Most benevolent souls drop a few quarters in the Salvation Army kettle every year, and many participate in a payroll-deduction program to benefit a combined charity, such as the United Way.
But other methods of giving that are becoming popular may help expand the practice of combining sophisticated tax planning with good intentions-by taking advantage of the Internal Revenue Service`s high regard for charitable gifts.
Among the fastest growing forms of organized philanthropy is the community foundation, which allows benefactors of more modest means to act like millionaires by setting up what, in effect, are mini-foundations.
With a grant to a community foundation, such as the local Chicago Community Trust, an individual may specify that he wishes a gift-or, more precisely, the investment income from that gift-to be used only for certain charities or to benefit programs of a certain type, such as the arts or childhood education. The foundation invests the donor`s gift and makes grants from it based on the donor`s recommendation.
At the Chicago Community Trust, the minimum grant to establish such a donor-adviser fund is quite high, at $25,000.
But other community foundations among the 400 around the nation offer similar options for initial grants as low as $5,000, said Jeff Shields, coordinator for the Washington, D.C.-based Council on Foundations.
As with most donations to a qualified public charity, a gift of, say, $10,000 to a community foundation qualifies the donor to reduce adjusted gross income at tax time by $10,000, said Shields.
That`s true as long as the donation doesn`t amount to more than half the donor`s adjusted gross income.
Someone in the 28 percent tax bracket thus can make a $10,000 contribution to a community foundation or an individual charity, subtract $10,000 from adjusted gross income on his tax return, and save paying $2,800 in taxes that would have been owed without the contribution, said Elaine Collins, of Collins Financial Planning in Libertyville, who advises many clients on charitable giving.
Therefore, when tax savings are considered, the cost of the donation to this taxpayer would be $7,200.
Along the same lines as the community foundations, but on a national scale, mutual-fund giant Fidelity Investments this year has taken an unusual step into the non-profit world with its Charitable Gift Fund.
Like a community foundation, Boston-based Fidelity offers to set up individual gift funds for anyone with a minimum of $10,000 to give. With the gift to the fund, ownership of the money transfers to the Fidelity charity, and the donor may take an immediate tax deduction. But he can direct the fund on when and to what charities to send proceeds of the gift.
”It`s a way to make giving easier for people,” said Jamie Jaffee, executive director of Fidelity`s new effort.
”This really is a donor-driven program; it`s up to the donor to advise where they want the dollars to go.” In the gift fund, the donor`s grant grows tax-free in any combination of three investment ”pools” managed by Fidelity, which include Fidelity`s Magellan Fund.
Backed by its expertise in managing billions of investor dollars in its commercial mutual funds-many of which are in the pools used by the charity fund-Fidelity boasts that ”we have the investment management expertise which we think will make the dollars work harder,” Jaffee said.
”People with unusually high income one year can let it grow and be thoughtful in the future,” she said, explaining that the tax deduction is awarded for the year in which the contribution to the gift fund is made, and the disbursements are made later, with advice from the donor.
Under the Fidelity program, as with many community foundations, individuals also may make gifts of stock, which can bring added tax benefits to generosity.
For instance, if a family holds shares of stock that have grown considerably since their purchase, even decades ago, the family can donate the shares to the Fidelity fund and take a tax deduction for the appreciated value of the stock, but pay no capital gains on the appreciation.
The charity fund may sell the stock at its appreciated value, and also need not pay capital gains, Jaffee said.
Financial planner Collins said this technique is an option with many other charities or community foundations.
A variation on the technique, she said, allows some benefactors to make a grant to a charity during their lifetime, but maintain the right to live off the income from the grant while they live. The technique is known as a remainder trust.
”People even do this with their homes,” she said. ”They have the ability to live in their homes the rest of their life, and the charity can sell the home after their death, or use it for whatever purpose,” she said.
While many of these approaches to charitable giving are out of reach for most Americans, Fidelity`s move into the area may have the effect of making charitable giving easier, and more popular among benefactors of moderate means, said Shields, of the community foundation group.
”It will reach donors no one else will reach,” Shields said.
Still, the move by Fidelity-best known for its for-profit investment management-has raised eyebrows in the charitable-giving community.
”There is some concern,” Shields acknowledged. Some foundations fear that Fidelity will strip away contributions that might otherwise go to them, and others believe Fidelity`s management fees are too high to constitute charity.
Jack Shakely, president of the California Community Foundation, last month fired off a letter to fellow foundation leaders and lawyers around his state, citing what he claims are Fidelity`s higher fees and inexperience in charitable giving, and a criticism that Fidelity has simply copied the community-foundation model.
Management fees charged by Fidelity`s gift fund include a 1 percent fee on assets in the gift fund as a whole, which helps cover investment management costs as well as the cost of distributing gifts to various charities, said Jaffee. In addition, donors` funds may be charged a maximum 1 percent fee to cover underlying fees of the mutual funds the gifts are invested in, she said. Fidelity waives the normal ”load” fee charged to commercial participants in its mutual funds, she said.
”The intention is not that Fidelity is in this to make a profit,”
Jaffee said, noting that the venture is losing money now and isn`t expected to break even for several years.
The California foundation as well as the Chicago Community Trust charge an annual fee only on the income generated by the fund, not the principal itself, said Richard Turner, director of communications for the Chicago foundation.
”(Fidelity) is competition for us,” he said. ”But our advantage is that we have lower fees, a donor has the services of our grant office and we monitor the grants once they`ve been made,” he said.
Advisers at the Chicago Community Trust, for instance, have developed a long-term relationship with the local Mexican Fine Arts Center Museum in Chicago`s Pilsen community, said Carlos Tortolero, director of the center.
The trust has supported the museum since its inception in 1987, most recently with a $73,600 grant that, in part, has allowed the center to hire a performing arts coordinator. The new program has helped launch three Latino theater groups, Tortolero said. The trust`s grants also have helped the museum fund its operating costs as well as renovate its facilities.
”Most community foundations will believe they have the advantage in that they know the community, and they have the grant-making staff,” said Shields, drawing a distinction between Fidelity`s effort and the more-established community foundations. ”With Fidelity, it`s up to the individual to seek out these charities.”
Fidelity`s new gift fund clearly will carry some marketing benefits for the mutual-fund company`s for-profit operations.
”The hope is that we attract new people into Fidelity,” Jaffee said.
It also may help Fidelity convince endowment-rich charities to allow Fidelity to manage their assets, she said. ”We are interested in having the non-profits see us as a potential place for them to invest their endowment money,” she said.
Since Fidelity`s September launch of its fund, it has attracted 220 donors and $14 million in assets. More than $2 million has been given away to 450 charities.
A major Fidelity competitor, Valley Forge, Pa.-based Vanguard Group, is watching Fidelity`s new program carefully, said Brian Mattes, a spokesman for the mutual-fund group.
