There’s a new kid on the charitable gift block. It’s called a Donor Managed Investment Account - DMI Account - for short. This vehicle allows donors to give money to a charity, take an income tax deduction for the whole amount and still manage the assets for as long as 10 years after making the gift. As you might guess, this is for donors who believe that their investment acumen is better than that of the charities to which they donate money.
The DMI technique was developed by Winklevoss Consultants, a consulting firm located in Greenwich, Con-necticut. In July of 2004, they received a private letter ruling form the Internal Revenue Service. An IRS private letter ruling is a request to the IRS to rule on a tax issue before a taxpayer takes certain action. Technically, an IRS to rule on a tax issue before a taxpayer takes certain action. Technically, an IRS private letter ruling is applicable only to the specific matter at hand and to that taxpayer only. Applicable only to the specific matter at hand and to that taxpayer only. However, what’s good for the goose is good for the gander; there-fore, private letter rulings are generally used more broadly.
Donors who plan to give at least $250,000 utilize this technique; however, the charity can decide to take an amount less than $250,000. Winklevoss, which administers the DMI Account programs, doesn’t charge donors a fee of less than 1% of the amount of assets under management. The hook of the program is tax leverage. As an example, a charitable minded donor who might want to contribute $1,000,000 to hospital can start growing the money now in their own investment account and pay the government 30% of their investment growth annually. With a DMI Account, they can donate a lesser amount now and grow the account to $1,000,000 over time on a tax-free basis because the money is held by the charity.
Let’s look as some numbers. Our charitable donor who can get a growth rate of 10% on their gift donates $620,920 to a DMI Account for which they receive an income tax deduction of the same amount. The assets grow tax-free and, in five years, become worth $1,000,000. The hospital can then ap-ply the gift for the intended purpose.
Now let’s look at a different scenario. If our donor invests $620,920 in their own account (which is taxable at 30%), at the end of five years they only have $870,874 because of the tax drag. It would take seven years to grow the money to the full $1,000,000. In both cases, our donor maintains control over all investment management decisions, but by using a DMI Account, they are able to generate an additional gift for the hospital of nearly $130,000!
Typically, the sophisticated investor will use a wide range of investment options. These might include stocks, bonds, mutual funds, hedge funds, real-estate-investment trusts, options, straddles, longs, shorts and derivatives. Donors can also choose to have their own financial adviser or broker manager the money on behalf of the charity, or invest the money themselves.
Is $250,000 to rich for your blood? How about $10,000? Donor-Advised Funds (DAF’s) get the same results as do DMI Accounts: however, the ante is a lot less and someone else gets to make the investment decisions. DAF’s can be found in local community foundations, nonprofit organizations, mutual fund companies, and independent sponsors.
So, if you are charitably inclined and are interested in doing something more than just writing out a check, DMI’s and DAF’s might be right for you.