payout," Rehl said.

A 35-year-old, for instance, would receive an annual income of 4.5 percent of the initial gift; a 65-year-old would reap 6 percent, she said.

Once the donor dies and payouts stop, any money left over goes to the nonprofit or designated charity.

Recently, Rehl's 89-year-old client donated $25,000 through a gift annuity. In return, she will receive 11 percent of the initial gift -- or $2,750 -- a year for life. Tax deductions are based on a formula tied to the donor's age. In this case, Rehl's client gets a $14,340 deduction.

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