It can still be better to give than to receive

Charitable endowment funds simplify giving, offer tax advantages and can help you leave a lasting legacy.

Have you ever considered the power and the pleasure of establishing your own private foundation? Giving creates a positive feeling in people, institutions and communities. It makes us feel generous, gives us an aura of well being and gives rise to new and innovative programs and services. Giving helps humanity. During 1999 individuals just like you made charitable contributions surpassing $190 billion in the United States alone. Since 1997 charitable contributions in this country have been increasing by more than $15 billion annually.

However, even the act of giving can become complicated, especially if you are exceptionally generous. Donors are often overwhelmed by requests for support from well-meaning charities and fundraisers. Donors must understand exactly when and how to give in order to obtain the highest tax benefits. When the charity changes its policies or philosophy, donors may lose control of their gift.

Charitable endowment fund

A Charitable Endowment Fund simplifies the power of giving by making grants to these organizations on your behalf. You can enjoy the pleasure of giving without such problems as timing, tax benefits, expense and bookkeeping.

How does it work? A brokerage firm establishes a tax-qualified public charity. Under this umbrella they accept your donation and the donations of other clients. Your donation is allocated into your specific account; other donors have separate accounts within the charity. Once you have funded your account, your donation is a part of the tax-qualified public charity. This charity will provide you with immediate and full tax deductions while increasing the value of your original gift through prudent investing. Some of the major brokerage firms have already established Charitable Endowment Funds in which their clients can participate.

These brokerage-established Charitable Endowment Funds are personalized. You can even name your investment account “The Doctor John Smith Family Foundation.” This foundation can be passed down to children and grandchildren, providing a gift to them that will establish the pleasure of giving for generations to come.

Establishing a fund

At the brokerage firm I use such a fund may be established for as little as $10,000 in cash, marketable securities or mutual funds. Subsequent contributions may be made for a minimum of $500 each. This foundation account may be used for small companies as well as individuals in establishing charitable giving. Through such a fund the business or individual can outsource administrative responsibilities, allowing the donor entity to focus on making grants and addressing strategic goals.

One note of warning! All gifts to a Charitable Endowment Fund are irrevocable. It is important for you to consider your long-range needs and goals before choosing to give away assets.

When it is time to make your initial gift, you will be asked to complete and sign the necessary paperwork and to name your account. You can honor a family member such as “The Doctor Charles Wilson Memorial Foundation” or you can specify your personal charitable organization such as “The Wilson Family Foundation for Cancer Research.”

How the fund works

Once you have established the account and chosen your charities, subject to Board approval, the Charitable Endowment Fund will review recommendations quarterly and make grants from your fund in amounts of $250 or more to as many charitable organizations as you specify. The fund will send a letter with each grant recognizing that you recommended this gift, or you can remain anonymous.

These types of funds are donor-advised. You will be asked to advise the investment managers in four specific areas: how the money is to be invested through a specific group of options to include Income with Growth or Growth with Income, Balanced or Growth; which charities will ultimately receive grants from your fund; specific dollar amounts for each specific charity; and a successor to make these decisions after you.

Assets contributed to the Charitable Endowment Fund are invested tax-free. Many brokerage firm-sponsored Charitable Endowment Funds allow donors to use mutual funds other than those offered through the sponsoring firm, providing clients with a greater choice of investment options. Some donor-advised funds also permit the use of privately managed portfolios.

The Board of Directors of the Charitable Endowment Fund identifies a diverse selection of mutual funds and private money managers. The Board continually monitors all investments as part of its fiduciary responsibility. While there is no assurance that this goal will be met, the main priority is consistent performance over the long term. There are no sales charges on the purchase of mutual fund shares, and any income or appreciation will be reinvested to further benefit your charitable organizations.

Making grants

You may recommend grants to religious organizations, hospitals, clinics, homeless and abuse shelters, museums, scouting organizations, colleges and universities, opera and the arts, community centers, theater groups and any number of other organizations. You may also grant support for a specific issue such as children’s health, the environment or any cause that is important to you. The Board will ensure that your gift is used specifically for this purpose.

To be approved by the Board, all charities must qualify as 501C(3) organizations under the Internal Revenue Code. It is important to note that grants cannot be used to fund private foundations or for political or lobbying purposes. The Board retains the right to disapprove such recommendations. The fund will verify the tax-exempt charitable status of the organizations you recommend, protecting you from supporting non-qualified recipients and losing tax deductions. Because every tax situation is different, I recommend that you consult your attorney and accountant regarding questions about your tax liability before donating to this type of fund.

The donor will set the timetable. Grants can be made at any time from immediately to 10 years later. You can take the full tax deduction up to the limit of the law immediately. Unlike private foundations, this Charitable Endowment Fund does not usually require individuals to make a 5% distribution annually. However, the fund in aggregate must give away at least 5% of its assets each year.

Advantages

There are further advantages to this particular fund than the pleasure of giving. You will avoid the pressure of making year-end decisions because of an income-tax deadline. Because the fund is a public charity, you may be able to take a larger deduction within a given year than you would receive for a donation to a private foundation.

If you contribute long-term appreciated securities to your fund, you will avoid capital gains tax on the appreciated portion of the asset and receive an immediate charitable tax deduction for the full fair market value of your gift. This is particularly useful for shares bought at a very low price that have appreciated greatly over the years.

Assets donated to the Charitable Endowment Fund during your lifetime are no longer part of your estate, and therefore not subject to probate. As part of your ongoing estate planning, you may choose to leave a bequest to the fund or name the fund as the beneficiary of a charitable remainder trust or a retirement account.

Depending upon your investment objectives and the number of grants you make, this gift may appreciate over time so that you are able to give far more to charitable organizations than the amount of the original donation. Through such a plan, you may create a legacy of giving in your family name and designate a successor donor to recommend grants for you even after your death.

Giving has never been easier. The brokerage-sponsored Charitable Endowment Fund provides all administration and reporting services including the documentation needed to calculate and support the income tax deductions. They will keep you apprised of account activity with quarterly status reports and a year-end summary. Unlike private foundations, there are no start-up costs, tax on fund investment income or individual payout requirement, and the brokerage firm provides all record-keeping services. I suggest that you check with your personal financial advisor or brokerage firm to see if such a Charitable Endowment Fund is available and in your best interest.