Give Stocks and Receive a Big Break
While many investors give money to charity, until recently only the very rich could boast of having their own charitable foundation. But that's changing.
An option that has gained popularity in the past few years is donor-advised funds, which let investors donate stocks or funds to charities for a minimal setup cost, plus a sweet tax break.
"Anybody really committed to philanthropy, who's making a decent living, can now have their own philanthropic legacy, in a way that previously only the very wealthy could," says Timothy Freundlich, director of strategic development for Calvert Social Investment Foundation. "Suddenly a really broad slice of the population can be a high-end, sophisticated philanthropist." Calvert rolled out its program in October, joining a number of major fund families.
Donor-advised funds work like this: First, investors decide to donate money to a foundation affiliated with a fund family. Minimums range from as low as $5,000 at Calvert to $10,000 at Fidelity and, at the higher end, $25,000 at Vanguard (which says it offers lower expenses in exchange for requiring bigger accounts).Donors get a tax deduction on the sum of the gift -- and if the donation was made with an appreciated security, they're also allowed to take a pass on capital gains taxes. For example, say you bought stock in Microsoft (MSFT) 10 years ago for $1,000, an investment that has grown to $10,000. Then you give the full sum to a donor-advised account. When you file your income taxes, you'll reduce the amount of income you're taxed on by $10,000. Because the donation consisted of appreciated stock, you'll also duck paying capital gains taxes on $9,000. In other words, you'll get to take a deduction on the $10,000 current market value of the donation, though your cost basis was only $1,000.
How It WorksAfter making a donation, you can divvy up the money in the account among the charities of your choice. The only restriction is that checks must be fairly significant to justify the processing time. For example, Calvert requires checks to charities to be at least $250, while Vanguard asks that they be at least $500. While some donors assign away all the money within a few years, others pay out only a portion of the account each year. Because the money is held by a charity, the capital grows tax-free. "You could really maintain it over your whole life and it will get bigger," says Freundlich. "You could pay out small amounts and leave it to your kids, just like a private family foundation." Meanwhile, though the money has legally passed out of your hands, you have control over what it's invested in (for as long as there's money in the account). Most donor-advised funds offer a range of preselected mutual fund baskets, from conservative to growth-oriented, from the affiliated fund family. Calvert also lets investors choose specific fund allocations, 401(k)-style. Though donor-advised accounts are charity, they aren't free. Fund families make money off the operating expenses of funds in the accounts, plus an overall administrative fee. However, fund executives say these arrangements are far cheaper than setting up private foundations, which are historically the province of millionaires. Calvert levies an administrative charge of 1% for donor-advised accounts less than $100,000, with the fee steadily dropping to as low as 25 basis points for accounts greater than $1 million. Vanguard's fee is a flat 45 basis points, declining to 15 basis points for the largest accounts, more than $5 million.
Do-Gooder FundsGranted, on the heels of a difficult year, many investors may not be feeling flush enough to hand over a big sum to a charity. For the charitably inclined, a couple of investments offer alternatives. These funds either funnel a share of their profits toward nonprofits or make a practice of lending money to such groups. The (DESRX)Devcap Shared Return fund allows investors to contribute between 10% and 100% of total returns each year to an affiliated charity (owned by Catholic Relief Services) that supports microloans in developing countries. The fund, which draws on Catholic principles in choosing stocks, charges operating expenses of 2%, a lot higher than the average of 1.38% for funds. But it also posts a better-than-average record, ranking in the top 19% of large blend funds over a five-year period, with annualized returns of 11.03%. A nonequity option, Calvert's Community Investment Notes, lends money to nonprofits that focus on areas such as low-income housing or microcredit, offering a fixed rate of return from zero to 4%. Investors decide to channel their money into specific geographic regions, such as New England, or donate it to international projects. For investments greater than $50,000, Calvert will even draw up a personalized portfolio of charities. "If investors are really interested in affordable housing in Washington, D.C., or microcredit loans to women in Nicaragua and Honduras, we'd do that," says Freundlich. Though it doesn't charge a fee, the foundation makes money by earning a spread between what it lends to the nonprofits and the return to investors, typically between 100 and 150 basis points. Finally, (AMAGX)Amana Growth, which caters to Muslim investors, makes giving a little easier for potential donors. Over the past five years, the fund ranks in the top 6% of large growth funds, with annualized returns of 14.79%. The fund doesn't identify itself as a socially responsible fund; its primary goal is to make money for shareholders, while remaining in accordance with Islamic principles. But as a service to its customers, the fund offers to calculate the yearly sum -- known as zakat -- that they owe to charity. Though similar in nature to the Christian tithe, compliance with zakat is a more fundamental obligation for Muslims, ranking alongside daily prayers and visits to Mecca as one of the pillars of the faith. "It's important for Muslims to know what the zakat amount is, and it can be a fairly complicated issue," explains Phelps McIlvaine, vice president and director of Saturna Capital, the adviser for the fund. Once investors know the amount of zakat, they can choose to donate to charities on their own, he adds.
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