I’ve recently discovered one of the coolest things in personal finance that I’ve ever seen. It’s called the Fidelity Charitable Gift Fund, and it has a lot of implications for maximizing the efficiency of both your charitable giving and your tax strategy.
Private charitable foundations have traditionally been the playground of the mega-wealthy. The cost to establish, maintain, and manage a private foundation is not trivial, making it difficult for all but those with the largest of fortunes. However, in 1991, Fidelity launched their Charitable Gift Fund (CGF), making it possible for millions of people to create a mini-foundation. Here’s how it works:
- Make a contribution to the Gift Fund and set up a Giving Account that you name — such as, The Smith Family Fund — then be eligible to take an immediate tax deduction.
- Advise how to invest your contributions, giving the assets the potential to grow.
- Recommend grants from the Giving Account to the charities you support, with the option of being recognized or remaining anonymous.
Essentially, the CGF is one of the largest private foundations in the US. Individuals can open a Giving Account, which is run like a mini-foundation within the CGF. You can provide guidance on how you would like your contributions to be invested and “recommend” charities for them to donate your contributions to. Fidelity reports that the recommendations are followed in 99% of cases, unless the charity doesn’t qualify (no political donations, for example).
Some of the advantages of using the CGF are:
- Contributions can be deducted from your taxes as soon as you add them to your Giving Account, even before you distribute them to the charities and non-profits of your choice.
- Once you setup a charity or non-profit in your account, giving to that organization is a simple 1-click affair.
- Any non-distributed assets in your Giving Account are invested in mutual funds, giving you more money to give away down the road.
- The minimum contribution to open a Giving Account used to be $10,000, but Fidelity reduced the amount last year to $5,000. Subsequent contributions to your account must be at least $1000. A distribution to a non-profit organization can be as little as $100.
- The receiving charity doesn’t have to worry about dealing with direct stock donations.
- The CGF will accept cash, stocks, bonds, mutual funds, and real estate. This means that if you have stocks that have gained a lot in the last year, you can transfer them to your Giving Account, not only avoiding any capital gains taxes on those assets, but also giving yourself a generous deduction.
This last point is one of the most exciting to me. My wife and I have been richly blessed, financially and otherwise, and we contribute 10% of our income as a tithe to our church, charities, and other non-profit organizations. We also invest in index funds. I’ve come up with a plan to reduce my tax liability every year and maintain our desired level of giving, all while making our giving more convenient. Part of this plan is based on a post from Free Money Finance, but the CGF adds a twist. Here’s my strategy:
- For the next year, we’ll save up most of our 10% tithe instead of distributing it. The goal is to amass at least $5k so that we can open a Giving Account in December.
- At the end of the year, I’ll take a look at what investments have done well over the last year and select an amount of index funds that match the amount of tithe that we’ve saved. For example, if we have $5,500 in tithe saved up, I’ll select $5,500 of index funds that have increased in value over the last year.
- I’ll transfer the tithe money into my brokerage account.
- I’ll transfer the selected index fund shares into my CGF account and immediately use the tithe cash to purchase the same number of shares back off the market.
Now I’ve contributed my tithe (in the form of index fund shares) to my CGF and I can take the deduction for 2007. I also still own the same amount of shares that I owned before, but my cost basis has been reset without having to pay capital gains taxes. If I decide in 2008 to sell those shares outright, I’ll pay capital gains on the difference between the selling price and what I paid in 2007, not what I originally bought the shares for. In the case of a year where my investments didn’t do well and were all down from the last year, I could just contribute the tithe cash directly.
Please consult a qualified tax adviser before you try this. Can anyone offer me any insights as to whether this is a good idea?