Stern Advice: How to create your own charitable fund

WASHINGTON (Reuters) - My husband buys lottery tickets when we go on vacation. Maybe he's thinking about staying on vacation forever, but my plan for those winnings is different -- I've always dreamed about setting up our own family foundation.

The truth is, I don't have to wait until he hits the right numbers. There are tools, called donor-advised funds, that even middle-income families can use to create their own charitable programs. A donor-advised fund can help families target their giving, teach lessons of generosity to the children and, yes, save taxes as well.

Maybe that's why they have become increasingly popular. Despite falling stock prices and withdrawals for charitable gifts, assets in donor-advised funds grew 25 percent between 2004 and 2009, according to the Chronicle of Philanthropy. Assets ended last year at $16.48 billion and are poised for much larger future growth, the Chronicle reported.

Donor-advised funds are typically set up as subfunds of tax-qualified charities, which make gifts out of the funds based on the directions they get from the donors. Families (or groups of friends) that want to create such a fund can name it whatever they want (for example, the Stern Giving Fund) and make tax-deductible contributions to it.

Money in the fund gets invested and can grow for years, enabling donors to make much larger gifts in future years.

Sound enticing? Here's how to set up your own donor-advised fund.

* Find the right umbrella organization. Most community foundations are happy to set up a donor-advised fund for you, and a well-run community foundation can often manage the fund and invest it wisely without costing very much in management and investment fees. You can find your own community foundation at a website sponsored by the Council on Foundations and the Community Foundations of America. (http://www.communityfoundations.net/page14122.html)

* Check out the big investment companies. Leading firms like Fidelity Investments, T. Rowe Price and Charles Schwab all offer donor-advised funds. It only takes an initial gift of $5,000 to set up a fund through The Schwab Charitable Fund (http://schwabcharitable.org/) or the Fidelity Charitable Gift Fund (http://www.charitablegift.org). The minimum donation is $10,000 for T. Rowe Price (http://www.programforgiving.org). Vanguard Investments also offers a Charitable Endowment donor-advised fund (https://www.vanguardcharitable.org) with a minimum initial donation of $25,000. Compare fees and investment choices to find the one you like best.

* Feed your fund with shares of stocks or other securities. There's an extra tax advantage when you build your charitable fund with shares that have gone up in value. You not only get a tax deduction for the full amount of your gift (as long as it does not exceed 30 percent of your adjusted gross income), but the charitable fund, as a tax-free entity, gets the full proceeds from the sale of the security. Most donor-advised funds can handle the transfer of the securities for you.

If you have shares worth $5,000 that were originally bought for $3,000, you'd avoid the $450 in capital gains taxes that would be due by selling those shares. And you would get a deduction worth another $1,750 (if your combined federal/state tax rate was 35 percent) for the gift. Bottom line? It would only cost about $2,800 after taxes to give your fund $5,000.

* Decide how you want to invest the money. Investing in your own donor-advised fund isn't that different from investing in your own individual retirement account. If you want the money to accumulate for years before you start making sizable gifts, you can put more of it into stock mutual funds. If you want it to stay safe and liquid enough to distribute every year, you'll probably aim at shorter term savings and investment vehicles.

* Choose your causes. It can be fun to have family meetings to decide where your precious gifts will go. Larger gifts to fewer organizations can have a bigger impact. Typically, donor- advised funds are not allowed to make contributions to individuals or groups that are not bona fide charities, but there are ways around that. If, for example, you want to establish a family scholarship fund, you can usually do that by using your donor-advised fund to give money to your local Parent Teacher Association. Local charities often act as intermediaries between donor-advised funds and their beneficiaries.

* Keep it up. Don't just fund it one year and forget it. Contribute to your family fund every year, and get your kids involved too. If you put $5,000 a year into your fund and let it build at a compounded annual rate of 7 percent, you will have more than $83,000 to give away in 10 years. That may not make you Bill and Melinda Gates, but it's enough to do some significant good.

(The Personal Finance column appears weekly. Linda Stern can be reached at linda.stern(at)thomsonreuters.com)

(Editing by Maureen Bavdek)