It’s that time of year again: storm season. The Oklahoma tornado disasters have me reviewing our Hale Nords hurricane readiness plans and tackling the time-consuming tasks like roof repairs. I’m married to a meteorologist who’s a military-trained Emergency Preparedness Liaison Officer, so there’s no slacking on our checklist. I’ve been through a few natural disasters and if I ever have to experience another one, I want to know that this time I’ve really done everything I could to be ready. Of course you’re never really ready to hear those sirens start wailing.
Last week I was only dimly aware that hurricane season is approaching. Instead, my spouse and I have been casting a wary eye on our retirement investment portfolio. After nearly six years it’s returning to new highs, and we all know how that trend ended the last time. Our asset allocation and our rebalancing triggers are subjects for another blog post, but one part of that process is our Fidelity charitable gift fund.
So rebalancing and donations were already on my mind when the Oklahoma disaster struck, and this is a good time to look at a different way to give money to relief organizations while rebalancing your portfolio.
Ideally we’d all have a philanthropic donation plan just like our investment plans. We’d choose our charity goals just like our asset allocations, and we’d regularly support our chosen organizations in ways that maximize their benefits.
However we humans are just as emotional as we are logical, and when disaster strikes we feel a strong affinity for helping others. Bankrate.com author Judy Martel, a CFP and an expert on family wealth, has a few suggestions on how to donate to tornado victims. When we impulsively give $50 to the Red Cross or one of the other organizations on her list, it makes us feel better next time the video & photos start scrolling across our screen.
But where is that $50 coming from? If you’re striving for financial independence then you’re already running a budget. It probably lacks a category for “miscellaneous charity donations”. You might allocate part of your spending to charity, but the organizations that you normally support are still every bit as deserving of your donation as the Oklahoma tornado victims. You’re probably pulling that $50 out of some other cell in your budget spreadsheet. If you’re planning to donate more, like $500 or even $5000, then it’s a lot more than just a part of your monthly budget.
You could pull the cash out of your emergency fund. However most people want their emergency fund to support their own personal emergencies so that they don’t need a relief organization. Cannibalizing your own emergency fund to help someone else is not in everyone’s best interests. Besides, you never want to get in the habit of frequently withdrawing “just a little bit of money” out of your emergency fund.
There’s another source of funds: your investments.
If you’re reading personal-finance blogs then you’re probably already familiar with the concept of rebalancing your investment accounts. You bring your asset allocation back to your personal comfort level by selling some assets (presumably at a gain) and using the cash to buy other assets (ideally on sale). You do it annually or whenever your chosen allocations get too far out of whack.
It’s fairly easy to sell assets from a taxable account, transfer the cash to your checking account, and then write a check to your chosen charity. However when you sell appreciated assets in a taxable account, you pay taxes on the gains. Now you have to have a little more cash available to pay your tax bill, and your $50 donation to the Red Cross has been contaminated by another involuntary donation to the U.S. Treasury.
That’s the beauty of charitable gift funds and donor-advised funds.
[There may be some legal distinction between those two terms, but I'm going to use them interchangeably as "CGFs".]
The Internal Revenue Service already lets taxpayers donate many types of appreciated assets to charities without (in most cases) paying taxes on the gains. Your charitable donation means that your profits on the sale are no longer subject to tax. In fact, if you meet the additional IRS limits on your other income and deductions, you may even save a little on your tax bill. I’m just a personal-finance blogger, so please seek professional advice before trying to save a little on your own tax bill.
In the past this meant obtaining actual paper share certificates, physically signing them and turning them over to the charity, and then having the charity cash them in to obtain the funds for their programs. In the 1990s, however, investment firms began acting as intermediaries. Instead of sending you a paper certificate they’d transfer the shares electronically to their own charitable funds. You, as the donor, could “advise” the fund on how you want to distribute the asset that you just donated. Three of the largest CGFs are run by Fidelity, Vanguard, and Schwab.
The fine print of a CGF agreement says that they’re only going to distribute your contributions to approved charitable organizations. You can tell a CGF to send your donation to support tornado victims in Oklahoma when there’s an IRS-approved charity for that cause. Even then you might only want your contribution to go to that charity if you feel that they’re responsible stewards of your money. However by the time you read this post, all major CGFs will have suggestions on their websites for where your tornado relief contribution will do the most good.
Although the CGFs are sending money to charities, they’re not completely altruistic. Fidelity will deduct a fee from your account every quarter, and the other fund companies will cover their expenses either with similar direct fees or through processing costs. However you can send appreciated shares to these funds much more efficiently via electronic transfers than by paper share certificates in the postal mail, and I think their fees are well worth the convenience. Best of all they’ll track your donations and your charitable distributions while sending you the appropriate tax forms.
Now when you want to send $50 to the Red Cross, you can sign up for an account at one of the CGFs. If you already own funds at Vanguard then it’s probably easier to set up an account at Vanguard’s CGF, but you can transfer your shares electronically among almost all major financial companies and a CGF of your choice. If you’re transferring shares from your Schwab account to your Schwab CGF, then it also happens overnight instead of over 3-4 days.
Next you have to choose which of your investments will provide the $50. You’re probably going to pick the fund or stock that’s appreciated the most (for the largest capital gain) or the asset class that’s farthest above its desired allocation. Instead of selling shares and transferring the cash to your checking account, you’re going to transfer the shares directly to the CGF account. Your trade will go through at the next available transaction price and $50 worth of shares will disappear from your taxable account. The CGF will let you deposit those shares into another investment fund if desired, but since you’re sending the money straight to a charity then you’ll probably direct them into the CGF’s money-market fund.
Once the shares have cleared the CGF’s processing and are credited to your account, you’ll select the Red Cross for a grant of your $50 worth of shares. Since the Red Cross is already on the CGF’s list of IRS-approved charitable organizations, your grant recommendation is immediately approved. The money-market fund shares are cashed in and $50 is transferred electronically directly to the Red Cross’ accounts. A Red Cross volunteer in Oklahoma uses the money to buy supplies for a shelter or hands a debit card directly to a hurricane victim.
That’s all it takes. The Red Cross has your $50 in Oklahoma faster than you could have tossed the cash to a volunteer. You didn’t have to write a check or deplete your emergency fund. You didn’t have to pay taxes on the donation, and the CGF will send you the IRS form in time for your next tax return.
By the way, you’ve just done a little rebalancing in your investment accounts. Now you can relax a bit and enjoy the stock-market trend.
[This example was for assets in a taxable account, but if you're older than 70½ then you can also make a charitable donation from your IRA. If you're younger than 70 ½ then you're going to have to wait until you're old enough to qualify to use your IRA for charity.]
Other charitable gift fund conveniences.
When you have the fund send a grant to a charity, you can tell the charity how you want them to recognize your donation. CGFs do the task for you in your name. You can use the CGF’s website to designate the grant “In honor of…” or “In memory of…”. For example, revenues from “The Military Guide” are donated to their military charities “In honor of the contributors to the book ‘The Military Guide to Financial Independence and Retirement’.”
You can distribute the grant for a specific purpose. When you send it to a large organization like the Red Cross without any conditions, they can use your “unrestricted” grant wherever they want. It’ll probably go to hurricane relief but it could also go to a local Red Cross chapter in your area, or it could be used to buy laser printer toner cartridges at the Red Cross headquarters office. If you check the box labeled “Use the money where it’s needed most” then it’s spent on their top priority for their annual program plan. When you specify “For relief efforts to Oklahoma hurricane victims” then that’s how they’re required to spend it.
You can send the grant in your name– or not. If the charity receives a donation letter from your CGF with your name on it, then the charity can put you on their mailing list and contact you directly. Even worse, some charities will sell their mailing lists to other organizations who will send you their own appeals. When you’re trying to help hurricane victims, it’s annoying to see a hurricane of unsolicited mail descend on your own house. However you can tell the CGF to make your grant anonymously, and the charity won’t be able to send you monthly appeals or other invitations. Now the charity is spending contributions on relief efforts instead of sending you junk mail.
My spouse and I really appreciate distributing anonymous grants. We don’t want the charity wasting our money on direct-mail fundraising expenses. We have a philanthropy plan, and we might want to change it without the charity sending us reminders or guilting us into donating more. We know how much we’re doing, and nobody else needs to know that information. You’ll never see my name on a park bench, let alone a hospital wing.
Now that you’ve set up a CGF account, you can make donations to it at any time. You can do your tax planning separate from your charity support. Instead of waiting for a specific event at one of your philanthropic organizations you can transfer appreciated assets to a CGF now, stash the funds in a money-market account, and wait for a charitable event to recommend a grant. This means that you can carry out your philanthropic plans on your schedule (quarterly donations or whenever you rebalance) and distribute grants to your chosen charities on their schedule (emergency relief, matching donation challenges, fundraising drives, or other events). We rebalance our investments every 2-3 years, and we transfer enough of that to our CGF’s money-market fund to fund three years of annual grants.
A CGF lets you organize your philanthropy and put it on autopilot. If you decide to add hurricane relief to the causes that you support, then you could use your CGF’s website to schedule an annual grant from your taxable investment account. It could be sent anonymously every March to the Red Cross in memory of someone (or in their honor) to be used for hurricane relief efforts. Now when you see a hurricane on the news, your heart still goes out to the victims. However you also know that you’re already supporting the relief efforts with your donations and grants, and you can even impulsively log into your account to send more.
A charitable gift fund is a great way for us to use our emotional investor psychological behavior to help others.
Does this post help?