I’ve talked about giving several times on ESI Money. It’s been an important part of our lives, and since this site is about what we did to become financially independent and retire early, it makes sense that giving is covered like the other issues.
To be more specific, even while we were saving for financial independence, we were also donating 26% of our gross income to various charities.
The reason we gave while we saved for FI was stated in Where Does Giving Fit with Financial Independence? as follows:
Our feelings are that people are hungry now, people are suffering now, people need help now — so how could we wait to give?
Besides, if you can grow your income enough and keep expenses low, you can do it all — pay down debt, save, and give. That’s what we did.
That said, we didn’t always do it the right way.
How Our Giving Could Have Been Better
In the Top 10 Money Mistakes I Made on the Way to FIRE I listed one mistake as giving the wrong way. Here’s what I said there:
Back in the day donor-advised funds weren’t as popular or as sophisticated as they are today.
As a result, we gave most of our funds through income.
Instead we should have given appreciated assets out of our investments. Then we could have used our income to buy more investments, effectively raising the cost basis in our investments and reducing our future tax burden.
I’m not sure how much this is going to cost us in extra taxes, but probably a few hundred thousand dollars at least.
Lesson to be learned from my mistake: Give the right way. Use all the advantages (like a donor-advised fund) that the government allows to minimize the tax implications of giving and investing.
Oops.
This wasn’t my only mention of a donor-advised fund (DAF). I’ve brought it up now and then in passing — in retirement updates, in the comments, and so forth.
Each time I do, I get a few responses asking for details of why and how to use a DAF.
This post, which gives details on donor-advised funds and suggests ways anyone can use them to increase the impact of their giving and benefit their finances, is in response to those requests. 😉
And FYI, I’ve seen it spelled both “donor-advised fund” and “donor advised fund.” I’m using the former because it appears most of the sites/organizations I trust spell it that way, but there are other credible organizations that use the latter. Just so you know, the sources using various spellings are talking about the exact same thing.
Before we get to specifics of why and how to use a DAF, let’s start at the beginning…
What is a Donor-Advised Fund?
Here’s a quick summary definition of DAFs from the National Philanthropic Trust:
A donor-advised fund, or DAF, is a giving vehicle established at a public charity. It allows donors to make a charitable contribution, receive an immediate tax deduction and then recommend grants from the fund over time. Donors can contribute to the fund as frequently as they like, and then recommend grants to their favorite charities whenever makes sense for them.
To add more detail, Vanguard Charitable (the DAF we use), tells us how one works:
A donor-advised fund is a tax-effective way to consolidate, accrue, and grant assets to 501(c)(3) public charities. To establish a donor-advised fund, or philanthropic account, at Vanguard Charitable:
- Make an initial contribution to establish your philanthropic account. Because Vanguard Charitable is a 501(c)(3) organization, contributions to Vanguard Charitable are tax-deductible.
- Recommend investment options for the donated assets. Assets in the philanthropic account grow tax-free.
- Recommend grants to eligible public charities you wish to support.
- Establish your charitable legacy with a succession plan which reflects your values.
Those two explanations are good, but they are a bit “stuffy” IMO for someone completely new to the topic.
Here’s my layman’s version of what a DAF is and how it’s used:
- A DAF is an account you set up with an organization established to hold donated assets for later charitable disbursement. Think of it as a charitable trust of sorts for those of us who aren’t named Gates or Rockefeller. As I said, we use Vanguard Charitable.
- Once the account is set up, the individual/family can make contributions to it, either in cash, securities, or a whole host of assets. Once the donation is made, it is irrevocable — just as if you gave it directly to a charity like the Red Cross, American Cancer Society, or Salvation Army.
- Since the donation is officially made when the money/assets are given to the DAF, donations are immediately available to claim as tax deductions (for the filing year in which they are transferred.)
- From there the donations are invested in accordance with the contributor’s wishes and can sit and accumulate just like any investment.
- When the donor wants to distribute the funds, he technically makes a recommendation to the DAF account holder, asking that funds of $XXXX be sent to ABC charity. He doesn’t direct the funds with certainty because he doesn’t own them any longer. That said, generally the funds are disbursed in accordance with the donor’s wishes.
- The account lives on with the cycle of donations and disbursements until the donor is done with it or dies, at which point the funds are distributed either according to the DAF’s guidelines or the donor’s wishes.
This all still might seem a bit vague to some, so let’s see if I can clear it up by using an example.
How We Use Our Donor-Advised Fund
I’ll give some details of the way we use our DAF, but won’t give any explanations as to why, what the advantages are, etc. — we’ll get to those later.
Here’s how we use our DAF:
- We already have an account at Vanguard Charitable. If you don’t have one at a DAF organization, they are pretty easy to set up — very similar to opening an account with a mutual fund company.
- I go into our Vanguard Charitable account and say I want to make a contribution. When it asks me where the funds are coming from, I select our Vanguard taxable brokerage account. It connects me to the account and I direct it to move shares/dollars to the DAF.
- Let’s say I tell it to move 100 shares of Vanguard Total Stock Market Index Fund Admiral Shares (VTSAX) at a price of $70 a share. So $7,000 gets moved to the DAF. I now no longer own that money and I can count it as a $7,000 charitable deduction on my taxes.
- I choose how the $7,000 is invested in the DAF. There’s a wide range of options. I can be as conservative as I want with more of an asset preservation option all the way up to an aggressive growth investment.
- When I decide I want to make a charitable contribution, I go into the DAF account online and recommend a disbursement. For instance, I might suggest that $2,500 be sent to the Salvation Army and $2,500 sent to the American Cancer Society.
- Vanguard Charitable reviews my suggestion and assuming they are in agreement with it, they send the money to each charity.
- I’m now free to add more or distribute the rest at my discretion.
To note, there are fees for this service and there are minimums you need to maintain. We’ll get into those later.
For now, that example should give a good idea of how things work.
What are the Advantages of a DAF?
You may have already identified a few of the benefits of using a DAF, but let’s state them outright to be sure I’m completely clear.
We’ll begin with some thoughts from the American Endowment Foundation:
Donor-advised funds provide five primary tax benefits to the donor:
- Income Tax: You receive an immediate income tax deduction in the year you contribute to your DAF. Since AEF is a public charity, contributions immediately qualify for maximum income tax benefits. The IRS does mandate some limitations, depending upon your adjusted gross income (AGI). (Deduction for cash – up to 60 % of AGI; Deduction for securities and other appreciated assets – up to 30 % of AGI; There is a five-year carry-forward for unused deductions.)
- Capital Gains Tax: You will incur no capital gains tax on gifts of appreciated assets (i.e. securities, real estate, other illiquid assets.)
- Estate Tax: Your DAF will not be subject to estate taxes.
- Tax-Free Growth: Your investments in a DAF can appreciate tax-free.
- Alternative Minimum Tax (AMT): If you are subject to alternative minimum tax (AMT), your contribution will reduce your AMT impact.
And here’s Vanguard’s take on the same issue. It’s a combination of the advantages of a DAF and the advantages of working with Vanguard Charitable:
- Tax-free growth: Contributions to a donor-advised fund get invested and grow tax-free. This means the return on your charitable contributions can go straight to the charities you admire.
- Unlock new tax-friendly assets: Did you know that savvy donors mix cash donations with in-kind contributions of appreciated securities, private equity, and even real estate? Donating appreciated assets is free of capital gains taxes, and contributions of illiquid assets can solve many estate planning issues for you and your family while simultaneously expanding your philanthropic playing field.
- Think long term: A Vanguard Charitable DAF amplifies your giving potential and gives you long-term flexibility, maximizing tax advantages in the years you need them. Whether you are planning a large gift, managing a windfall or high-income year, or looking to continue your giving after retirement, we can help.
- Leave the legwork to us: Prefer to leave the onerous record-keeping to someone else? Grantmaking is hard work, but not with Vanguard Charitable. We conduct due diligence for you so you can rest easy, and we keep comprehensive giving records in one, easy-to-access location so you’re ready for tax season.
- Our low all-in fee: Tax-free growth maximizes your charitable impact. So do our super-low fees. Vanguard Charitable’s all-in fee is simple and among the lowest in the industry. (And it just got lower.)
As you can see, there are several advantages to a DAF.
The benefits I think are most valuable are as follows:
- You get a tax deduction in the year you contribute to your DAF. You don’t need to wait until the dollars are disbursed.
- You can give appreciated securities/assets while avoiding capital gains taxes. This allows you to both maximize your gift and minimize the government’s cut.
- You can combine contributions in years to get the full income tax benefit. I’ll tell you how in a bit.
- You can distribute the funds over the course of many years, a great benefit for those who retire early (as we’ll see).
- It’s a pretty easy way to give — especially if you have your assets at Vanguard and use Vanguard Charitable. I assume it’s the same if you use Fidelity and others that have the same arrangement.
Vanguard notes above that one advantage is investing your donations and have them grow for years before distributing them.
That’s good if you’re willing to take the same risks with your giving as you do with your investing (the investments can go down, of course.) It really depends on your time horizon for distributing, just like in investing.
I don’t invest my donations in anything aggressive as I plan to distribute them within a year or two, so this isn’t a big advantage to me.
The Downsides to DAFs
A search for “downsides of donor-advised funds” doesn’t turn up much that’s very meaningful, because if you want to give, they are pretty awesome.
But there is one issue worth noting as follows:
Of course, DAFs have drawbacks, primarily related to donor control.
Once a donor contributes to a DAF, the organization managing the fund has legal control over it—in other words, the gift is irrevocable. The donor may indicate an investment objective or strategy offered by the managing charity but does not control the investment.
Additionally, while a donor can recommend charities to receive grants, the donor does not reserve the right to direct distributions. Ultimately, the managing charity has the authority to approve or deny any recommendations made by the donor.
In other words, once you make the donation, you lose control. You can not get the money back — it’s gone.
In addition, you can only recommend how the funds are disbursed — you can’t mandate it. That said, you can mitigate this last risk. You do this by looking at a list of approved charities for your DAF account before you establish one to make sure your favorites are approved. That’s what I did.
The Advantage in Avoiding Capital Gains Taxes
Since some of the advantages I detail above are best illustrated with an example, let’s do it!
We’ll look at them one at a time beginning with this one:
You can give appreciated securities while avoiding capital gains taxes. This allows you to both maximize your gift and minimize what the government’s cut.
Let’s say you have the following circumstance:
- You own 1,000 shares of index fund ABC at $50 per share or $50,000 total at today’s market value.
- You bought the shares 5 years ago when they were $30 a share (total $30,000), so you’re sitting on a $20 per share capital gain ($20,000 total).
- You want to donate these shares to a charity.
There are a couple ways you could give…
Option 1: Sell the shares and give cash to the charity.
If you sell the shares first, you owe capital gains tax on the $20k.
The current capital gains tax rates vary based on your tax filing status and income.
Let’s assume you’re in the 15% capital gains tax bracket. That means you’ll owe $3,000 tax ($20,000 * 0.15) on the sale.
As a result, you’ll have $47,000 left after the sale ($50,000 less the $3,000 in taxes).
You can now give $47k to the charity.
Option 2: Move the shares directly to a DAF and then distribute.
In this case, you’d transfer the $50k in shares to your DAF. If you have a Vanguard to Vanguard Charitable arrangement (or something similar) this takes about two minutes to do online.
In this case the entire $50k is the donation and no tax is due.
You can now distribute the $50k to your charity.
Of course you could always donate the shares directly to the charity and also avoid the tax, but that can be a hassle. Believe me, I know from experience.
Back in the day when DAFs didn’t have as many options and weren’t as easy to use, I wanted to donate appreciated index fund shares to an organization. I talked to a DAF and they told me they weren’t sure whether or not my recommendation to give to this organization would be approved or not simply because they hadn’t worked with them before (the donation choices were limited). Note that I wanted to give to an established 501(c)(3) so it wasn’t like I was donating to my “brother” in a foreign country or something shady like that.
Since they couldn’t guarantee that my recommendation would be followed and I wasn’t about to give if it was possible my money wouldn’t go to my selected charity, I decided I would give shares directly to the organization to avoid capital gains tax. The ensuing complications were not pleasant.
First, Vanguard had me fill out enough paperwork to choke an elephant.
Second, the charity had to spend countless hours figuring out how they could receive the shares (this involved a lot of back and forth with me, which was frustrating).
It finally happened (I actually did this a few times) but it was painful. Using a DAF makes it easy as they have established ways of accepting assets and then sending cash to charities, making the process very smooth.
Using a DAF is Good for Cash Contributions as Well
Even if you can give cash, I’d encourage you to donate through a DAF. Here’s why…
Let’s use the same numbers in the example above:
- You own 1,000 shares of index fund ABC at $50 per share or $50,000 total.
- You bought the shares 5 years ago when they were $30 a share (total $30,000), so you’re sitting on a $20 per share capital gain ($20,000 total).
- You want to donate to a charity.
Instead of giving the $50k in cash, here’s what I would do:
- Make the $50k donation to your DAF using appreciated shares as noted in option 2 above.
- Take the $50k in cash and buy the same shares at the current market value.
Doing this you have both 1) given the maximum to the charity (by avoiding the capital gains tax) and 2) reset your cost basis at $50 a share versus $30 a share (putting you in a better position to avoid or lower capital gains taxes if you want to sell outright in the future).
This is where I messed up while I was saving, though it wasn’t all my fault.
Today I am sitting on massive capital gains in my brokerage account, so if I was to sell now, I’d owe a ton.
If I had given appreciated assets instead of cash for 28 years, my cost basis would be much higher and I’d have much lower potential capital gains tax liabilities.
Of course, as I said, DAFs were not as advanced then so I’m not sure I could have done what I wanted. But you certainly can these days.
In addition, it’s likely I’ll be giving away the entire amount of my taxable account (right around $400k now) over the next decade, so I’ll probably avoid the taxes anyway. But if you want the option to sell and keep as much as possible, using a DAF to increase your cost basis is a great strategy.
One note/reminder/limitation from above: “Deduction for securities and other appreciated assets – up to 30 % of AGI”. You are limited in what you can deduct for any given year, so keep this in mind as you donate.
The Advantage of Combining Contributions to Lower Income Taxes
Here’s the second example based on this advantage:
You can combine contributions in years to get the full income tax benefit.
Currently the 2019 federal income tax standard deduction for a couple who is married and filing jointly is $24,400 So unless you have itemized deductions above that amount, anything you do (like donate securities) will bring you no tax advantages.
But with a DAF, you can bundle your deductions to get a benefit.
For example, let’s say you have the same $50k in securities and want to give $10k per year for the next five years.
If you actually do give $10k per year, there’s no tax advantage as you won’t get above the standard deduction.
But with a DAF, you can donate the entire $50k in one year and get the tax deduction for that year — well above the standard deduction (of course, you’re still limited by what you can deduct based on AGI, so take that into account).
So in year one, you’d itemize since you’re above $24,400 and in the other years you’d take the standard deduction (assuming all cumulative deductions are below $24.4k) to minimize income taxes.
Then you’d distribute your funds over the next five years, $10k per year, using your DAF.
As you see, these examples work mostly for high income individuals. But this site does have a lot of millionaire readers who earn a ton and I wholeheartedly recommend earning more versus earning less! 😉
The Advantage in Preparing for Giving in Retirement
Finally, here’s the third example for the following advantage:
You can distribute the funds over the course of many years, a great benefit for those who retire early.
I know several early retirees who are 1) cash/income strapped (or at least prefer the flexibility of having more cash), 2) asset rich (especially appreciated assets), and 3) want to give even in retirement.
This is where bulking up your DAF can be a great benefit.
For example, if you know you’ll be retiring in five years, you can build up your DAF (with assets and/or cash) in those years, then distribute the proceeds for years to come in retirement.
In effect you are pre-paying your donations/giving. This way, you can keep giving well into retirement with zero impact to your retirement income/cashflow or assets.
Our Experience and Plans with DAFs
A bit of background on what we’ve done with our DAF so far and some future plans:
- We opened our DAF in November 2016 shortly after I retired.
- Since then we have contributed roughly $226k of appreciated index fund shares from Vanguard to Vanguard Charitable. It helps that the market has been on fire during this time. 😉
- We have distributed all but $96k at this point. We are looking to make a big disbursement at the end of this year as you’ll find out in a few days. 😉
- The distributions we do make are based on our goals (of course). These days even churches are approved to receive these funds and we do our church giving this way.
- As the funds run low, we make another contribution and the cycle repeats itself.
- Eventually we may give real estate or other assets (our house?) in this way, but I’d have to do a lot of due diligence before I proceeded. Perhaps in later years we’ll contribute the required minimum distributions (RMDs) from our IRAs.
One last note before I wrap up: there are fees for both DAF administration and investments, so check these out in advance for any DAF you’re considering.
Here are the fees (as well as account minimums) for Vanguard Charitable if you’re interested.
A DAF is a great tool and if you use it wisely you can maximize your giving while decreasing taxes, all while making the giving of appreciated assets very easy.
Anyone out there use a DAF? How do you use it and how do you like it?
P.S. For those who prefer a video version of this post, see the ESI Money YouTube channel.
My experience follows the same path as yours.
Initially, we were giving checks to organizations that we supported, including weekly at church (and it was always a mad scramble to write the check on the way out the door Sunday morning.)
Then we were giving individual securities that we had for a while. This was do-able, but a little awkward in terms of paperwork requiring getting an account number from the organization, filling out a paper form (we use Schwab), and then making sure that they transferred the lowest cost basis shares that we selected on said paper form. (This they often seemed to mess up.)
In 2017, we put a little more than $100k into a DAF with Schwab and it has been very straightforward. They easily transferred the shares into it, and I’ve nominated a few charities that were not on their list — it has not been a problem. Now distributions are just a click away.
As we approach retirement we will put a few more chunks of securities into it using the 30% of AGI as an upper limit per year.
I’ve mentioned DAFs to a few folks that I casually talk money with (taxes, AMT, even giving) and generally i just get blank stares. Thanks to you and Physician on Fire for helping to publicize this valuable tool to do “good.”
I am a big fan of utilizing our donor advised fund. The Fidelity Assets to Fidelity DAF is as simple as Vanguard is. Lumping donations, giving appreciated assets, and having some embedded research about the charity right at your fingertips is great.
I went with Fidelity over Vanguard because it allows for grants as small as $50.
Started DAF in 2006. Used Fidelity instead of Vanguard because min grant could be $50 vs,$500. Otherwise pretty much the same. I give to a number of local small 501(3)(c) for various small program activities under $500. To larger non-profits give more.
When I want to benefit specfic non qualified groups grants to churches, etc can be helpful in reaching those targetted needs
DAF are so convenient and useful.
Several years ago, I started giving low-cost-basis stock to a couple of charities. It was do-able, but definitely harder than writing a check. I chose this path only because the donations were big and because I wanted to get rid of low-basis stock. I set up a donor-advised fund with Fidelity Charitable a year ago, and so far, I LOVE LOVE LOVE it. It takes me a few days to transfer stock from Vanguard to Fidelity, and I do wish that part were easier. However, I want to give amounts less than Vanguard Charitable’s $500 minimum. Once the money is at Fidelity, it’s smooth sailing. I have had no problem giving to any 501c3 charity, including to various churches. The DAF makes my life so much easier because it keeps a record of every grant I recommend. For example, I can easily see if I just gave a month ago to, say, the Salvation Army or Meals on Wheels, whereas I used to have to comb through credit card statements. Also, I was able to bunch approximately three years’ worth of giving, and take a charitable tax deduction for that amount in tax year 2018. In tax years 2019 and 2020, I plan to take the standard deduction. Another thing I like about the DAF, that I didn’t anticipate before setting it up, is that it takes the pressure off our household checking account. When I have an opportunity to give to a charity, I don’t have to worry about how a gift will impact that account. Another unanticipated benefit is that, because I invested a small portion of my DAF balance in index funds, I have given away about $8000 this year, though my DAF balance has only decreased by about $5000.
Still not sure I completely see the benefit of DAF. Maybe someone can set me straight.
1. For the situation where a person currently gives cash to charity, there is an immediate (same year) tax benefit. That immediate benefit seems to be excluded from the recommendation to use a DAF. Or am I missing something?
2. I’m not sure how to reconcile the thought “Our feelings are that people are hungry now, people are suffering now, people need help now — so how could we wait to give?” with the idea of transferring assets to a DAF and then distributing those assets over a number of years. If you think that “people need help now” (and I completely agree), how do you reconcile that view with actions that withhold those donations to achieve appreciation of the asset over time? Do you believe that the increase in value of the asset outweighs the immediate needs of the charity?
As I’ve mentioned before in comments on ESI, I highly recommend the book “Doing Good Better” by William MacAskill. This book opening my eyes to the ways that charitable giving can (and cannot) make a real difference in the lives of people. After reading it, I understood that there are certain charities that make the most impact in the world (saving lives). It’s a book that has changed my outlook on the world.
1. Giving cash has an immediate tax benefit. Giving to a DAF has an immediate tax benefit. No difference.
But if you have ANY appreciated assets it’s better to give those than cash for the reasons donated above.
2. As with anything, giving needs to be done with balance, so planning ahead can have a larger impact/create more savings.
People need help now, so we give now. That doesn’t mean we give everything now and it doesn’t mean we give everything. It means we give a good amount now and plan our future giving to maximize impact/reduce costs.
If you disagree, do you give everything now? (i.e. maintain net worth = zero at all times)
Of course we don’t give everything we have, as we are saving/investing for our retirement. I was strictly commenting on the idea of giving $X now or giving $X+appreciation later.
The hypothetical I was referring to is this: If I have $100K to give, is it better to give $100K to charity now (i.e., save lives now), or invest the $100K into a DAF, have it grow to say, $120K, and donate $20K/yr over 6 years (save maybe more lives later)? I would argue to give the $100K to charity now. I guess the idea of donating $100K of an appreciated stock and then purchasing $100K of that same stock is an interesting idea to mitigate future capital gains taxes. But my position remains that the $100K should go to the charity (not just the DAF) now.
I think that a lot of people use the excuse of “Oh, I’ll give later” as a procrastination that probably never materializes. Or it materializes as volunteer work, which I don’t believe has as much impact as people convince themselves it does. The best way to make a meaningful impact is by giving your $$ to a charity.
Lots of thoughts here:
1. It’s all hypothetical until you actually do it, so my advice would be to get into the giving game first and then consider what you’d actually do if you had $100k to give. It’s easy to decide what you’d do with your $100k when you’re not really doing it.
2. Saving for retirement/investing and giving are not mutually exclusive. We did them all. If you work on your income enough and control expenses, you can do all of them.
3. “I think that a lot of people use the excuse of “Oh, I’ll give later” as a procrastination that probably never materializes.” Exactly. That’s why you should be exercising your giving muscle now.
4. ” The best way to make a meaningful impact is by giving your $$ to a charity.” I’m not sure what this means, but if you have appreciated assets and want to plan out to minimize taxes, then giving cash straight to a charity is not the best way IMO.
3.
Hopefully this overly simplified (and not bulletproof) example might help you. Let’s say your AGI this year is $100k, you have some appreciated shares and want to maximize your giving. Having a DAF would allow you to do the following:
1. Transfer $30k of shares to your DAF. (30% of AGI)
2. Contribute $30k cash to your DAF. (30% of AGI)
3. Immediately grant the $60k from your DAF to the charity.
4. Donate the cap gains tax savings to your charity.
So instead of only being able to donate $60k you’d be able to donate your tax savings too.
Great post. I was watching DAFs for years before the recent tax change, but decided that as long as I was not selling my appreciated stock, I would donate cash and keep my investments in lower cost vanguard ETFs, instead of the somewhat higher fee vanguard charitable fees. When the tax laws changed and capped state and local taxes (a very political move, I might add), I quickly jumped on a DAF, in order to bunch my donations and continue to get deductibility. I can add 4 items to help new DAF folks:
1. Always use “specific identification” as your cost basis in your regular brokerage account. This allows you to donate stocks with the lowest cost basis and sell stocks with the highest cost basis. The default at Vanguard is “average cost,” which is terrible for this sort of tax management of capital gains.
2. When transfering from Vanguard brokerage to Vanguard charitable, write down your exact
dates of purchase of shares donated and cost basis. This is key because TurboTax will ask you for this when doing taxes, and Vanguard doesn’t retain the data! Very important. I think that they charge you for research if you need to get it, and if you own shares that have had splits, this is very hard to re-engineer from past records. Trust me on that.
3. Never donate appreciated stock that you have had for less than a year, because the tax advantages of donating appreciated stock IS ONLY FOR LONG TERM CAPITAL gains. Again, Vanguard brokerage won’t even be able to tell you if your gains were short or long term, so be prepared for tax season.
4. Finally, I follow ESI’s logic on donating to my DAF and then buying new shares at a stepped up basis. Note, however, that dividends earned on stocks and ETFs held less than one year are taxed at ordinary rates, rather than the reduced cap gain rates. Thus, while still absolutely the most tax efficient move, the newly purchased stocks will kick off high-tax dividends during their first year. For the most tax-fastidious, I think that this could be avoided or reduced by donating and repurchasing right after the ex-dividend date on the annual or semi-annual ETF dividends, thereby having slightly longer than one year after donation and repurchase before the next annual dividend is paid (then at the lower long term rate).
I think you missed one of the key advantages to a DAF: Anonymity.
We use our DAF for the reasons you mentioned (bunching itemized deductions every other year, donate appreciated stock to avoid capital gains, setting up automatic monthly/annual distributions, etc), but the biggest advantage to me is being able to donate anonymously. No mailers, no end of year appeals for funds, no phone calls on behalf of adjacent/similar charities. Everything you need to vet a new charity or see what your current ones are up to is online these days.
We regularly volunteer at a local charitable organization that works in difficult youth/teen situations, and they have no idea that they receive non-trivial funding from our family. My kids don’t know that we support the charity in that way (we’ll address that when they’re a few years older), and no one at the charity is making that sort of deduction based on the car we show up in.
Being able to select the anonymous option when setting up a gift is well worth the nominal DAF administrative fee.
The IRS is taking another look at DAF’s established at the same institution the donor has their investments. Congress is currently looking at restrictions to these DAF’s such as mandated distributions and penalties for not granting but using the fund as a tax shelter.
My recommendation is a community foundation. The fee structure is competitive, the service is concierge level with direct knowledge of community needs and nonprofit capacity. The same benefits apply to the donor as those listed above. As the CEO of a community foundation I highly recommend becoming part of your community.
Thank you for the post. We are big supporters of giving now vs. “some day” in the future. As you and others have mentioned for the longest time we were also donating cash and then the light bulb went off to donate securities instead (only past 5 years).
We have not set up a DAF, but donate securities directly to the charities we support (since we have supported them for years, we’ve got the process down now).
At this stage still, we prefer the flexibility of transferring shares out of our taxable accounts directly to non-profits and not have additional fees assessed by a DAF.
Great article. I am currently above the standard deduction and give quite a bit each year to charities including giving appreciated stock to two of them. My experience has been much easier as they both have existing brokerage accounts.
But my goal is to pay off my mortgage ion the next 5 years and that will make it much harder to get above the standard deduction so this has been on my mind.
I don’t like the limited control of distributions but that could be fine if you do your homework. I also like the idea of combining years and alternating standard and itemized. I also think just before I retire I may do a big lump sum and take that deduction in my last year of full income.
Thanks, ESI. Another great article. We’ve had a DAF (Fidelity) for 5y, and it’s been a game-changer for us. I’m close to (early) retirement, so a few years ago a financial adviser pointed out my now favorite feature of the DAF: anticipating giving in retirement by maxing out the 30% non-cash and 30% cash tax limit on donations. This allows us to pay very little in federal taxes each year and accumulate a DAF balance for later giving in retirement. I usually effectively stop my withholding around April. (Yes, this is possible; check the withholding calculator on the IRS site.)
Just last week we transferred the last shares of an appreciated mutual fund in which I’d been investing for 25y. It took us 5y to transfer all the shares. This saved us a ton on capital gains. I concur with a lot of the advantages that ESI and others have mentioned. Instead of writing a check each week we do a grant to our church every 6mo. Just about all our other giving is automated to once/year per organization. We used to have ~dozen lines to itemize for the IRS; now we have one or two. Tracking down all those receipts used to be a pain. We occasionally make anonymous donations too.
I do not think you can donate your RMD to a DAF.
It appears you are correct:
https://www.vanguardcharitable.org/news/thinking-of-using-your-rmd-for-charitable-giving
I talked to a planner the other day who appeared to say otherwise, so perhaps he has a work-around. I will need to find out.
There is a clear ban on RMD to DAF. But RMD to charity is simpler than than direct stock transfers to charity. So, I have been following the logic above from FMF M20: build up DAF while working in order to use DAF from retirement up to age 70.5. After that, RMDs can be used for charity, making DAFs less important. I would add that those of us who follow this blog and make a good income should feel a responsibility to support local causes. For example, only 5% of households earn $260k or more per year. If not us now, then who will support important local causes?
From what I’ve read, there is the option of using a QCD or Qualified Charitable Distribution to transfer assets from an IRA to a charity and it can count toward satisfying your RMD. However, I see no mention of being able to use a QCD to fund a DAF. I wish that were an option.
This is a really useful post. This might be they year for us to make a sizeable donation to push our last year of mortgage interest over the standard and get some tax benefits. I’ve been considering it and really appreciate the overview. Thanks ESI.
I also want to acknowledge how much I appreciate you sharing your contributions and what you’ve distributed. Good to see a DAF being used as intended, and your giving continues to be inspiring.