Suppose you have a sudden surge of income or, better yet, wealth. What do you do?
The question isn’t as dumb as it may seem.
The first thing you can do is be thankful. This is a great problem to have, so don’t complain about it in public. Most people will see it as an opportunity, not a problem. The only sympathy you’re likely to get will be from the person who does your tax return. He’ll see that your tax bill is going to go up, big time, if you don’t do something.
No one wants to enrich crazy Uncle Sam, so what can you do?
One option is that you can contribute money, or appreciated shares of stock, to a donor-advised charitable fund, or DAF. You’ll get an immediate tax deduction for the contribution. The money will be in an investment account, awaiting your instructions for what charities get it— and when. Actual distribution can be done over a period of years.
Give appreciated shares of stock and you avoid the capital gains tax on the gain. You also get to deduct the full value of the contribution against your other income, reducing your income tax bill. Giving isn’t free, but it can be very attractive.
The word “when” is important here. Since the money doesn’t have to be given away all at once and can go to any number of charities, you’ll have what amounts to your own funded charitable foundation— but without all the staffing and paperwork.
Don’t think you have the means to start such a fund? Think again. The minimum starting account at Fidelity and Schwab is $5,000. The minimum grant at both is $50. (See comparison chart below)
While there are thousands of donor-advised funds that have held and dispensed donor funds for decades, e.g. The Communities Foundation of Texas (1953) or the Boston Foundation (1915), the landscape of giving has changed dramatically since Fidelity created their Charitable Gift Fund in 1991. Fidelity is still the largest of the funds created by an institutional asset manager, but Vanguard and Schwab (in that order) are now major alternatives. All three have enjoyed dramatic growth from a combination of continued gifting convenience and relatively low costs.
I’m serious about “convenience.” You can give online, transferring money or securities from another account. You’ll also be able to see your charitable account listed with your IRA Rollover, Roth, taxable, and checking accounts if you keep all your assets in one place. The cash in the charitable account isn’t yours to spend on yourself anymore, but it is right at hand for giving.
Are there any limits to what you can do, or how you can give? Yes, but they are entirely reasonable. Sorry, you can’t give to your struggling nephew or anyone else you’d like to help directly. What you can do is give to genuine, non-profit institutions— 501-(c) 3’s that are known and have filed recent tax returns. Sometimes it requires a bit of work to get the tax account number, known as the EIN (for “employer identification number”) for smaller charities— a phone call or two— but if you like the organization, the effort is worth it.
These funds have highly practical uses, too. Here are two:
—When you have a fund, you can give money at any time of year. You won’t be waiting until late in the year, wondering how much you can give for the year. You’ll know because the money is already in an account. Evening out contributions is also great for recipients. No organization likes to get all its income in December.
—When starting a fund you can identify a time period you want to prefund and put the money aside when your tax bracket is high. Suppose, for instance, you’ve just taken an early retirement offer that might double your income for the year. You can ‘pre-fund’ your charitable giving for a period of time, such as when you need to start taking required minimum distributions from your retirement accounts. This means you’ve maxed the tax savings. It also means the money is there for annual giving, even if you are uncertain about future earned income.
The Basics for the Big Three in Charitable Gift Funds
Fidelity Charitable Gift Fund
Website: http://www.fidelitycharitable.org
Minimum starting account size: $5,000
Minimum additional contribution: $1,000
Minimum grant size: $50
Administrative Fees: 0.5 percent or $100 on first $500,000, whichever is greater
Investment fees: additional and vary, but include low-cost index funds
Vanguard Charitable Endowment Program
Website: http://www.vanguardcharitable.org
Minimum starting account size: $25,000
Minimum additional contribution: $5,000
Minimum grant size: $500
Administrative Fees: 0.6 percent on first $500,000
Investment fees: additional and vary, but include low-cost index funds
Schwab Charitable Fund
Website: http://www.schwabcharitable.org
Minimum starting account size: $5,000
Minimum additional contribution: $500
Minimum grant size: $50
Administrative fees: 0.6 percent or $100 on first $500,000, whichever is greater
Investment fees: additional and vary, but include low-cost index funds
This information is distributed for education purposes, and it is not to be construed as an offer, solicitation, recommendation, or endorsement of any particular security, product, or service.
Photo by Pixabay
(c) A. M. Universal, 2013