Funding DAF

[Rivertop]

We are ready to set up a Donor Advised Fund and I’m wondering the best way to fund it. We have cash sitting around in a checking account and we also have money in VMMXX and index funds. Is there a better source to use, or does it not matter?

Also, we are going to use Vanguard since that’s where most of our investments are sitting. Besides Vanguard’s higher initial deposit, Fidelity and Vanguard looked similar. Is there anything I’ve overlooked?

 

[braumeister]

Many people fund it with appreciated stock. That saves you from the tax on the capital gains and the DAF gets the full value.

Fidelity lets you give smaller grants than Vanguard (that may have changed, I don't know). We have used a FIDO DAF for many years and we like it a lot.

 

[RunningBum]

There is a tax advantage into moving highly appreciated funds into a DAF.

Suppose you want to fund it with $50,000. You have the option to use $50,000 cash, or a mutual fund worth $50,000 that has a $25,000 basis. You will spend the asset you don't donate.

If you donate the cash and spend the stock for living expenses, you get the tax deduction for $50,000 that can offset regular income. When you sell the MF shares for living expenses, you'll pay $25,000 * 15% or $3750 in cap gains tax on the MF sale.

If instead, you donate the MF shares (directly, not selling them and donating the proceeds), you get the same $50,000 tax deduction. Using the cash for living expenses, you have $0 tax on that. So you've saved yourself $3750 donating the MF shares to the DAF.

In addition to the higher initial deposit, VG has higher limits on grant disbursements. At least they did when I opened my DAF. Check it out for yourself. If you just make larger grants it won't matter to you, but if you like to spread your grants around and make smaller grants to more charities, Fidelity is better.

I was up against a time crunch at the end of 2017 and opened my DAF with VG first, since my investments were there. Then in 2018 I transferred the account to Fidelity. But it should be no problem to just transfer the shares from a VG account to a Fidelity DAF with this much time left in the year. Given the time you have, I would decide which place I wanted the DAF and start with that rather than doing a transfer later. Just know that if you are unhappy with one, it's not a big deal to transfer it to the other.

 

[RunningBum]

Oh, you should also check out your investment options. I thought both have good, low fee options, but you may prefer one over the other. I opted to invest in Fidelity Contrafund, which is otherwise closed to regular new Fido investors.

 

[OldShooter]

Overlooked? Maybe. We are using a community foundation in a town near our lake home. We have a named fund there and communicate with them on criteria for grants but technically is is not donor-advised. This is important because we are funding with QCDs (https://www.fidelity.com/building-savings/learn-about-iras/required-minimum-distributions/qcds) and donor-advised funds are not eligible for this.

We also like that our grants can be of significance in a small community, feeling that donations to large organizations just disappear into the general funds. Last fall the fund gave a one-time grant to a family who could not afford winter clothes for their children. This need was identified and facilitated by a school counselor when one of the children came to school without adequate outerwear. It's this kind of small-scale personal crises that the fund is set up to help with. Another, similar, fund that the community foundation runs has purchased several bicycles for halfway-house residents' transportation to work.

 

[Rivertop]

Thanks for the feedback - you all are so knowledgeable!

If the funds in our taxable VTSAX have not been held for a year, is there any issue in transferring them to the DAF?

 

[RunningBum]

Overlooked? Maybe. We are using a community foundation in a town near our lake home. We have a named fund there and communicate with them on criteria for grants but technically is is not donor-advised. This is important because we are funding with QCDs (https://www.fidelity.com/building-savings/learn-about-iras/required-minimum-distributions/qcds) and donor-advised funds are not eligible for this.

We also like that our grants can be of significance in a small community where donations to large organizations just disappear into the general funds. Last fall the fund gave a one-time grant to a family who could not afford winter clothes for their children. This need was identified and facilitated by a school counselor when one of the children came to school without adequate outerwear. It's this kind of small-scale personal crises that the fund is set up to help with. Another, similar, fund that the community foundation runs has purchased several bicycles for halfway-house residents' transportation to work.

I'm confused by what you are saying.

The link you give says that you cannot make a QCD contribution to a DAF. OK, but I don't know what that has to do with anything.

If someone had a DAF at Vanguard or Fidelity, and wanted to make a grant contribution to that community foundation, why couldn't they? You seem to be implying that they couldn't. But both QCD contributions and DAFs have to go to a 501(c)3 charity organization. Your whole spiel about this local community fund sounds nice, but meaningless in this discussion unless you tell me how one could not grant to it from a DAF.

There are different advantages for QCDs and DAFs. A QCD (available only if at RMD age) is a reduction in income, so you don't have to itemize deductions to get the write-off. It also helps with any income based programs, like IRMA for Medicare premiums. A DAF (open to anyone) can be funded with appreciated assets, so you can get a bigger write-off if you were itemizing anyway. It also lets you do a bulk charitable deduction, so you can take a sizeable deduction one year while spreading out your grants over a number of years.

 

[RunningBum]

Thanks for the feedback - you all are so knowledgeable!

If the funds in our taxable VTSAX have not been held for a year, is there any issue in transferring them to the DAF?

[-]I don't see how it matters at all if it's a LT or ST holding. If there is, you should find out quickly enough when you try to transfer that, but I don't recall being asked for basis or purchase date. The only taxable aspect to this is the market (current) value of the donation. The tax savings comes from not having that highly appreciated asset to sell some day, and instead spending from your checking account.[/-]

EDIT: See timberline's post below, turns out it does matter!

 

[TheRunningMan]

I funded mine by transferring over several appreciated funds, avoiding the taxable gains and maximizing the contribution.

Mine is with Fidelity since the majority of my investible assets are there. I'm sure Vanguard (were most of the remainder is) is equivalent.

If you know you are going to be giving it away, this is a terrific mechanism to shelter taxes today; I'm still 2.5 years from joining the club so tax rates are somewhat the catastrophe for me.

Cheers!

 

[OldShooter]

I'm confused by what you are saying.

The link you give says that you cannot make a QCD contribution to a DAF. OK, but I don't know what that has to do with anything.

If someone had a DAF at Vanguard or Fidelity, and wanted to make a grant contribution to that community foundation, why couldn't they? You seem to be implying that they couldn't. But both QCD contributions and DAFs have to go to a 501(c)3 charity organization. Your whole spiel about this local community fund sounds nice, but meaningless in this discussion unless you tell me how one could not grant to it from a DAF.

There are different advantages for QCDs and DAFs. A QCD is a reduction in income, so you don't have to itemize deductions to get the write-off. It also helps with any income based programs, like IRMA for Medicare premiums. A DAF can be funded with appreciated assets, so you can get a bigger write-off if you were itemizing anyway.

I'm saying a few things:

1) For someone doing RMDs, QCDs are very advantageous but they cannot be used to fund a DAF. The OP didn't say whether they were in RMD territory or not, but for those who are a smaller foundation will probably accept donor input even though the donor's fund is not a technically a DAF. Hence, you can do a pseudo-DAF with a QCD.

2) We like smaller foundations where our money can have an impact.

3) I said nothing about using a DAF to give to a small foundation. Obviously that can happen. I said nothing about appreciated assets but if that is the source of the money rather than QCD funds, then a DAF may make sense depending on whether the donor is using the standard deduction vs itemizing. 2018, our first year of RMDs, was the first year I can remember that we took the standard deduction. It was because of funding charitables with QCDs, which previously had amounted to over half of our itemized deductions.

 

[The Cosmic Avenger]

We started our DAF last year. Now, normally I take all of the RMDs from my inherited IRAs and that is our charitable giving money. Let's say for argument's sake it's $10K (after taxes). Last year, instead of putting the $10K of RMDs in my checking account and then writing checks, I donated $10K of the most appreciated taxable stock I held, then used the RMD to buy it back. I just reset the capital gains on that $10K to zero, basically.

So, however you normally set aside money for charitable donations, you can now use that money to repurchase whatever stock you donate, if you want. That's what I'm doing, at least. We used to put aside a few hundred a month also into a charitable giving account, but the RMDs have grown enough that we're donating more now anyway without putting aside any money each month.

 

[Scratchy]

There is a tax advantage into moving highly appreciated funds into a DAF.

Suppose you want to fund it with $50,000. You have the option to use $50,000 cash, or a mutual fund worth $50,000 that has a $25,000 basis. You will spend the asset you don't donate.

If you donate the cash and spend the stock for living expenses, you get the tax deduction for $50,000 that can offset regular income. When you sell the MF shares for living expenses, you'll pay $25,000 * 15% or $3750 in cap gains tax on the MF sale.

If instead, you donate the MF shares (directly, not selling them and donating the proceeds), you get the same $50,000 tax deduction. Using the cash for living expenses, you have $0 tax on that. So you've saved yourself $3750 donating the MF shares to the DAF.

Agree this is the point of donating appreciated shares, and for many the savings could be even more than 15 % of the capital gains. I have to pay NIIT (Net Investment Income Tax) and state tax on my capital gains. For me, the marginal tax rate on long term capital gains is 29.1 %. In the example you give above, where the $50,000 mutual fund donation has a basis of $25,000, I would save $7250 donating the appreciated shares rather than donating cash.

This is all assuming I needed to sell those shares at some point before I died. If I never sold the shares, my heirs would inherit them and get a step up in basis so there would not have been any savings.

 

[copyright1997reloaded]

In general, use appreciated shares to:
1) Fund a DAF, which now is even more important given the larger standard deduction and the value of 'bunching' donations
2) Use for inheritance due to step up in basis

In general, use underwater holdings (i.e. with a loss) to:
1) offset gains, particularly if you can offset a short term gain with a long term loss

In general, use cash/non-appreciated securities to:
1) Fund gifts while living to children
2) General use

As an aside, I've been happy with Schwab's DAF. Reasonable admin costs, no issues so far with any donations, allows a $50 minimum donation.

 

[RunningBum]

In general, use cash/non-appreciated securities to:
1) Fund gifts while living to children

If the child is over 14(?) and has low enough income that cap gains aren't taxed, appreciated securities are appropriate for this (up to the top of the untaxed range). Just have them sell and they get a free basis reset.

 

[timbervest]

I don't see how it matters at all if it's a LT or ST holding. If there is, you should find out quickly enough when you try to transfer that, but I don't recall being asked for basis or purchase date. The only taxable aspect to this is the market (current) value of the donation. The tax savings comes from not having that highly appreciated asset to sell some day, and instead spending from your checking account.

See https://www.kiplinger.com/article/taxes/T054-C001-S001-giving-stock-to-charity.html

If you donate appreciated stock held more than a year you can deduct full market value. If it is held less than a year you can only deduct cost basis.

Always better to contribute appreciated stock held LT than cash for reasons stated previously here.

 

[gcgang]

If the child is over 14(?) and has low enough income that cap gains aren't taxed, appreciated securities are appropriate for this (up to the top of the untaxed range). Just have them sell and they get a free basis reset.

https://www.forbes.com/sites/kellyp...a-to-z-2019-k-is-for-kiddie-tax/#44b3ba211abc

Age 14 hasn't applied for a couple decades, I think.

Above article explains how the income shifting technique Bum suggested doesn't work anymore, unless you are talking very small unearned income, $1,050 or less. Anything above gets taxed at whoever is claiming the dependent's tax rate.

Give highly appreciated, long term holdings to your DAF, especially when you expect your tax rate to drop in the future.

 

[RunningBum]

OK. It does work for adult children who aren't earning a lot though.

 

[kaneohe]

We started our DAF last year. Now, normally I take all of the RMDs from my inherited IRAs and that is our charitable giving money. Let's say for argument's sake it's $10K (after taxes). Last year, instead of putting the $10K of RMDs in my checking account and then writing checks, I donated $10K of the most appreciated taxable stock I held, then used the RMD to buy it back. I just reset the capital gains on that $10K to zero, basically.

......................................................................

Trying to understand how this works..............you donate 10K of stock to DAF.
Do you have other deductions that match or exceed the std deduction so you get a deduction for your stock donation?

 

[Rivertop]

Thanks again everyone! We are 55 and 56, so no RMDs for awhile. While our VG taxable accounts are less than a year old, I do have an old betterment account I have been ignoring - I can fund it from there. I'm going to take a look at the VG, Fido, and Schwab DAFs again. I was originally thinking I wanted to have it at VG because that's where everything else was.

 

[RunningBum]

Trying to understand how this works..............you donate 10K of stock to DAF.
Do you have other deductions that match or exceed the std deduction so you get a deduction for your stock donation?

That would be the ideal. I did mine in 2017, the last year with the smaller std deduction so I was itemizing because of property taxes anyway. I did a very large donation to fund the DAF so that I wouldn't have to refund it for quite awhile, if ever, when I was taking the std deduction and wouldn't get any benefit from smaller yearly donations. Under the new tax laws, it's still possible, the bar is just higher.

If you don't get above that bar and would be taking the std deduction even with the DAF contribution, you'll at least get the benefit of unloading appreciated stock.

Once you get to RMD age, a QCD probably makes more sense because it is taken off of income before you even get to the deduction decision, so it'll always be a tax benefit unless you're paying no taxes at all.

 

[The Cosmic Avenger]

Trying to understand how this works..............you donate 10K of stock to DAF.
Do you have other deductions that match or exceed the std deduction so you get a deduction for your stock donation?

No, I was thinking about bunching in order to itemize, but 1) that's a totally different topic, and 2) it requires a lot of money up front. In brief, I could put in $30K, itemize that year, distribute the $30K over the next three years, and take the standard deduction for the next two. It winds up reducing your taxes...there's a good explanation with great visuals here: https://www.thcf.org/Charitable-Bunching

My method allows me to reduce my eventual capital gains by increasing my cost basis. Here, I'll give a more detailed example:

Let's say I bought Google at 500, it's now worth 1000 per share. I donate $10K of Google stock, which has a $5K cost basis. IF I'm itemizing, I can deduct $10K, but more importantly, I take the $10K RMD that I used to use for charitable donations (or $10K I saved up during the year for charitable donations, however you do it), and immediately repurchase $10K of Google stock. Now that lot has a cost basis of $10K instead of $5K, so in retirement if I sell it my CG will be lower. I try to do this with my most appreciated taxable stock.

Part of the reason I like this tactic is that I'm not retired, so I'm trying to hold these stocks, not sell them off. This tactic might not be as useful in retirement when you need to sell off 2% or so of your portfolio anyway, but right now I want to hold onto everything, the only thing I plan on liquidating are the RMDs on my inherited IRAs, since I have to.

 

[kaneohe]

No, I was thinking about bunching in order to itemize, but 1) that's a totally different topic, and 2) it requires a lot of money up front. .............................................

My method allows me to reduce my eventual capital gains by increasing my cost basis. Here, I'll give a more detailed example:

.............................................

.............................................

Cosmic..............thanks for your detailed explanation. When I first saw your initial post, I wondered why you didn't just do a QCD w/your RMD and, in effect, get a deduction for your contributions. I see now that I missed that critical word "inherited" so that along w/ your explanation tells me that not everyone is a geezer like me and that you can't do a QCD because you haven't been on this earth long enough.

Since you're giving anyway despite no deduction, your technique makes sense to me now.

 

[copyright1997reloaded]

If the child is over 14(?) and has low enough income that cap gains aren't taxed, appreciated securities are appropriate for this (up to the top of the untaxed range). Just have them sell and they get a free basis reset.

Excellent addition. On DC’s UTMA account I’ve been doing tax gain harvesting as a similar approach.