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 www.foolanthropy.com 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.
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
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.
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
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
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
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
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
By Buz Livingston, CFP
November 30, 2006