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Posted: November 24, 2009

Set up your own charitable foundation

Donor Advised Funds make it easy to spread the wealth

Wayne Farlow

Thanksgiving is my favorite holiday. It's the one holiday that focuses on being grateful for the abundance we have. As the year comes to a close, many of us will want to share our abundance with those less fortunate through our year-end charitable giving.

Did you know that there is a simple, easy and free way to set up your own "charitable foundation?"

This "charitable foundation" can be used to make gifts to all of your favorite charitable organizations. If you are planning on making charitable year end gifts to claim a 2009 tax deduction, now is the time to establish your "charitable foundation" by setting up a Donor Advised Fund.

Donor Advised Funds are qualified, private, non-operating foundations that pool their donations and allow you to select your favorite charities for gifts. The gifts that you make can be as little as $50 and can be given to any qualified charitable organization.

You may use a Donor Advised Fund to gift appreciated stock to many charitable organizations. As you are probably aware, giving appreciated long-term capital gain stock to a charitable organization provides a double tax savings. You receive the full market value of the appreciated stock as a charitable deduction, plus you pay no capital gains taxes on the stock's appreciated value.

However, giving small amounts of stock directly to multiple organizations can be both cumbersome and time consuming. Donor Advised Funds solve this problem.

 A Donor Advised Fund account can be established at Schwab, Vanguard or Fidelity as well as at many other brokerage firms. Once the account is established, you may donate appreciated long term stock to the account and take the full market value of the stock as a 2009 tax deduction. If you do not gift the full value of your donated stock during 2009, you still get the deduction for the stock's full value in 2009 plus the remaining funds can be gifted at any time in the future.

Let's look at an example of how a Donor Advised Fund works. Suppose that you bought 100 shares of IBM stock in July 1993 at $10.50 per share. You now wish to sell this stock, but you would prefer not to pay the long term capital gains taxes on your profit.

Today, IBM is trading at approximately $126/share. Your $1,050 investment in 1993 is now worth $12,600. If you donated this stock to your Donor Advised Fund, you would get a 2009 charitable deduction of $12,600. You would also avoid the requirement of paying capital gains taxes on the $11,150 capital gain.

If you wished to continue to hold IBM, you could gift the stock to your Donor Advised Fund and immediately buy 100 shares of IBM stock. This approach provides a new cost basis of $12,600. Since you are gifting the IBM stock and not selling it, the "wash sales" rules do not apply. This approach allows you to increase the basis of your stock while dramatically increasing the after tax value of your charitable gift.

Donor Advised Funds are similar to having your own charitable foundation. However, charitable foundations have high overhead and legal expenses that make them impractical for most people. With a Donor Advised Fund, you have your own "mini charitable foundation" with none of the headaches.

 If this approach seems appropriate for you, contact your brokerage firm today to get your Donor Advised Fund account set up before the end of 2009.

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Wayne Farlow is the founder of Financial Abundance, LLC, a Registered Investment Advisor firm.  He is a Certified Financial Planner (CFP®), focusing on Retirement Planning, Investment Management, Small Business Owner Planning and Sudden Wealth/Inheritance Planning.  His book, “Financial Abundance Guide,” is available free at www.farlowfinancial.com .  He can be reached at wayne@farlowfinancial.com or at 303-554-0309.

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