Can't decide which charity to give to this year? Consider a donor-advised fund. By Cameron Huddleston, Former Online Editor April 1, 2009 Editor's note: This story has been updated. With so many organizations in need of donations in this recession, you may find it difficult to decide which charities to give to this year. You don't want to rush your decision, but you don't want to let a valuable tax break slip by, either.There is a way to get a deduction now and make your giving decision on your own timetable: a donor-advised fund. By setting up and contributing to a donor-advised fund by the end of the year, you may deduct your contribution on your 2009 tax return (as long as you itemize your deductions) and take your time deciding how to allocate your gift. (Donor-advised funds are not, however, eligible recipients of the new, temporary provision that allows seniors to direct all or part of their required minimum distribution from an IRA -- up to $100,000 -- to a charity tax-free in 2009.) RELATED LINKS 5 Ways to Check Out a Charity A Dozen Creative Donations Teaching Kids the Value of Giving If you sold a business, received a lump-sum pension payout, actually made money in the stock market or had any sort of windfall this year, setting up an account with a donor-advised fund now will help offset your increase in income. Then, if you find you are pinching pennies more next year -- considering that the recession is expected to drag on -- you'll already have the money set aside to make charitable donations. Advertisement Sarah Libbey, president of the Fidelity Charitable Gift fund, says that "a donor-advised fund can be a reserve account even in a down market." That is, you can contribute to a donor-advised fund in good years and have money available to give even in lean years, such as this one, or in retirement, when your income will likely decrease. "When you have a giving-account balance at the ready, you are able to plan your giving and feel more organized," Libbey says. According to Libbey, 70% of Fidelity's clients say they donate more to charity because they have a giving account. You don't have to be a millionaire (or even close) to set up an account. Most donor-advised funds -- which are run by financial-services firms, community foundations and educational institutions -- require a minimum investment of $5,000 to $25,000, with some community-foundation-sponsored funds requiring as little as $1,000. Contributions may be in the form of cash, stocks, bonds, mutual funds, restricted stock and even real estate. And opening an account is easy. Fidelity, which sponsors the largest national donor-advised fund, lets you open an account online. Other financial-services firms, such as Vanguard, Charles Schwab and T. Rowe Price, and some community foundations require you to mail in a form that you can download from their Web sites. How it works. You make an irrevocable contribution of cash or appreciated assets to your donor-advised fund. The gift is tax-deductible at the time of your contribution, and you can recommend (but not require) the fund to direct donations to your designated charity at any time throughout the year. You usually get a choice of how to invest your contributions, and the value of your fund will fluctuate based on how your investments perform. Fees and expenses vary. Advertisement The benefits. You don't have to wait until you actually make a grant through the fund to get a tax benefit. For cash contributions to the fund, you may deduct the equivalent of up to 50% of your adjusted gross income; for securities you've held a year or more, you may deduct up to 30% of your AGI. People who contribute appreciated assets to a donor-advised fund get the biggest benefit. Instead of selling stock, paying capital-gains taxes on the proceeds and then handing the cash over to a charity, you can escape the tax bill and write off the full market value of the stock, even if it is worth substantially more than you paid for it. And if you plan on giving to several organizations, it's easier to give the shares to the fund and have it dole out the cash, says Tom Carstens, a partner with Lenox Advisors, a fee-based financial-services firm in New York City. Another benefit is that you are not required to give away a percentage of your account's assets to charity each year. However, most funds have minimum grant requirements (at least $50) each time you do make a donation. With a donor-advised fund, you'll have a record of all your giving -- a big plus considering strict new tax rules require documentation for all charitable contributions. Your donation may be anonymous or accompanied by a letter saying that you authorized it. Also, many accounts allow more than one person to contribute and make grant recommendations, so family members may get involved. Advertisement The drawbacks. Your giving is limited to IRS-approved tax-exempt charities -- otherwise known as 501(c)(3) organizations -- so you can't make grants to, say, scholarship funds or individuals. Your investment choices within your account are usually limited. However, large accounts sometimes get more investment options. For example, if you have at least $1 million in an account with the Fidelity Charitable Gift fund, you may select outside investments.