Laura Rowley Money & Happiness

Research psychologists say that giving to others is a surefire way to boost happiness. On the practical side, charitable donations are also a smart way to offset a big tax bill.

With that in mind, one of the fastest-growing and most flexible ways to give is through a donor-advised fund.

Giving Made Easy

"We call them charitable checking accounts," says Stacy Palmer, editor of the Chronicle of Philanthropy in Washington, D.C. "A lot of people like how easy they are. You can give without having to set up a private foundation, and give to many causes rather than writing a check to one particular cause."

Most important, you can get the tax deduction the year you make the contribution, take your time dispensing the funds, and minimize administrative headaches.

Assets of the nation's largest donor-advised funds rose 21 percent in 2006 to $19.2 billion. This was up from $15.9 billion the year before, according to a survey by the Chronicle of Philanthropy.

Avoiding Big Taxes

Sponsored mainly by community foundations and national financial companies such as Fidelity and Schwab, donor-advised funds allow contributors to give cash, stock, or other assets to special accounts. They can be set up in an hour or less, often online. Donors typically choose from an array of investment funds to make their charitable contribution grow. Then they decide how, when, and where to distribute the funds.

"If you know you want to give $10,000 to your alma mater, give directly -- it doesn't do any good to put the money in a donor-advised fund," says Palmer. "But let's say you're getting to the end of the year, you've had big capital gains, and you don't want to pay big taxes.

"But you have no idea what causes you want to support, and you want the time to do research; or you know that in the spring you'll be asked for a big gift. The donor-advised fund allows you to get the tax deduction this year, and have money in the account and use it next year or over the next several years."

Charity for Everyone

Moreover, donor-advised funds are not exclusively for the ultra-rich. Last year, for example, Fidelity Charitable Gift Fund lowered its minimum account contribution to $5,000.

"We've seen individuals getting involved earlier," says David Giunta, president of Fidelity's Gift Fund, which has burgeoned into the nation's fourth-largest charity, with $3.5 billion in assets in 2006. "There has been an uptick in younger people setting up accounts."

The fund sponsors handle the administrative, legal, and accounting requirements.

It simplifies giving for someone who, say, wants to divide 500 shares of appreciated stock between 10 charities. They would simply donate all 500 shares to the fund, which would sell it and administer the grants. As of last year, the Internal Revenue Service began requiring receipts for all donations under $250. When smaller gifts are dispensed from a donor-advised fund, the sponsor tracks that detail.

Matching Goals to Funds

Every fund has its own rules and restrictions regarding minimum contributions, investment options, and donations. "Some require more of a payout, or some community foundations might require that at least a small percentage of a gift go to the [sponsoring] institution," says Palmer.

When choosing a fund sponsor, start with your charitable goals. If you want to make an impact locally, a community foundation can help identify needs you might not have considered, or connect you with other donors focused on a specific cause. (For more on developing your personal giving strategy, see my blog.)

If you already have a roster of charities you support, the national funds typically offer lower administrative and investment fees, may offer more investment options, and are set up to handle smaller transactions. At Fidelity, for example, donors can make gifts as small as $100. Be sure to find out how many gifts you can make in a year with the fund you're considering.

"National donor-advised funds are doing transactional philanthropy," says Ken Strmiska, managing director of community foundation services at the Council on Foundations in Washington, D.C. "If you live in Green Bay, Wisconsin, and want to find out what's going on in the area of childhood obesity, you can't call up Fidelity -- they're not going to know. But you could call the Green Bay Community Foundation."

Stock Up Your Donations

If you're thinking about a donor-advised fund, consider opening the account with appreciated stock rather than cash. A study released last month by Fidelity found that this provides a bigger tax bang for the buck. For a $10,000 contribution, Fidelity estimates that the median federal tax savings from donating appreciated securities is about $450.

"A lot of times, people will opt to give $15,000 in cash as opposed to looking across all of their assets and considering appreciated securities that they have held for more than a year," says Fidelity's Giunta. "They can avoid paying capital gains while still receiving the deduction for the full $15,000." This year to date, 77 percent of assets coming into the fund year-to-date have been non-cash assets.

Finally, before you choose a donor-advised fund, take a look at the sponsor's administrative spending. You can research the organization by checking out its 990 informational tax return online at the Foundation Center.