Charitable Gift Funds – How to Set Up An Account to Donate to Your Favorite Cause

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Several readers have asked about this donation system.  I’m not an expert, but let me tell you what I know and you can share what you know.

Like most people, my spouse and I started our philanthropy by donating to charities somewhat randomly. We supported our military command’s drives for the Combined Federal Campaign. We spend a lot of time giving to and buying from Goodwill. We support school fundraisers, where any kid with the guts to ring our doorbell and talk with us can get a $10 donation. (Especially for Zippy’s chili or School Kine Cookies!!) We contribute to drives for the local food bank or a shelter.

Cash donations are anonymous (unless you get a receipt), but writing a check usually puts you on a non-profit’s mailing list. That generates two surges of mail:  one wave from the non-profit, and later an even stronger tsunami of appeals from all the other non-profits with access to the first one’s mailing list. Some of my Mainland friends heat their homes by fueling their wood-burning stoves with junk mail, but here in Hawaii, the slick brochures aren’t even suitable for composting.

Volunteering our time & labor with non-profits has had mixed results. Spouse (mostly) likes working with a couple, but the only long-term commitment I’ve enjoyed has been writing “The Military Guide.” Over the last decade, I’ve concluded that I’d much rather offer my money than my time.

Helping local schools was another problem. We’d be happy to contribute to a class project, but we became concerned that the teachers might treat our daughter differently. Most teachers are way too professional for that, but a few would publicly thank our family in front of the other kids and make everyone feel uncomfortable about the attention. While we liked helping out the teachers with computers or science equipment, we had no interest in getting involved with the parent’s groups or the other school organizations. Our alma mater and our daughter’s college have been particularly aggressive, and it’s taken substantial time and effort to persuade them to leave us alone.

We enjoy helping by giving, but we crave anonymity.

Charitable Gift Funds & Donor Advised Funds Make Giving Easy

[There may be some legal distinction between those two terms, but I’m going to use them interchangeably as “CGFs”.]

Then we discovered donor-advised charitable gift funds. Fidelity has done this for 20 years, and both Vanguard & Schwab have had their own versions for over a decade. Other fund companies have started their own, and a number of independent CGFs have sprung up. I’ll mention one of the independent ones later on.

Charitable Gift Funds are regulated by the IRS like any other charity. They take your donation like most other charities, and they’ll use it according to your wishes. The difference is that your contributions and grants are tracked for you and disbursed in accordance with your specifications. A CGF can send your grant to almost any U.S. charity and many international ones. The larger charities are usually electronically linked to the CGF’s systems, but even the smallest local non-profits can be approved by the CGF staff and receive a paper check in the snail mail. At a minimum, the group has to be listed with the IRS’ approved charities and have a tax ID number.

CGFs will happily accept cash, of course, but they’ll also handle stock or shares of mutual funds. Larger CGFs may accept donated real estate, works of art, or other valued possessions. Again the IRS regulates the types of donations that a CGF can accept, and the CGFs may have additional restrictions. When I was trying to figure out how to donate the book’s royalties to charity, I learned that CGFs won’t accept royalty rights.

Once you set up an account with a CGF, you direct how your grants are acknowledged. You can name your account just like any charitable foundation, although your foundation’s mailing address is usually your home address. When you choose the grants you want to distribute, you can make them in your foundation’s name (although that will reveal your mailing address to the grant recipient). Better yet, you can make the grant in honor (or in memoriam) of someone– or you can remain anonymous. The CGF itself knows who made the grant, but that information is not shared with the recipient.

The CGF offers the convenience of tracking your generosity. You can link your brokerage account to the CGF, so your shares of appreciated stocks or mutual funds can be donated directly to the CGF and you’ll know the exact amount of the deduction. After you’ve set up a non-profit in your account, you can make additional grants with just a few mouse clicks. You can analyze your grants by date, amount, or charity sector. You can search the CGF’s database for additional charities to support. You can even automate recurring grants and let the CGF take care of the details.

You can make the contribution whenever you want, and you can disburse your grants whenever you deem best. Unlike writing a check to your local charity, the two actions become separate events.

When you make a tax-deductible donation to the CGF, you’re free to use the deduction on that year’s tax return. However, you can disburse the grants at any time, even years later, as long as you comply with the CGF’s restrictions.

For example, you may be required to disburse at least an average of 5% of your account balance every year, similar to the IRS’ guidance for non-profit organizations. This convenience is especially useful for a one-time fundraising campaign (like repairing the USS ARIZONA Memorial) or a challenge drive (where your grant is matched by other donors).

A fund company’s CGF may grow your contribution by investing it in an index fund. We used to leverage ours in a mutual fund while we decided what charities would get our grants. Then in 2008, the fund lost 40% in just a few months, so now we put our contributions in the CGF’s money market. We usually do it only a week or two before we send out our grant to our chosen charities, but we still appreciate the flexibility to be able to make CGF contributions any time of the year and send out the grants at any other time.

Why Would a Charitable Gift Fund Offer These Services to You?

Well, first, they’re not free. The CGF will either deduct a fee directly from your account or will include it as an expense of operating the fund. Second, their customers have asked for it. Once Fidelity took the initiative, Vanguard and Schwab followed suit for fear of losing customers to Fidelity’s convenient donation system. Finally, it’s great marketing. The grants are chosen by the donors but the CGFs don’t hesitate to take a share of the credit for all the good work.

Another immensely popular non-profit is Donors Choose. Their job is connecting educators with donors by maintaining a huge database and certifying legitimate requests. Donors Choose adds a fee for their expenses, but you know that your donation is really going to the project you’ve selected.

Motivated Teachers Use Donors Choose to Leverage Their Grants.

They don’t have to enter contests or apply to multiple organizations or send home repeated appeals to their student’s parents. They can explain their plans in detail, supply keywords for database searches, and even include photos & video. They can form a team or apply individually. They can remain anonymous, although you can probably figure out which of your high school’s teachers is applying for that History Day video camera. Donors can sort the database by many criteria, including a specific school or subject or activity. They can fund all or part of a project. After donors have contributed, the teacher (and students!) can even post a “Thank you!” to show the donors how their money is being put to work.

If you register directly with Donors Choose then you’ll end up supplying contact information. However, your CGF can also disburse a grant by using the Donors Choose project number/name while preserving your anonymity. You won’t get a “Thank you!” in your e-mail, but you can see the project’s results on the Donor’s Choose website.

We use a Charitable Gift Fund to Donate Book Royalties

We have been donating royalty checks from “The Military Guide” from day one. The contributors have already asked me to split the donation between the Wounded Warrior Program and Fisher House. I’ll transfer the money to the CGF, set up the two military charities, and send out the grants in honor of the book. As the royalty checks roll in, all I’ll have to do is transfer the money and send more grants with a couple of mouse clicks. Unlike signing the royalties over to one charity, we have tremendous flexibility. If a military charity falls on its sword, or if the contributors decide that we’d like to donate to another organization, then it just takes me a few seconds to change the plan. (More on this below).

How to Use Your Charitable Gift Fund to Support Other Charitable Causes

You can also use your Charitable Gift Fund to support causes at any time. For example, you can use it to make regular contributions or in times of great need.

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 a recent natural 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 natural disaster 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 natural disaster 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. For example, 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.

How to Use Your Charitable Gift Fund to Rebalance Your Investments

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 tornado 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 my book, “The Military Guide to Financial Independence and Retirement,” 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 tornado 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 tornado 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 tornado victims, it’s annoying to see a tornado of unsolicited mail descend on your own house (pun intended).

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 tornado 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 tornado relief efforts. Now when you see a tornado 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.

We Use Our Charitable Gift Fund To Donate Book Royalties

I’ve sent the first royalty check of “The Military Guide” ($1136.15!) to our Fidelity charitable gift fund. From there I used their website to split it into two grants for the Wounded Warrior Project & Fisher House. The Fidelity CGF makes it easy to supply the book’s contact info to the charities without getting my personal name & snail-mail address in their databases. Fidelity’s designation letter includes my custom text: “In honor of the contributors to the book ‘The Military Guide to Financial Independence and Retirement’. Please use this contribution where it’s needed most” along with my e-mail address and the blog’s URL. This lets the charity use the money however they feel is best (even a new computer for the admin assistant or more toilet paper for the staff bathrooms) while saving them the time & expense of sending unsolicited snail-mail to my address.

I started writing the book in 2005. When you’re slogging through the details of Chapter 2 (or later sending your seventh query letter) it’s a bit difficult to envision the royalties. While I was expecting that a royalty check would eventually arrive, frankly I was surprised by its size. (Thanks for buying!)

Why Donate Book Royalties?

Let’s back up a step: Why keep giving book royalties & blog revenue to charity at all? You contributors contributed. We wrote a book. I sold it and we donated royalties to charity. You guys can pat yourselves on your backs for an average charity donation of at least $20. How much longer do we keep this up?

Well, in the first place: I don’t need the money. I’m financially independent. I’m already buying a second longboard rack, and I’m out of storage space. I already have 50 t-shirts and two pairs of cool surf shorts. My military pension covers our beach-bum lifestyle. My spouse has her own military pension barreling down the pipeline in another decade. Our daughter has displayed considerable talents for earning & saving, and she won’t need our inheritance. (Sorry, honey. You go, girl!) Even if we were planning to give it to grandchildren (or a hospital wing), our longevity planning puts that at least 50 years away.

Why not declare a “dividend” and distribute the profits to your contributors?

Well, sure, we could do that. It’d upgrade your lifestyles by roughly one Starbucks trip per month (if you’re frugal). The blog revenue might boost that hedonism to two or even three times a month. But, hey, you guys are supposed to be financially independent too– or at least striving for that distinction. Readers want to know that your stories and your advice actually work on their own and aren’t just intended to generate the revenue to make it work. If we’re so smart we still may not be rich, but we’d better be financially independent.

Donating royalties to charity also ensures that we have the right author and contributors.

If I’m trying to inflate my bank account with royalties then I might make editorial & marketing decisions that aren’t necessarily in a reader’s best interests. Paying contributors might attract the wrong sort of contributors, and their stories & advice might not be so much “pay it forward” as they’d be “pay it to me!When we donate the royalties to charity, we preserve our credibility along with our integrity. We want people who are happy to share their wealth of experience, not just grab a share of the wealth.

Which gets to the final point: if we’re donating the royalties to charity, then readers feel good about buying the book. Military support organizations can also feel good about buying it in bulk, and corporations can feel good about donating a few pallets to their own customers. (If you’re a corporation looking for a few pallets, please contact me about bulk discounts.) Everyone feels that they’re getting objective advice and practical tools while donating their money to a good cause.

So we’re gonna keep donating. All of it.

How Long Will You Donate Book Royalties?

Until we’re done.

That’s a simplistic answer, but it’s also the beginning of an exit strategy. I think we have more to say, and I’d like to put out another edition of the book. (Some Impact Publications authors are on their 13th edition!) I think we can tie future editions more tightly into website tools and maybe even mobile apps. I’d like to consider tackling a different e-book format (sorry, Amazon) or even self-publishing. (Don’t worry, Impact, at least not for the 2nd edition.) I like the writing, and I think I can get better at the rest of the process.

The book may turn out to be evergreen, but in another 10 years a binding of dead trees may be considered an archaic novelty. If When that happens, the book may be absorbed into the website (or whatever we’ll be calling it) and everything may be done online… or downloaded to your smart headset in your personal flying car.

I may write the third edition, or I may move on to something else. Frankly, I don’t have a clue. However, I think a big, robust, revenue-earning website would be the proper incentive to attract my relief author. They could keep donating the earnings to charity or take a chance with earning their own income. One of you may even someday want to be that relief, or maybe it’ll be someone who’s still wondering about joining the military. But when I exit this gig, I want to leave a smooth-running machine ready to roll out with the new driver.

Ways to Donate?

Book royalties are easy: they go on Schedule C of a tax return as self-employment income. There are all sorts of deductions to offset royalty income, and the net result is taxed as regular income. One minor annoyance with that approach is paying nearly 15% of that royalty check as self-employment income tax.

I could have just signed the royalties over to (one) charity when Impact Publications offered me the contract. That’s still an option, but it also means that we lose some flexibility. We’d have to choose one charity and we wouldn’t easily be able to switch things around. New contributors wouldn’t be able to add their votes to choosing more charities.

I’d love to just sign the royalties over to our Fidelity CGF and have them totally bypass me. Unfortunately, the last time I checked, CGFs are restricted on the types of assets they can accept as charitable donations– and they’re not allowed to accept book royalty payments. If you’re a tax expert who knows a way around this restriction, I’d love to hear it.

Blogging income is also Schedule C self-employment income. That means I’d pay the self-employment tax and then donate the leftovers to charity. While I’m happy to help rescue Social Security for the rest of America, I think we’d prefer to have the blog income go directly to a charity instead of to “me”. However, we’d also want to retain the flexibility to change up charities once in a while. WWP and Fisher House do a great job, but you contributors might have other places you’d like to send the money.

Another way to donate blog revenue would be to create a “Military Guide” charitable foundation– and have all the royalties & blog revenue go to that foundation. I’d have to set up the foundation so that the revenue could be booked as donations, not unrelated business income. I know how to do that. It’s a cumbersome IRS paper shuffle. I’d file IRS Form 990 tax returns every year. But then the foundation could dispense the income to any charity it wanted to.

Unfortunately (for me), the advertising and book sales might be raising funds in all 50 states. That could mean the foundation would also need to be registered in all 50 states. I’m watching my spouse do this now at a non-profit, and it’s a full-time job for two people for several months. As much as I love writing, I’m not going to file 50 registrations– and the expenses of doing so might be far higher than paying self-employment tax. Again, if you’re an expert who knows whether I’d have to register in 50 states, I’d love to know how to figure out the rules.

A third way would be to have advertisers donate their payments directly to the charity. I’d think that an advertiser would rather donate directly instead of buying an ad, although I don’t know. Call me cynical, but I suspect that the revenue would be a lot lower– less than just paying the self-employment tax, anyway. Google AdSense also has an issue with bloggers announcing that ad revenue goes to charity. I suspect that I’d be able to convince them (with my tax returns?) but Google is too big to care and might not pay any attention to me.

A fourth option would be to sell out. No, not that way: I mean sell out to a blogger company that would… put me on royalties or salary. Which I’d donate to charity. However, the blog would have to at least triple its current hits to attract corporate attention, and again I think we’d be spending more money than we’d be saving on avoiding self-employment taxes.

Has anyone else dealt with this “problem”? Any other ideas?

Stewardship and Philanthropy Are Important – And We’re Stil Learning

My spouse and I have a lot to learn about stewardship and philanthropy. I feel as if most of the authors & websites are either writing feel-good boilerplate like “discover your bliss” (?!?) or else telling me to send it all to the Gates Foundation where their trained professionals will know what to do with it. While we’re trying to figure out our priorities, it’s a relief to know that we can remain anonymous and experiment without worrying about long-term commitments or unwelcome attention.

How do you donate to charities? Any other advice on CGFs?

Related articles:
Volunteering for charity or neighbors
During retirement: You will change. Your plans may change too.
Retirement: don’t recreate your old environment
Book review: “Give Smart”



WHAT I DO: I help you reach financial independence. For free. I retired in 2002 after 20 years in the Navy's submarine force. I wrote "The Military Guide to Financial Independence and Retirement" to share the stories of over 50 other financially independent servicemembers, veterans, and families. All of my writing revenue is donated to military-friendly charities.

2 Comments
  1. Thanks, I enjoy Paycheck Chronicles too!

  2. We have a charitable gift fund for several reasons. First, it helps me to be more purposeful about my giving. Second, it allows this active-duty family to clump it’s actual giving into years when we have more taxable income, yet still distribute when we feel so moved.

    First time visitor to your site, it looks like you’ve got lots of good stuff here!

    Comment? Question? What's on your mind?