Small Grants Lift Charities in Lean Times

By Beacon Staff

Pinched by a tough economy, Americans are making extra use of a tool that lets them fund favorite charities without touching their overworked checkbooks.

To the rescue in this difficult season are donor-advised funds. DAFs hold donations until donors authorize them to issue grants, sometimes years later, to other charities that then put the money to work. By using DAFs, donors get big tax deductions up front and then pace their giving over a few or many years.

This year, donors who created DAFs in the past are giving these instruments a workout. Both Schwab Charitable and the Fidelity Charitable Gift Fund report that grant amounts are up about 12 percent from a year ago.

“During good times, our donors have set aside significant charitable dollars, and now are able to tap those funds when they are needed most,” says Schwab Charitable President Kim Wright-Violich.

Financial advisers caution, however, that DAFs don’t make sense for everyone. And even those who wish they had DAF to tap right about now might find this isn’t the best year to create one.

That’s in part because a plunging stock market has left scores of would-be donors with losses in 2008. Without taxable gains that could be offset by charitable deductions, money experts say, donors lack an incentive to create or contribute to a DAF.

“For people who have a lot of losses and are not going to be in a high tax bracket, it’s definitely not worth doing,” says Penny Marlin, a financial planner in Del Ray Beach, Fla. “It doesn’t make sense to do it if you’re not going to get a significant benefit from the tax deduction.”

Creating a DAF is easier than it used to be, but it still means jumping through a few hoops. Fidelity and Schwab, for instance, each require a minimum of $5,000 in cash or donated assets, such as appreciated stock. Both charge 0.6 percent in annual management fees for lower-end donors. Other institutions, such as community foundations and colleges, also allow donors to create DAFs, although minimum initial deposits plus restrictions and fees apply there as well. So for donors who give away less than $1,000 or $1,500 per year, the tax advantages and administrative services that DAFs offer may not be worthwhile.

But for people with certain circumstances, creating a DAF even this year can still make sense. A manager who’s left a job with a lump sum in a severance package, for instance, might do well to maximize this year’s tax deduction by creating a DAF, which effectively “frontloads” his or her charitable giving for years to come, according to Lisa Featherngill, a financial and estate planner for Calibre in Winston-Salem, N.C.

But donors seem to agree that this might not be the year to launch a new DAF or to beef up an existing one. Through the third quarter, contributions to Fidelity’s Charitable Gift Fund were down 35 percent from a year earlier.

As year’s end approaches, philanthropists also need to weigh what’s apt to come for the stock market, advisers say. With stocks down nearly 40 percent from a year ago, some wonder if now is the best time to put new DAF funds to work in the markets.

“Typically, people would fund a donor-advised fund with stock, but they might say, ‘this is not a good year to give up my shares because the value is so low’,” Featherngill says. “There’s also the risk that you’ll put in $10,000 this year and it grows to $13,000 by next year. You’ve then lost the ability to deduct [an additional] $3,000.”

But someone aiming to maximize money in the hands of charity might see an immediate opportunity.

“If your mind-set is, ‘I want to grow this [donated] money over time,’ then I would argue now’s a better time than it was a year ago” to deploy new DAF funds in the stock market, says Michael Goodman, president of Wealthstream Advisors, a financial services firm in New York. “The stock market has got to be the most attractive now than it’s been for a long time.”

Meanwhile, commercial operators of DAFs are trying to attract new dollars by rolling out new options. Fidelity, for instance, is giving donors an option to invest DAF money in a fund pool that includes alternative-asset classes, such as commodities. Fidelity is also dropping its minimum grant amount from $100 to $50. And Schwab has started allowing donors to leverage DAF dollars to guarantee microfinance loans.

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