Focus on Personal Finance
Create a "Donor-Advised Fund"
It's like having your own tax-advantaged, charitable foundation.

BY RICHARD J. ALPHONSO, JD, CPA/PFS, M.S.T., AND ANITA S. FRANK, CPA

Now is the time to take steps to reduce your income tax liability for 2002. As you know, itemized deductions such as home mortgage interest, real estate taxes and charitable contributions are the primary expenses that you're permitted to deduct from taxable income on your personal income tax return.

In this month's article, we'll explore an attractive, tax-advantaged option that enables you to give to your favorite charitable causes over a period of years, while involving your family in philanthropic decisions. This could even be a "hands-on" parental tool for teaching charitable giving, with family members voting for the charities that will benefit from your family's gift.

MAKING THE DONATION

You may not be aware of it, but a method for charitable giving exists that differs from giving cash or securities directly to a charitable organization.

In using this method, you can make a donation to a "donor-advised fund" in 2002 and receive an income tax deduction this year. Then, at some future date, you decide which charities will receive grants from your account. The assets grow tax-deferred prior to your decision to withdraw the funds and make grants to the specific charities. These donor-advised funds are typically invested in mutual funds managed by financial service companies such as Charles Schwab, T. Rowe Price and Fidelity.

Some donor-advised funds are run by nonprofit organizations like the Nature Conservancy, Rotary Foundation and Harvard, for example. Donation pools can also take the form of funds called "community chests." These are community foundations in which all donations benefit the specified community.

HOW THIS CONTRIBUTION WORKS

You'll be entitled to a tax deduction for the charitable contribution in 2002 because you're transferring cash or securities (publicly traded stock, mutual fund shares or bonds) to the donor-advised fund this year. The fund becomes the owner of the assets, but you'll have an account titled with your name or your family's name. Most of the mutual fund companies that offer donor-advised funds allow you to select among several investment options, including bond funds, emerging market funds, growth funds and balanced funds. You still have a say in how the fund is invested and you can designate grants to specific charities in future years. You'll receive account statements periodically listing all investment and grant activity in the account. When you decide to make a grant to a charitable organization, you notify the fund, and the grant is made.

Be sure to inquire about fees charged to your account. Fees are calculated as a percentage of the asset balance, and are charged for asset management and administration. A wide range of fee rates exists among these funds, so be aware that the charities will receive smaller grants from your account if you donate to a fund that charges high fees.

And be sure that the IRS recognizes the fund as a public charity. This will protect your ability to deduct the contribution on your income tax return.

MINIMUM INVESTMENT REQUIRED

You must contribute a minimum amount to open an account, and this varies with the funds. Typical minimum investment amounts are $10,000 to $25,000, but could be much higher.

You can contact the financial service companies or nonprofit institutions by telephone or on their Web sites.

Two examples are the Fidelity Advisor Charitable Gift Fund and Schwab Fund for Charitable Giving. If you're interested in giving to a specific community foundation, visit www.communityfoundationlocator.org. The funds are listed by state with links to the Web sites of each community foundation. Just be sure to make your contribution before the end of the year to qualify for a 2002 tax deduction.

Richard J. Alphonso, JD, CPA/PFS, M.S.T., and Anita S. Frank, CPA, are president and tax manager, respectively, of The Financial Advisory Group, Inc., in Houston. The Financial Advisory Group {(713) 627-7660} provides personalized fee-only financial planning, investment management and business consulting services.