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Fidelity Charitable Gift Fund

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Earlier this year I discussed how I was going to follow Flexo’s lead and open up a Fidelity Charitable Gift Fund. The idea behind the Fidelity Charitable Gift Fund is that you can make a charitable donation now, have the assets appreciate, and then decide where donations will go later on. Much like how a mutual fund is actually an organization, the Fidelity Charitable Gift Fund is an organization. When you donate money, you are donating to the Fidelity Charitable Gift Fund and you have two options as to where the money goes. You can either open up a Giving Account under your name (or any name you wish) or open up a Pooled Income Fund.

Giving Account

This is the type of account Flexo talked about and one that I was seriously considering. What you do is open a Giving Account, contribute funds, direct how the funds are to be invested, and then recommend grants. You will notice that all the documents say that you will “recommend” which organizations will be the beneficiary of your funds, but they aren’t legally bound to honor your wishes. I think that specific language is used for legal purposes but they honor most recommendations.

Pooled Income Fund

This is the second option and one I hadn’t considered. It’s part charitable fund and half income generation, akin to an annuity, though the final payout goes to a charitable organization (up to 10). So let’s say you contribute $10,000. You direct where the contributions will be invested and you can select up to two beneficiaries. Each quarter, the proceeds from your investments will be paid out to the beneficiaries. Upon the death of the final beneficiary, the value of the account goes towards charities. It’s different than the Giving Account and less desirable for what I’d like to accomplish.

Considerations

So, it sounds pretty easy right? Why wouldn’t everyone do this? (these concerns cover only the Giving Account)

  • Initial limits and fees: The initial contribution has to be greater than $5,000 and each additional contribute has to be greater than $1,000. The fees include the expenses of the investments plus an Annual Administrative Fee. The administrative fee is the greater of 0.60% of the total fund value or $100 for the first half million, 0.3% for the second half million, 0.2% for the next million and a half, and 0.15% for the rest up to five million. Beyond that and the fees are different. If you were to contribute $5,000, you’d be talking an administrative fee of 2% plus the underlying investment fees. If you don’t have $5,000 or you don’t want to pay any of these fees, you might want to just donate directly to a charity.
  • Time horizon: Since you do select investments for your contributions, there is the potential that your investments will lose value. So, if you plan on doing this, contribute funds you think you might want to use next year or the year after (or, ideally, in five years). Increasing the time horizon will smooth out the random walk of the stock market.
  • Tax benefit: As much fun as it would be to have the Jim Charitable Trust, the tax benefits are better if you contribute appreciated stock. When you donate appreciated stock that you’ve held for over a year, you can deduct the entire value of the stock from your income, including the appreciation. (For more on that, read this article about reducing your capital gains by donating stock) With the Giving Account, you deduct your initial contribution and not the amount actually granted, so you never actually benefit from the appreciation (but you can donate appreciated stock).
  • Grant exclusions: Almost any recommendation you give will be accepted with the exception of several groups, though there are very good reasons. For example, you cannot recommend any donation that would result in you receiving any sort of gift or preferential treatment. The list is available here.

I’ll be honest, the idea of opening a small charitable gift fund in our name does sound like fun and it would be great to be able to leverage the market to help further our philanthropic goals but with a $5,000 start price and those annual fees, I may wait a little while before opening one up. The uncertainty of the market (and a short time horizon) are also serious considerations as well… what do you all think? Good idea? Bad idea? Wait? Go now? :)

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4 Responses to “Fidelity Charitable Gift Fund”

  1. Even after reading Flexo’s post I’m not sure if fully understand the benefits of creating this fund. Why not just contribute the principal you are going to invest directly to your choose charity and let them use it immediately for the benefit of others rather than wait a year, five years, ten years etc for them to then receive it.

  2. jim says:

    I think the main draw is that it’s an ego trip to be able to say you have a fund, but it seems that its “better” (tax-wise) to just invest the funds yourself and then donate stock directly if you can.

    Another reason someone might do this is if they want to reduce their tax liability immediately (say on December 30th) but they don’t have the time to do their due diligence research on what charity they want to support.

  3. The benefits of using a so-called “donor advised fund” which is what it really is or a “pooled income fund” – which functions like a charitable remainder trust is a great thing.

    But I do think this really has to be part of an overall estate planning strategy. Any funds you set up and donate is considered an “irrevocable gift” and is out of your estate.

    Transferring highly appreciated stock (perhaps from grants by your company) to a charitable remainder trust is one method of avoiding paying massive capital gains tax. You and your spouse (beneficiaries) can get income for life (like an annuity from the trust) and proceeds go to charity after death. To leave money for your kids, you can use the income from the trust to buy a “whole life insurance” policy for your kids.

    So I think you should look at these things from an estate planning point of view as well.

    With regards to what Future Millionaire said, the advantages of setting up a donar advised fund is that you can leave a legacy long after you have left this world. You can entrust your kid to be the trustee after your death and continue your charitable contributions. If the fund is well managed, the charity you support can get donations “forever”.

  4. Sarah says:

    We just opened a giving fund with Fidelity, and for us it was the perfect solution to the “problem” of appreciated stock. I had a chunk of stock in a bank that had been gifted to me over the years by my grandparents, went though several mergers/name changes, split several times – you get the picture. The records of when/how much was purchased are sketchy at best. The idea of figuring out the cost basis for this thing (other than the DRIP shares) looked like an unfun wild goose chase. And in the end, it was going to be almost all capital gains.

    On the other side of it, we always give a certain amount to charitable organizations each year – our church, our alma maters, and other organizations whose work we support. We’re not super-systematic about it, but some of those pleas in the mail would get a modest check from us.

    So for us it made perfect sense – take this chunk of stock that I’ve been sitting on my entire adult life, donate it to a gift fund, and use it to support the charitable causes that we want to for the next 5-8 years. An additional factor is that, with the impending birth of our second child, I’m looking very seriously at staying home with the kids for a few years, starting next year – so this being the last two-income year made it the perfect time to take a big deduction.

    So, I’m not saying it’s the right choice for everyone, but for us all of the planets aligned such that it really worked in our situation.


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