Stern Advice: How to create your own charitable fund

By Linda Stern

WASHINGTON (Reuters) - My husband buys lottery tickets when we go on vacation. Maybe he's thinking about staying on vacation forever, but my plan for those winnings is different -- I've always dreamed about setting up our own family foundation.

The truth is, I don't have to wait until he hits the right numbers. There are tools, called donor-advised funds, that even middle-income families can use to create their own charitable programs. A donor-advised fund can help families target their giving, teach lessons of generosity to the children and, yes, save taxes as well.

Maybe that's why they have become increasingly popular. Despite falling stock prices and withdrawals for charitable gifts, assets in donor-advised funds grew 25 percent between 2004 and 2009, according to the Chronicle of Philanthropy. Assets ended last year at $16.48 billion and are poised for much larger future growth, the Chronicle reported.

Donor-advised funds are typically set up as subfunds of tax-qualified charities, which make gifts out of the funds based on the directions they get from the donors. Families (or groups of friends) that want to create such a fund can name it whatever they want (for example, the Stern Giving Fund) and make tax-deductible contributions to it.

Money in the fund gets invested and can grow for years, enabling donors to make much larger gifts in future years.

Sound enticing? Here's how to set up your own donor-advised fund.

If you have shares worth $5,000 that were originally bought for $3,000, you'd avoid the $450 in capital gains taxes that would be due by selling those shares. And you would get a deduction worth another $1,750 (if your combined federal/state tax rate was 35 percent) for the gift. Bottom line? It would only cost about $2,800 after taxes to give your fund $5,000.

(The Personal Finance column appears weekly. Linda Stern can be reached at linda.stern(at)thomsonreuters.com)

(Editing by Maureen Bavdek)