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Charity Begins at Home

Dr. Claire Gaudiani argues in her book, The Greater Good, that American democracy is successful because of its philanthropic nature. Philanthropy is as American as baseball, apple pie, and Chevrolet. From the Mayflower Compact where the signers pledged their support for the "common good" to the 21st century, Americans are an exceptionally philanthropic bunch. For instance, in 2001, 89% of Americans gave to charity.

For you philanthropic Fools out there, here are some ideas on how to give. And keep in mind -- it's not that one is better than the other, but one may be more appropriate for you.

Unrestricted cash donations are best for charities. Foolanthropy, The Motley Fool's annual charity drive, is a prime example. You can go through our pages set up at and give directly to the charity(ies) of your choice. In 2005, Foolanthropy raised almost $300,000 and over $2.5 million since 1997.

Appreciated assets can be donated at market value, and the charity avoids the tax liability. Everybody wins, except Uncle Sam. Oh, well, he does get his cut, actually.

Foolish Tip: If you find yourself approaching the standard deduction ($10,300 Married Filing Jointly, or $5,150 Single), consider "bunching" your gifts in one year to maximize tax benefits.

New ideas/tools
For 2006 and 2007, the Pension Protection Act of 2006 allows for required minimum distributions from IRAs that are directed to qualified charities to be exempt from gross income. Some people refer to this as a "charitable IRA Rollover," and it's a novel way to reduce tax liability and benefit charities. Consult with a tax professional.

The Calvert Charitable Foundation allows investors to work with charities around the world in a unique way. Essentially, investors loan money via a bond to the foundation.

What's the catch? Investors agree to accept a below-market rate of return on their investment. For maximum flexibility, you should buy the bonds directly from Calvert, but a limited number of bonds are available through many broker dealers.

CAUTION: These bonds do not trade on the secondary market, so most bond desks will think you're speaking Swahili. "It's not on Bloomberg," you might hear. Contact Calvert directly, and they can help you navigate these waters. Since these bonds do not trade on the secondary market, you should plan on holding them to maturity. Very importantly, there has never been a default on a Calvert Foundation issue. Future performance may vary, but the Calvert Foundation does an exemplary job of screening applicants and counseling ongoing clients.

Donor-advised funds
If you listen to NPR, you know that many programs are sponsored by different charitable foundations. Wealthy individuals or corporations have traditionally set up foundations to promote causes they support. A donor-advised fund is very similar to a charitable foundation. In either case, the donor makes gift and the trustees disperse the funds.

Donor-advised funds are much easier to establish and maintain than a foundation. Think of a donor-advised fund as a "poor man's foundation."

The Fidelity Charitable Gift Fund is the oldest and largest donor-advised fund. Fidelity lowered the minimum investment to $5,000 and has added non-Fidelity funds to its investment pools. Even better, Fidelity has slashed its annual costs to 0.6% on account balances less than $500,000.

Foolish Tip: This administrative fee is in addition to the annual expenses of the underlying mutual funds in the investment pools. While there are many providers of donor-advised funds, once you get past Fidelity and Vanguard, the annual costs are often significantly higher.

Charitable gift annuities/charitable remainder trusts
If you have appreciated assets, a charitable gift annuity (CGA) may be appropriate. A charitable gift annuity is, by definition, part gift and part purchase of an annuity contract. The donor gets an immediate charitable deduction on a portion of the gift, along with the promise of an income stream based on one or two lives. This income stream consists of non-taxable return of principal, growth in the annuity (taxed as ordinary income), and capital gains based on basis of the gift (taxed at favorable long-term capital gains rates). CGAs allow rebalancing a portfolio without the immediate drag of taxes and deferral of capital gains tax liability over the annuitant's lifetime

CGAs payments can be immediate or deferred and are based on the gift annuity rate, the value of the contribution, and the age and number of annuitants. Gift annuities can be purchased from non-profits for as little as $5,000.

Charitable remainder trusts (CRTs) are similar to gift annuities in that they also provide lifetime income. However, there are some important differences. Remainder trusts can be annuities, where the payment is fixed, or unitrusts, where the income stream can fluctuate depending on the needs of the beneficiary(s) or performance of the assets. Remainder trusts also allow the donor to avoid all capital gains on the donated assets. Remainder trusts can have more than two beneficiaries, and multiple charities can be the remainderman.

From the charities' point of view, a gift annuity is preferable, because with a CRT, the charity doesn't get diddly until the beneficiaries croak. Estate attorneys like CRTs. While they are valid estate-planning tools, they're also expensive to draft. Stockbrokers are loath to recommend gift annuities because there are no assets to manage (or fees to bill) once the gift is complete. Given the overhead costs, CRTs are more useful when the donor wants to transfer a large amount of assets.

These are a few tools for Fools as they cruise the philanthropic highway. Always discuss any estate-planning technique with a professional who is familiar with the laws of your state. Bring your family into the discussion. One of the benefits of charitable giving is that you can initiate a conversation with those close to you on what really matters to you as a family. And what's more important than that?

By Buz Livingston, CFP
November 30, 2006

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