Are Charitable Gift Accounts Right for You? Charitable gift accounts may be a good idea for individuals looking for a tax-advantaged way to support their favorite charities, improve their estate tax situation or bring more order to their gift-giving strategy. These are not necessarily inventions for the rich – some of these accounts can start with an initial contribution of $10,000 and allow additional contributions of as little as $1,000.

Charitable gift accounts offered by financial institutions come in two varieties -- donor-advised funds or pooled-income funds. Donor-advised funds allow a donor to deposit a specific amount in the fund, take an immediate tax deduction up to the full value of the contribution, select investments among the choices provided by the investment company and then recommend which charities will receive money from the account over time. Pooled-income funds, meanwhile, pay the donors a fixed income for life from the fund. The balance of the account is paid to the donor’s designated charities after the last designated income beneficiary dies.

Depending on a donor’s particular situation, these two options can be an attractive idea depending on whether the donor’s focus is maximum tax deduction or income for life. That’s why it’s a good idea to discuss either option with a trusted financial adviser such as a CERTIFIED FINANCIAL PLANNER® professional or a trained tax advisor to see if either of these or other tax advantaged charitable options are right for you.

Some general points about these options:

Know the kinds of assets you can deposit: Most funds will allow you to deposit cash (by check), publicly traded stocks, bonds and mutual fund shares and, in some cases, life insurance policies. Your tax deduction will depend on the type of asset you donate. Gifts of cash are limited to 50% of your adjusted gross income while gifts of stock are limited to 30% of AGI. Unused charitable deductions in one year may be deductible within the following five tax years.

You can reduce the overall size of your estate: In 2009, the federal estate tax exclusion amount is scheduled to be $3.5 million, but federal estate taxes are will be repealed in 2010 for one year only. Unless Congress enacts new laws, the estate tax exclusion will be re-set to $1 million in 2011. No one can know the future, but for taxpayers with significant estates, charitable gift funds might be a good way to reduce the size of a taxable estate.

You need to keep an eye on fees: Always consider management fees when considering any potential benefits. You will probably be paying higher fees than the average index investment or similar pooled investment. The organization that offers the charitable gift account handles any legal, administrative, and filing requirements (including tax returns). These costs are factored into the fees. However, because the charitable gift account is administered as part of a larger organization, the fees are generally lower than those incurred by a family foundation.

This decision is irrevocable: Understand that your gift is final. Because of the tax-advantaged treatment, you’re not going to be able to reverse this decision if you find you need the money later. Give careful consideration to how prepared you are for retirement and long-term care spending before you make this choice.

Watch the IRS: The Pension Protection Act of 2006 mandated the Treasury Department to study donor advised funds and make recommendations to Congress about the tax deductibility of donor contributions and the donor’s ability to make recommendations as to which charities will benefit and when.

Labels: Charitable gifts, fees, Financial planning

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