A Good Way to Give Well

Donor-advised funds serve as tax-effective tools for giving.
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Tis the season for giving. But like any financial transaction, there is a right and wrong way to go about your charity.

For all the talk about "ugly" Americans, ours is an extremely generous nation. Americans give more than $300 billion per year in charity, twice as much as any other nation, and 76% of that comes from the pockets of individuals, not foundations or corporations.

That said, while not stingy, Americans are often are sloppy givers.

"We tend to be reactive, instead of proactive when it comes to charitable giving," says Kim Wright-Violich, president of Schwab Charitable. "Responding to the requests of friends and family over the course of a year can lead to very inefficient giving."

A better way, suggests Wright-Violich, is to use donor-advised funds that enable investors to track donations and maximize tax benefits similar to the manner in which a private foundation would. Or in other words, giving like Bill Gates, even if you don't have his billions.

A donor-advised fund is housed in a public charity, which means donors receive the maximum tax deduction available, while avoiding restrictions and fees imposed on private foundations. The way it works is that the deduction is received by the donor at the time of the gift, giving the fund's sponsor full control over the contribution. In turn, the contributor becomes an "adviser" with the power to recommend the direction of charitable grants.

Feeling Charitable? Consider Donor-Advised Funds

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Quite often, donors pledge appreciated securities as opposed to a straight cash gift. Using this method, the donor gets a tax deduction for the market value of the stock and avoids paying the capital gains taxes associated with selling the stock and donating cash.

Wright-Violich says most funds have tools to help donors make their charitable decisions. She also suggests the funds can be used as a good teaching tool for parents and grandparents.

"Affluent grandparents can open up a $5000 donor-advised fund for their grandchildren," says Wright-Violich. "They can't spend that money on frivolous items, and they can learn the importance of giving."

Before joining TheStreet.com, Gregg Greenberg was a writer and segment producer for CNBC's Closing Bell. He previously worked at FleetBoston and Lehman Brothers in their Private Client Services divisions, covering high net-worth individuals and midsize hedge funds. Greenberg attended New York University's School of Business and Economic Reporting. He also has an M.B.A. from Cornell University's Johnson School of Business, and a B.A. in history from Amherst College.