Donor-Advised Fund

[RunningBum]

A DAF has been discussed in a couple places recently, but I thought it deserves it's own thread since it may become more relevant for some of us with the proposed tax changes. If you're like me and will likely start taking the standard deduction, you may have realized you would no longer get a tax break for your charitable contributions. Setting up a DAF this year can help address that by lumping your donations this year, but distributing the grants over time. You can also donate appreciated stock or funds to take a full deduction (subject to 30% of your AGI) while avoiding the taxable gains. Thanks to audreyh1 and JoeWras for making me more aware of how to take advantage of this.

I had heard of a DAF before but it sounded complex to set up, perhaps like a trust, in my uninformed mind. Turns out it doesn't look any harder than opening up a brokerage account, as far as I can see.

As I understand it (and I've started this thread partly to make sure I understand it correctly), Vanguard, Fidelity, TRowePrice and Schwab are good places to open an account (fairly low fees). Then you fund it, ideally with appreciated equities, but you can just transfer in money. You take the full deduction of your donation now. Then you can distribute grants over time. It seems that any 501c3 should qualify, but you may need to set up the charity as a recipient if it has not already been done. Those grant distributions are not tax deductible events because you already took the deduction when you funded your DAF. What you don't distribute is invested per your direction. Investment choices are fairly limited, but look like reasonable index funds many of us invest in anyway. If you donated equities/funds, they are sold and reinvested as directed.

Disadvantages are a 0.6% annual admin fee at VG or Fido, on top of the regular (low) fund fees, but that seems dwarfed by the tax advantage. Also there are minimums in how much you have to contribute/donate to open the account, as well as additional contributions/donations, and minimum amounts on grant distributions. Vanguard has a lot higher minimums that Fido/Schwab.

Other than the fact that you may have to set up your favorite charity in the system of the administrator, bookkeeping is easier because there's no tax reason for you to keep track of your distributions. You only write-off the funding, which could be done just once if you choose. It certainly makes gifting stocks easier on both you and the recipient, because they get cash, not stocks.

You can set up an successor advisor to manage the DAF if you die, or there are other options.

https://www.bogleheads.org/wiki/Donor_advised_fund is a good source of info. I've got more research to do but I'm virtually certain I'll do this with a pretty sizeable contribution, especially since I'm planning to sell a highly-appreciated tax inefficient fund this year to help me qualify for the ACA subsidy in future years. It will also give me more room for Roth conversions this year.

Any other points, clarifications, corrections and such are welcome.

If this looks like a good solution to you, I encourage you to start investigating now to make sure you get the tax break this year, especially if you are looking to transfer equities or funds from one brokerage to a different one where you'll keep your DAF.

 

[audreyh1]

There have been several threads on DAFs here. Sorry I don’t have links right now.

Christine Benz at Morningstar very recently wrote a series of articles comparing DAFs.

We set one up at Fidelity several years ago and it’s been really straightforward to deal with. We’ve been able to donate to every charity we hoped to contribute to, even though we had set up several new ones.

We started out at ~$5000 initial donation and we’ve been able to make donations as low as $50 to $100 to a few charities, although the main ones it’s more. Because the minimums are low we have been able funnel all donations (that don’t get desired value like internet streaming on PBS) through the charity.

It’s a lot bigger now. Over the past couple of years we’ve donated quite a bit in appreciated securities.

We treat it like an endowment, where we give around 5% a year and let the remainder grow.

 

[RunningBum]

I searched and saw a couple, but I see more with a slightly difference search ("donor" in the thread title). The new tax proposals add more incentive and make it more relevant, at least for me, and I suspect some others. I know you've been using one for awhile. I'll go back and read those other threads that I missed.

 

[Hermit]

As I recall from looking into these several years ago, I don't think you can just sit on the money in the fund. A certain amount has to be distributed in a timely and continuing fashion.

 

[audreyh1]

I searched and saw a couple, but I see more with a slightly difference search ("donor" in the thread title). The new tax proposals add more incentive and make it more relevant, at least for me, and I suspect some others. I know you've been using one for awhile. I'll go back and read those other threads that I missed.

Nords started a good one a while back. But there have been several since.

 

[audreyh1]

As I recall from looking into these several years ago, I don't think you can just sit on the money in the fund. A certain amount has to be distributed in a timely and continuing fashion.

You can sit for a while and don’t have to donate every year. But why would you sit on it? It’s not your money anymore.

 

[RunningBum]

As I recall from looking into these several years ago, I don't think you can just sit on the money in the fund. A certain amount has to be distributed in a timely and continuing fashion.

From a quick read, I think the administrator has to distribute 5% or more each year. If they are behind they may insist you do your 5%, but if some grant more they can make up for those that grant less. 5% of what I'm thinking to donate right now is more than I've been doing, but I've been thinking I should do more anyway, so that wouldn't bother me.

 

[Hermit]

You can sit for a while and don’t have to donate every year. But why would you sit on it? It’s not your money anymore.

I was looking at funding a large (to me) construction project that was not supposed to start for several years. Funding one of these accounts would have helped while I was working while delaying distributing the money until the timing would be closer to the use which would help keep the funds focused on the intended project.

BTW, the project has been delayed (partly on my suggestion) until I can donate from QCD funds.

 

[audreyh1]

Fidelity grants more than the min each year, so some folks are able to delay if they really want to.

 

[audreyh1]

I was looking at funding a large (to me) construction project that was not supposed to start for several years. Funding one of these accounts would have helped while I was working while delaying distributing the money until the timing would be closer to the use which would help keep the funds focused on the intended project.

BTW, the project has been delayed (partly on my suggestion) until I can donate from QCD funds.

So the charity would not have had funds set aside for that specific project?

 

[FIRE'd@51]

I have been thinking about DAF's, as well, and have been wrestling with donating this year, or (assuming the tax bill passes) donating enough in the future to make itemizing a better deal. For example, if next year one were to donate 24K to a DAF, that would meet the 24K standard deduction threshold, and make all other itemized deductions (property taxes, other charitable contributions, medical expenses over 7.5% of AGI, etc) fully deductible. This would then allow me to itemize on my state income taxes, which would be a significant saving over taking the standard deduction on my state income tax. From the "back-of-the-envelope" calculations I have done, any reduction in my Federal taxes from the tax bill, would be largely offset by the increase in my state income taxes, should I take the standard deduction on the Federal (Virginia requires one to take the standard deduction if you took it on the Federal).

 

[braumeister]

Disadvantages are a 0.6% annual admin fee at VG or Fido, on top of the regular (low) fund fees, but that seems dwarfed by the tax advantage.

This is completely irrelevant in my view, because it's not really my money any more -- the same as if I donated it directly to a charity. The amount is still growing nicely.

I set up my FIDO DAF four years ago and I love it. To me the biggest single advantage (although the tax break was nice) is the ability to give anonymously. In these four years I have dropped off most of the begging lists which is a benefit both to me (less junk to deal with) and to the charities (fewer begging letters to mail at their cost).

 

[RunningBum]

This is completely irrelevant in my view, because it's not really my money any more -- the same as if I donated it directly to a charity. The amount is still growing nicely.

I set up my FIDO DAF four years ago and I love it. To me the biggest single advantage (although the tax break was nice) is the ability to give anonymously. In these four years I have dropped off most of the begging lists which is a benefit both to me (less junk to deal with) and to the charities (fewer begging letters to mail at their cost).

I don't think it's completely irrelevant, assuming your goal is to actually get money to the charities you want to support, rather than just get the tax write-off.

Take an extreme example, if the annual fees were 10%, and you planned as I do to make a large donation now and distribute grants over perhaps the rest of your life. The 10% fee would quickly whittle down your account, and the charities wouldn't get nearly as much as you probably intended in the long run. I'd be better off just investing the amount I intend to give myself, and giving smaller grants directly over the years. Less of a tax break, but less out of my pocket and the funding would last for more years so the charities would get more over time.

Ignoring the fees in a DAF is like not caring how efficient a charity is at using my money. It's true that it's no longer my money anymore, but I'd be upset if a significant amount were used for staff perks. Anyway, the math works out ok for 0.6% expenses, but at some rate it would not.

Very good point about the anonymity.

 

[audreyh1]

This is completely irrelevant in my view, because it's not really my money any more -- the same as if I donated it directly to a charity. The amount is still growing nicely.

I set up my FIDO DAF four years ago and I love it. To me the biggest single advantage (although the tax break was nice) is the ability to give anonymously. In these four years I have dropped off most of the begging lists which is a benefit both to me (less junk to deal with) and to the charities (fewer begging letters to mail at their cost).

Yep, anonymous gifting is great.

As is the reduced reporting requirements - only have to report the occasional DAF contributions which arrive on a single form (available online too) instead of tracking numerous charities and their acknowledgment letters over every year you gift.

 

[kaneohe]

I have been thinking about DAF's, as well, and have been wrestling with donating this year, or (assuming the tax bill passes) donating enough in the future to make itemizing a better deal. For example, if next year one were to donate 24K to a DAF, that would meet the 24K standard deduction threshold, and make all other itemized deductions (property taxes, other charitable contributions, medical expenses over 7.5% of AGI, etc) fully deductible. .........................................................

Wouldn't you be better off doing it this yr. The threshold is half of the proposed std deduction so nearly half of your DAF donation would be a useful deduction as well whereas under the proposed law, none of it would be useful except to meet the threshold.

 

[RunningBum]

Wouldn't you be better off doing it this yr. The threshold is half of the proposed std deduction so nearly half of your DAF donation would be a useful deduction as well whereas under the proposed law, none of it would be useful except to meet the threshold.

That's my thought. Right now with state taxes deductible, I'm already over the threshold, so my entire DAF donation is an extra deduction. If I wait until next year and the state total goes away, I'll have to use a good part of the DAF donation just to carry me over the threshold. It works out a lot better to far exceed the threshold while it's low, and take the standard deduction when it's higher.

 

[RunningBum]

Fidelity looks like where I want to set this up. I'm going to call them tomorrow and make sure I have time to transfer a VG appreciated fund to them by the end of the year. Their timeline recommends Nov 27 as the date to do this by, and that has passed. https://www.fidelitycharitable.org/what-you-can-donate/charitable-year-end-tax-deadlines.shtml If that say it's no problem, I'll still do it, but if there's any doubt, I'll go with Vanguard. It looks like I could switch over to Fidelity later by making a grant from Vanguard to my Fidelity DAF. A bit of a hassle but it has to happen this year to get the full tax break.

 

[FIRE'd@51]

Wouldn't you be better off doing it this yr. The threshold is half of the proposed std deduction so nearly half of your DAF donation would be a useful deduction as well whereas under the proposed law, none of it would be useful except to meet the threshold.

Possibly. That's why I said "wrestling with". I'm already well over the standard deduction this year and expect my marginal rate (Federal plus state) to be higher next year.

 

[flintnational]

Okay, I read Vanguard's DAF summary material. They include a chart with contribution limits. Stocks are limited to 30% of AGI and mutual funds are also limited to 30% of AGI. I think cash is limited to 50%. Can you stack these amounts and contribute 60% of AGI, 30% stocks and 30% MF?

 

[RunningBum]

Okay, I read Vanguard's DAF summary material. They include a chart with contribution limits. Stocks are limited to 30% of AGI and mutual funds are also limited to 30% of AGI. I think cash is limited to 50%. Can you stack these amounts and contribute 60% of AGI, 30% stocks and 30% MF?

Doesn't look like you can, not surprising. When I did a sample run in TT last night it didn't ask whether it was a stock or MF. Just asked the amount and the basis, and when it saw it was an appreciated asset, anything over 30% of AGI is carried over to the next year. You can do your own run with a tax program to confirm, but this is what it looked like to me.

And as a follow on, the 50% looks to be total, so if you did the full 30% equities, you could only add 20% cash.

 

[flintnational]

Doesn't look like you can, not surprising. When I did a sample run in TT last night it didn't ask whether it was a stock or MF. Just asked the amount and the basis, and when it saw it was an appreciated asset, anything over 30% of AGI is carried over to the next year. You can do your own run with a tax program to confirm, but this is what it looked like to me.

And as a follow on, the 50% looks to be total, so if you did the full 30% equities, you could only add 20% cash.

Thanks. I thought that would be the answer. You also answered my other thought about total gift including cash + stock or MF. If we open a DAF this year, we will probably be limited in the gift amount since we are trying to stay under the ACA subsidy threshold (limiting MAGI >AGI>DAF contribution).

 

[RunningBum]

Yeah, this year turns out to be ideal for me. Not limiting income for the ACA subsidy, and taking a large LTCG gain, which raises my deductible amount and also the marginal rate I get the deduction on. It also lets me make a larger Roth conversion since I can convert up the total of deductions/exemptions at 0%, just pushing more LTCGs at 15%. A small amount is subject to HIIT tax at 3.8%, so once income is taxed at 10% my rate is 28.8%, so I'm stopping there, though not worried if I'm barely over. So I can basically fund a lifetime of giving, more or less, with a big tax break this year and not have to worry about not getting a itemized tax deduction in later years.

 

[JoeWras]

I won't repeat all the great things about a DAF. See above. I'll try to add a few more tidbits. I'm a real fan of these for so many reasons. Here are a few more than I don't think were mentioned much:

- The "vetting" process (at least at VGC) mostly used Guidestar (http://www.guidestar.org/Home.aspx). If your charity is listed and has up to date, clean financials, there's a good chance your recommendation won't have any hiccups. They may also do some manual approvals if the info in Guidestar is hazy. The charity I'm involved in never was asked by VGC or FC for any info. We just got the checks with no hassle. However, if that charity's finances or purpose were unclear, they may be contacted.

- At VGC, donating to the "general unrestricted fund" of a charity also smooths the process. If you start specifying programs or put notes in the grant, a human will vet it out. That's not necessarily bad. I think they are looking for something like: "Pay for person x's tuition" or some such, which is against the rules.

- The "Succession Plan" options are extremely flexible. This is for when you die. You can have other people run your fund, or you can give instructions to automate it. For example: "Give 5% per year, to charity X". Essentially, an endowment of sorts. Or you can distribute it all.

- You can specify your fund in your will. Using the succession plan above gives a lot of flexibility.

Our lawyer actually endorsed the DAF idea from our will. He worked the language to be very clear about our wishes to donate to our fund at VGC. From there, we can change charities as often as we like, depending on our changing desires. Our lawyer said that's actually better than constantly updating the will or trust and was very positive about this aspect of a DAF.

 

[RunningBum]

A question about the will. What happens to the DAF when you die? My impression is that you can name a successor advisor, but then it is up to them to make grants, so those may or may not go to charities you desire. Or can you instead chose to liquidate the DAF according to some designation formula you've made?

 

[JoeWras]

A question about the will. What happens to the DAF when you die? My impression is that you can name a successor advisor, but then it is up to them to make grants, so those may or may not go to charities you desire. Or can you instead chose to liquidate the DAF according to some designation formula you've made?

For Vanguard Charitable, either method.

For the endowed method, here are details.

https://www.vanguardcharitable.org/individuals/leave_legacy/endow_to_charity

Endow grants to charity
Recommend your account's remaining assets go directly to nonprofit organizations as a last testament to your charitable mission by endowing final or recurring grants.

Recommend final grants to charity. Recommend one or more charities to receive a final grant from your remaining account balance.

Establish recurring grants. Recommend one or more charities receive a recurring grant based on a percentage of your remaining account balance through an endowed grant plan.* Total annual distribution must exceed 5% and can be distributed across any month except November or December, because of seasonal transaction volume. Over time, remaining account funds will continue to grow tax-free through investments.

Term: Recurring grants may continue for a specific time or as long as the account's size and growth continue to exceed distributions. While accounts are not permanent endowments, theoretically, your recurring grants could continue indefinitely if the account growth, which depends on financial markets and investment choice, outpaces the distributions. The minimum term for an Endowed Grant Plan is five years.