Charitable Gift Funds: Save the World and Save on Taxes

Charitable gift funds are becoming an increasingly popular way for investors to reduce their taxable income, while at the same time accomplishing philanthropic goals, according to industry data showing record contributions to the funds in 2011.

Fidelity Charitable, the nation’s largest charitable gift – or donor-advised - fund program, yesterday announced that contributions reached an all-time high of nearly $2.9 billion in 2011, an increased of $1.6 billion from 2010. Grants made to charitable organizations also reached a record high last year, according to statement from Fidelity. The program distributed more than 380,000 grants totaling more than $1.3 billion to U.S. nonprofits, an increase of 8 percent from 2010.

Other large national financial service providers, such as Vanguard and Charles Schwab, also offer charitable gift funds, a product that enables investors to establish a charitable fund and direct how the assets are spent, but spares clients the day-to-day management of the fund. As a result, investors can engage in philanthropic ventures without going to the time, trouble and expense of establishing their own foundation.

Contributions made to the funds are tax-deductible, and assets donated to the funds are removed from an investor’s taxable estates. Some wealthy investors choose to donate appreciated stock to a charitable gift fund – a strategy that allows them to claim the full fair market value of the asset on their tax returns and avoids taxes on the investment gains.

Donations of appreciated securities accounted for 71 percent of total incoming contributions to Fidelity Charitable in 2011, an increase of 51 percent from 2010, said Fidelity. Donations of complex assets – such as limited partnership interests and restricted stocks – were up 30 percent in from 2010 to 2011.

“With the U.S. stock market improving 86 percent from its recession lows, donors once again turned to their stock portfolios and other non-cash assets to fund their charitable giving,” said Fidelity.

Donor-advised funds can be established with relatively low account minimums. A Bank of America Charitable Gift Fund can be opened with a minimum initial contribution of $5,000. Additional contributions can be made in increments as low as $1,000. Unlike assets held in private foundations, funds held in charitable gift funds are not subject to minimum or maximum distribution requirements.

Charitable gift funds are most commonly used by America’s ultra rich but even retail investors have adopted the products, according to Millionaire Corner research, which shows that 40 percent of investors with $25 million or more have charitable gift funds with an average value of $5.5 million. The funds are used to a lesser extent by millionaires at lower wealth levels. Thirteen percent of investors with $5 million to $25 million have charitable gift funds with an average value of $168,000, and 5 percent of millionaires with $1 million to $5 million have charitable gift funds with an average value of $23 million. A small percentage of non-Millionaires with investable assets of $100,000 to $1 million have charitable gift funds with an average value of $9,000.