It's not just the size of Warren Buffett's gift but the fact that he applied the same scrutiny to his largesse as he does to his investments. His example provides a lesson for all of us. By Mary Beth Franklin, Senior Editor June 28, 2006 When Warren Buffett speaks, the investment world listens. But the Oracle of Omaha's latest pronouncement involved a different type of investment than Wall Street is accustomed to -- one that could change the world. Buffett, the planet's second richest man, announced that he would donate 85% of his fortune -- more than $40 billion worth of Berkshire Hathaway stock (at today's prices) -- to a charity affiliated with the world's richest man, Microsoft's Bill Gates. Buffett designated the Bill Melinda Gates Foundation, the country's largest foundation, as the primary beneficiary.Buffett's move sets a standard not just for the amount of his largesse but for the way he's giving his money away. "The way he is making his gift is an argument in support of having one's charitable dollars operate as efficiently as possible," says Larry Richman, chair of the private wealth services group at Neal, Gerber Eisenberg, LLP, in Chicago. "It tells people of more modest means to look to the overall efficiency of the organization to which they are giving." RELATED STORIES Some Big Firms to Gain From Buffett's Largesse Philanthropy Made Easy Make Money Doing Good Reversing his earlier plan to give away his money after his death, Buffett's gifting plan, the largest commitment in philanthropic history, will begin next month. He has earmarked 10 million shares of Berkshire Hathaway's B shares for the Gates Foundation. He will give away the first installment of 602,500 shares this month and will turn over 5% of the remaining balance each year until his death. Buffett will serve as a trustee of the Gates fund, which focuses on global health and education. The remainder of his philanthropic dollars will go to foundations run by his children and one that he created with his late wife, Susan, who died in 2004. Every bit helps While the charitable contribution of the average American pales in comparison with Buffett's enormous gift, the combined generosity of millions of Americans is impressive. Individuals were responsible for more than three-quarters of the near-record $260 billion donated to charities last year, according to Giving USA, the yearbook of philanthropy. Nearly half of the 6% increase in giving in 2005 was in response to natural disasters, including the tsunami in Indonesia, the earthquake in Pakistan and the triple Gulf Coast hurricanes. Advertisement Del Martin, vice-chairwoman of the Giving USA Foundation, doubts that Buffett's gift will inspire average Americans to step up their contributions, as last year's disasters did. But she hopes it will prompt wealthy individuals to think about how they give. "I hope it will inspire people of means to think about giving money to existing organizations rather than setting up their own," Martin says. "We haven't seen this before -- someone giving a large amount to another foundation because they trust in the work." Here are some suggestions to stretch your charitable contributions in a way that would make Buffett proud. And like him, you can enjoy watching the effects of your legacy while you're still around. You also get to lower your tax bill in the process. Donor-advised funds If you want to create a philanthropic legacy while getting the maximum tax benefit from your largesse, consider a donor-advised fund. With this charitable-giving fund, you turn over assets to an intermediary organization run by a financial services firm, a community foundation or charitable group. (Fidelity, T. Rowe Price, Schwab and Vanguard all offer donor-advised funds.) You get a tax deduction in the year you make the contribution and then you advise the program how to disburse the money. The fund's sponsor handles the paperwork. While the specifics of setting up an account vary by sponsor, many of the steps are identical. You donate cash, stock or other assets, such as real estate or art, to a sponsor. Stocks and other noncash donations are then sold and the proceeds are either added to a common pool or placed into the donor's account. In return for the donation (perhaps $10,000 to start, although subsequent donations can be smaller) the donor can direct money to registered charities. Contributing noncash assets to a donor fund cuts a pile of red tape -- especially if the donation includes appreciated assets -- and avoids the capital-gains taxes you would incur if you sold them on your own. Advertisement Donor-advised funds have advantages over both private foundations and direct contributions to charity, including a bigger tax deduction. You can deduct up to 50% of your adjusted gross income for cash contributions and 30% of AGI for securities or other assets with a donor fund, compared with 30% and 20%, respectively, for donations to a private foundation. In a way, setting up a donor-advised fund is not all that different from Buffett's approach because it lets you park your contributions while you decide how to disburse them. "Donor-advised funds are terrific because they enable people to separate the issues of tax planning and charitable giving," says Richman. "It supports a more thoughtful process about the recipient of your gifts without the time pressure of deciding by the end of the tax year or when a stock you want to donate has appreciated significantly." (Read Knight Kiplinger's recent column on donor-advised funds.) A gift that gives back Donor-advised funds let you see the results of your generosity during your lifetime. But another method -- a charitable remainder trust -- is a gift that helps you now by giving you income and helps your favorite charities later, after your death. It can be a wise move just before retirement, giving you a big tax deduction during your peak earning years and creating added income in retirement. Here's how a charitable remainder trust works: You make an irrevocable gift of cash or, ideally, stocks or other appreciated assets, to the trust. Advertisement You can be your own trustee, so you don't give up control of the assets entirely. You designate an income beneficiary (possibly you and your spouse) to receive the income from the trust. You get an income-tax deduction for the estimated value of the assets that will be left to the charity after your income interest ends. After the death of the last income beneficiary (or at the end of a specified number of years) the charity gets whatever assets remain in the trust. Charitable remainder trusts generally make sense if the assets total $100,000 or more. Do your research Whether you set aside $10,000 to establish a donor-advised fund or $100,000 to set up a charitable remainder trust -- and even if your gift contains fewer zeroes -- you must scrutinize the beneficiaries of your generosity. Before handing over money, take a look at the following Web sites that analyze hundreds of philanthropic groups to ensure that your dollars are well spent. A good place to start is the BBB Wise Giving Alliance (www.give.org), which is affiliated with the Council of Better Business Bureaus. The Alliance offers free reports on 500 national nonprofit organizations, including most major charities. Each report analyzes the organizations' success in meeting 20 "standards of charity accountability," such as how the charity is run, the share of income that goes to program services and the nonprofit's willingness to disclose information. Another watchdog is Charity Navigator (www.charitynavigator.org), an online service that provides free evaluation of the financial health of 4,700 charities. It looks at financial performance and assigns star ratings -- from zero to four -- on measures such as whether a charity keeps administrative and fundraising costs to a reasonable level and whether it has enough revenue growth and working capital to be stable for the long term. Charity Navigator suggests donors consider only charities that spend at least 65% of their budget on programs and services. The most extensive site is GuideStar (www.guidestar.org), which reviews 1.5 million nonprofits. A basic search, which is free, tells you whether the IRS has approved the charity to accept tax-deductible contributions.