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The Philanthropic Investor

Philanthropy isn't meant to be a vehicle for delivering tax breaks.

By LIZA ROCHE

Following the generosity of Bill Gates and Warren Buffett, Americans were particularly philanthropic this past year. Donations to charitable causes rose by 6.1 percent to more than $260 billion. The increase was likely a direct response to recent natural disasters, according to the Glenview-based Giving USA Foundation, an educational and research arm of the American Association of Fundraising Counsel. To be sure, charities are big business in the U.S. economy. The sector now makes up more than 2 percent of our gross domestic product.

But while charitable gifts are often made for completely altruistic reasons, some donors--whether individuals, foundations or corporations--find that gift-giving is a smart component to an overall financial plan.

Ron Jordan, co-author of Invest in Charity: A Donor's Guide to Charitable Giving (Wiley, 2001), says that philanthropy isn't meant to be a vehicle for delivering desirable tax outcomes. If you are looking for a way of saving a buck, "you should probably just hold onto your money" and not donate, he says.

Many strategies have been developed, however, to ensure that donors can make gifts and take care of their own financial needs in the process. In fact, there is so much for donors to learn that it prompted Jordan and co-author Katelyn Quynn to write their book.

The authors discuss not only the tax and financial considerations, but finding the right charity and researching the legitimacy of a nonprofit organization. They suggest a multi-step action plan toward selecting the right approach and charity.

There is no single recipe for figuring out the best way to make a charitable gift, says Cary Stamp, president of Lincoln Park Financial Group in Chicago.

Many donors today don't just want to make a gift--they want to have a voice in how the money is used or distributed. Making such a gift work as a tax play isn't bad, either, Stamp says.

For those who can give enough to make the extra costs associated with it worth it, family foundations can bring extreme control to giving. Insiders point out that because gifts can continue for years to come, the creation of a family foundation can bring employment to family members and the social perks that go along with being associated as a notable donor.

A donor advised fund might be a good choice for high net worth people who want to exercise a high amount of control over their giving, but don't want the costs and responsibilities of a private foundation.

"It's literally just you deciding on who you want to give the money to," says Stamp. "Even though you give the money away, you still control it. For a lot of folks, that has appealing benefits."

Firms offering such funds include Fidelity Investments, Vanguard and T. Rowe Price. Some community foundations and nonprofits also offer DAFs.

Donors can enjoy immediate income tax deductions and can reduce or eliminate capital gains, gift or estate taxes by putting money into a DAF, even though they don't have to immediately decide how to disperse the funds. Annual fees generally run no more than 1 percent of the account balance. Another benefit is that because checks originate from the DAF, contributors' identities can be protected.

Potential donors who want to see direct financial benefits from their donated assets should also look at charitable remainder trusts and charitable lead trusts. In a charitable remainder trust, the irrevocable trust allows donors to give away money or property while still receiving an income in the way they see fit for up to 20 years.

The donor, or other income beneficiaries, receives distributions from the trust annually, and the charity or charities receive the assets remaining when it ends. Donors get an immediate income tax deduction for the remainder interest, can avoid capital gains tax on the donated assets and get gift or estate tax deductions for the remainder interest.

A charitable lead trust operates in reverse to the charitable remainder trust, in that the benefiting charity receives regular payments from the trust for a certain period of time. Those named as the remainder beneficiaries then take what is left in the remaining trust assets.

For most situations, Stamp says donors should look at giving low-basis, highly appreciated assets to charities because doing so can bring substantial savings in capital gains taxes. "It used to work phenomenally well when capital gains taxes were higher," he says.

Published: August 01, 2006
Issue: Fall 2006