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You don't have to be rich to set up a family foundation through a donor-advised charitable fund, a relatively new way to be philanthropic.
By HELEN HUNTLEY
© St. Petersburg Times, published December 3, 2000
You don't have to be a Ford or a Rockefeller to launch a family foundation. These days it takes as little as $10,000.
The secret: a donor-advised charitable fund. Versions are springing up at mutual fund companies and brokerage firms across the country.
"It's a family foundation for people who drive Fords rather than for people who are Fords," said David Ness, president of St. Petersburg-based Raymond James Trust Co., which recently launched the Raymond James Charitable Endowment Fund.
Although many of the donor-advised funds are relatively new, they have become serious competition for more traditional methods of giving. For example, the Fidelity Charitable Gift Fund has accumulated $2.5-billion, making it one of the largest U.S. charities.
This is how the funds work:
The donor makes an irrevocable gift of cash or securities to a donor-advised fund. The fund is considered a public charity even though most are simply conduits for giving to other charities.
The donor gets an upfront tax deduction the year of the gift, then can direct the fund's giving over many years. As long as the donor's chosen charities pass IRS muster, the directions usually are followed.
The donor can name a child or someone else to direct giving after the donor's death or can let the fund trustees give the money away.
The money is invested until it is distributed, so the donor's account grows or shrinks with market returns. Typically the donor selects from a menu of investment options, usually mutual funds.
"These donor-advised funds have the potential to do for philanthropy what the 401(k) plan did for retirement planning and mutual funds," Ness said. "We also think they're a good planning tool for clients."
But in promoting donor-advised funds, the financial services industry is competing directly with traditional community foundations, Jewish federations and other charities that operate similar funds of their own.
"The gift funds pour an enormous amount of money into marketing," said George Baxter, president of the Community Foundation of Tampa Bay. "The community foundations have small staffs and don't have significant marketing budgets so we are at a disadvantage."
He said community foundations offer donors benefits that brokerage firms do not attempt to provide. Among them: advice on which charities are worthy of support, avenues for donors to become personally involved with charities and follow-up to see how the money was spent.
One brokerage firm, Merrill Lynch, created an alliance of community foundations as an alternative to setting up its own donor-advised fund.
Still, Baxter said he thinks the competition is healthy.
"The positive side is that more philanthropy will be stimulated," he said. Baxter said the marketing efforts by Fidelity and other companies mean that many more people understand how a donor-advised fund works, which makes it more likely they will contribute to one.
Donor-advised funds, including those sponsored by community foundations and Jewish federations, have tripled in size over the past five years, to $7.5-billion in assets, according to a survey by the Chronicle of Philanthropy. Last year, the funds gave away $1.2-billion.
Bill Perkins, a program manager for a St. Petersburg defense contractor, said the opportunity to get a big income tax deduction prompted him to open an account with the Fidelity Charitable Gift Fund this year.
"You can take two or three years worth of what you're going to give to charity and dump that into one year, and it's an enormous benefit," he said. Perkins said the gift also eliminated the usual end-of-the year pressure to get donations completed in time for a tax deduction. Perkins manages his account online, an option many funds offer.
"Now that I've got it set up and doing it, I'm finding it very enjoyable," he said.
Perkins said he uses the fund to make donations to his church and other organizations he has supported in the past. In addition, he uses research tools available through Fidelity's Web site to find out about organizations he might like to support. He said his fund's beneficiaries have included St. Petersburg Christian School, WEDU and the Tampa Bay Performing Arts Center.
Fidelity Investments was the pioneer of donor-advised funds in the financial services industry. Since its launch in 1992, the Fidelity Charitable Gift Fund has been the vehicle for more than $1.7-billion in contributions to charities. Its popularity with donors has caused competitors to take notice.
Fund companies Vanguard Group and T. Rowe Price and brokerage firm Charles Schwab & Co. are among those that have responded to Fidelity's success by launching their own funds. One reason: They don't want Fidelity to attract their customers' money.
Sponsors of charitable funds make their money from investment management and administrative fees based on a percentage of assets. At most funds total fees are 1 percent to 2 percent a year for smaller accounts. For example, a $10,000 account invested in the Fidelity Charitable Gift Fund's equity income option would be charged combined fees of about $163 a year, while a balanced account at the Scwhab Fund for Charitable Giving would be charged $108 a year. Fee percentages are reduced for large accounts. There are no sales commissions on fund purchases.
Ness said the Raymond James offering is a bit different from its competitors because donations are invested in mutual funds from multiple companies instead of just one. In addition, people who donate $500,000 or more can have an individually managed account.
Most of the funds allow an account to be opened with as little as $10,000, although Vanguard requires $25,000. The minimum gift that can be directed to a particular charity is typically $250 or $500. Some funds require that the account maintain a minimum balance, such as $2,500.
The donor-advised funds offer several financial planning advantages. The most obvious is the timing of tax deductions.
For people whose itemized deductions are fairly close to the standard deduction, it makes sense to bunch deductions into every other year, taking the standard deduction in alternate years. A donor-advised charitable fund simplifies that process.
Donor-advised funds also work well for people who have highly appreciated stock on which they would owe a big capital gains tax if they decided to sell. Giving the stock away allows them to avoid the tax. Giving the stock in one donation to a fund is simpler than parceling out shares to multiple charities.
Joseph and Aila McEwen of St. Petersburg took this approach, donating stock in Modern Group Ltd., the company he founded in Bristol, Pa. Because the stock is not publicly traded, their donation to the Fidelity Charitable Gift Fund required an independent appraisal to determine its value. The company's employee stock ownership plan then bought back the stock from the fund.
"That's a convoluted process that a lot of small charities wouldn't be able to handle," Mrs. McEwen said. "The fund gives us a lot of flexibility. When something comes up, I just fax the little form up to Fidelity and tell them to shoot some money down."
A fund can be used to create a legacy of giving that extends for many years beyond the donor's death. One way is to name a fund the beneficiary of a retirement account, avoiding the taxes that would be due if the account is left to any non-charitable beneficiary.
Donations to charity, whether in life or at death, also reduce estate taxes for the donors.
A donor-advised fund even can be used to teach adult children how to give by setting up accounts in their names. This will allow them to direct the donations (but not divert your legacy for less charitable purposes).
The funds also are the perfect vehicle for a long-standing charitable tradition: the anonymous gift. Because the check comes from the fund, the original donor's name need not be revealed.
Interested in creating your own charitable fund? Here is an option from a local community foundation, followed by five from the financial services industry:
Community Foundation of Tampa Bay: Minimums: $10,000 initial contribution, no minimum for subsequent contribution, $250 gift distribution. (813) 282-1975 or http://www.cftampabay.org.
Fidelity Charitable Gift Fund: Minimums: $10,000 initial contribution, $1,000 subsequent contribution, $250 gift distribution. (800) 258-5759 or http://www.charitablegift.org.
Raymond James Charitable Endowment Fund: Minimums: $10,000 initial contribution, $500 subsequent contribution, $250 gift distribution. Toll-free (866) 687-3863 or http://www.myfamilyfoundation.org.
Schwab Fund for Charitable Giving: Minimums: $10,000 initial contribution, $1,000 subsequent contribution, $500 gift distribution. (800) 746-6216 or http://www.schwabcharitable.org.
T. Rowe Price Program for Charitable Giving: Minimums: $10,000 initial contribution, $500 subsequent contribution, $500 gift distribution. (800) 564-1597 or http://www.programforgiving.org.
Vanguard Charitable Endowment Program: Minimums: $25,000 initial contribution, $5,000 subsequent contribution, $500 gift distribution. (888) 383-4483 or http://www.vanguardcharitable.org.