Getting the biggest bang from your charity buck

Personal Finance. By Katherine Vogt, amednews staff. Dec. 8, 2003.

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When given the opportunity to contribute to a new chapel at his hospital, Edward L. Schulte, DO, reached deep into his pockets.

The anesthesiologist wanted to give the best gift he could to the St. Alexius Medical Center in Hoffman Estates, Ill., so he turned to an investment adviser for help. The adviser devised a strategy to transfer some appreciated stock to the cause. That way, the money went directly to the cause without being depleted by an intermediary. And because the stock was gifted away to a charity instead of sold, Dr. Schulte didn't have to pay capital gains taxes on it, and that meant a larger donation.

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The gift, nearly $40,000, was used for an altar in memory of his parents, and a statue. Dr. Schulte said the method he chose to make the donation made all the difference. "I just think it's the right thing to do when you make a donation to be as generous as you can, and you can certainly do that this way."

Dr. Schulte is among a growing number of people who are educating themselves to ensure that their charitable donations are used properly and made in the most advantageous way.

Experts warn that it is easy to lose track of where donated money is going. It may end up getting used for administrative costs or paying to keep solicitors in business. But there are steps that a savvy donor can take to ensure that the contribution is used in the way it was intended.

If you give to a health care research organization, for example, "what you think might be going to laboratory research may actually be going to marketing research," said Daniel Borochoff, president of the American Institute of Philanthropy, a charity watchdog organization.

Borochoff said some charities spend as much as 90% of the money they receive in donations to pay solicitors to ask for money.

He said donors who want to know how their contribution will be spent can ask to see the organization's IRS 990 form, a financial disclosure document. The philanthropy institute and other organizations also provide information about how charities spend their money.

According to the Federal Trade Commission, some $212 billion was raised for charities in 2001, with some 700,000 federally recognized charities soliciting for contributions.

Even those who aren't planning to give should be prepared for a solicitation during the holiday season, observers say. Physicians, especially, may top a solicitors' lists of targets because of their perceived wealth and the availability of phone lists with their names and numbers.

Borochoff predicts a lot of mailings from charities in coming months because of a change in postage rules. And he said telemarketers whose work was stymied by the National Do Not Call Registry might refocus their attention to soliciting for charities, which are exempt from that federal program.

He said potential donors should investigate any solicitation they receive before handing over money. "The No. 1 reason people give is because they're asked. But the groups who might be asking the most might be doing the most fund-raising activity," he said.

When possible, Borochoff recommends giving directly to the charity. Writing a check might be better than giving cash to ensure that the money goes directly into the charity's coffers, he said.

Other giving strategies are more complex. The method Dr. Schulte used, donating appreciated capital gain property, is popular among high net worth clients, said Deborah Feldman, a certified financial planner in Buffalo Grove, Ill. This allows a tax donation for the property's worth, puls is a way for the donor to circumvent paying capital gains on any appreciation.

But to get the tax benefits, there are limits of how much appreciated capital gain property can be donated. Depending on the type of charity, the gift may be no more 20% or 30% of the donor's adjusted gross income to receive the full tax deduction, she said.

Jere Doyle, a Boston attorney in private wealth management, said there are rules about how long the stock has been held that may affect whether it qualifies for a deduction. Still, he said the method is a popular and effective way of giving.

"When you give away appreciated property, you are in effect giving away the gain as well. So that gets the charity more money and it gets the donor a large income deduction," he said.

Another popular route for giving is through donor advise funds, which are typically set up by a brokerage or mutual fund company. They allow contributions to made into a mutual fund portfolio, with the charity named as benefactor of the fund.

Doyle likened donor advise funds to "the poor man's private foundation." He said they function in the same way as an umbrella tax-exempt organization. The donor puts in money and designates who gets it and when. There is an investment management fee that depends on the fund. And like other donations, there are limits to how much can be contributed and qualify for a tax deduction.

Some donors set up charitable remainder trusts to hold assets for charitable causes while getting paid a percentage of the principle. But these trusts can be complex.

Potential donors who want to avoid using a financial institution may consider making a restricted donation. These gifts go straight to the charity but allow the donor to say how the money should be used. It's basically a direct contribution with strings attached.

"People want to know what the money is used for," said Sandra N. Salter, a financial adviser in Newark, N.J. "They are concerned whether it's going to go to salary or a specific program. They're concerned about control. So a lot of people are making restricted donations."

Salter said the charity has the discretion to decide whether to accept those conditions, though she has never heard of any gifts being turned down. Still, she warned, the restricted gifts might cause headaches for the charity.

"You definitely want to allow for some funds to go for overhead because that's just part of business," she said. "Sometimes if you are going to give a restricted donation, you might actually be helping people the charity is for but hurting its workers."

Vogt was a business reporter during 2003-06.