One of my goals after entering the decumulation phase is to give more to charity. And one of the best ways to give to charity is through a donor-advised fund. All my wealthy friends have set up donor-advised funds, so it was about time I do the same.
The following guest post about donor-advised funds is by Olaf from MileHighFinanceGuy. He will also show you how to set up a DAF through Fidelity, the brokerage firm he and I use.
The Start Of Tax-Deductible Charitable Giving
Charitable giving is a mainstay of American culture and helps advance needs not addressed through government intervention. Such acts of selflessness help improve and provide support for our local communities, marginalized groups, the environment, and society. One way to do so is through a donor-advised fund.
In 1917, wealthy people such as Rockefeller and Carnegie, were already giving away their wealth. Given the high tax rates of the era, which topped out at 67%, legislators wanted to encourage more giving. So a group of bipartisan legislators enacted legislation enshrining charitable gifts as tax-deductible against one's income.
The first donor-advised funds were created in the 1930s, though donor-advised funds were not recognized formally in the Code until the Pension Protection Act of 2006. In the 1990s, donor-advised funds began to grow in visibility and popularity, and today they are philanthropy's fastest-growing vehicles.
Over time, charitable giving has become a system of optimization. For benefactors, this means putting their funds towards endeavors that provide significant socioeconomic benefit while receiving preferential tax treatment.
Because Financial Samurai is a personal finance blog, I will not focus on how benefactors have become impact-focused. Instead, I will focus on how benefactors have learned to maximize tax benefits through donor-advised funds.
What Is A Donor-Advised Fund?
Donor-advised funds act as a medium for giving, similar to an automobile's function of providing transport.
Using them, the donor places money in a DAF, similar to how one fills up their gas tank. While the donor no longer has the money in their possession, they now have a vehicle that they can accelerate and steer towards an end goal.
For some, that goal may entail upkeeping public lands. Others may prefer to help impoverished children nearby or afar. Regardless, the donor advises the charitable foundation managing the DAF where the money should go.
Notably, the donor receives an immediate tax deduction and can spread the money amongst various charities over time, similar to a road trip.
How Donor-Advised Funds Work
Donor-advised funds (DAFs) are a simple premise:
- Donate to a charitable (holding) company¹
- Receive an income tax deduction in that tax year²
- If desired, invest the donation in various assets in the hope of further growth
- Ask the charitable company operating the DAF to disperse the funds to a final recipient(s)³
There is (generally) no minimum or maximum donation amount, nor is there a timeframe for fund dispersion.
- The holding company must be a 501(c)(3) charity, such as Fidelity or Vanguard Charitable. Both charities are distinct legal entities separate from their respective brokerage partner. However, each has contractual agreements with their brokerage counterpart to receive administrative help, permission to use intellectual property, and investment assistance.
- Donors can deduct up to 60% of their adjusted gross income. Still, feel free to donate above this amount!
- The final recipient of DAF monies must be a 501(c)(3) charity, such as the American Red Cross and the World Wildlife Fund.
Why Use A DAF? Double Tax Benefit
DAFs are often deployed by donating highly-appreciated securities in-kind, which optimizes tax savings since capital taxes are avoided and income taxes are lower.
In laypersons terms, DAFs are best used to donate securities that will incur more significant tax burdens. By doing so, the donor can deduct the amount without realizing capital gains and concurrently lower their income tax burden. Talk about a double tax advantage!
Donors can contribute directly from brokerage accounts. Unfortunately, IRAs cannot contribute to DAFs directly and can only be set as a beneficiary. Still, IRA donations to a charity that is not a DAF can be used to satisfy yearly RMD requirements for those 72 and older without incurring income taxes on withdrawals (401(k) ‘s don't have this feature).
DAF operators such as Fidelity and Vanguard Charitable enable the donor to give securities and assets in-kind. These include including public stocks, bitcoin, artwork, private business ownership, and more. Before using a specific DAF operator, ensure they can process the securities or assets you wish to gift.
An Example Of A Donor Advised Fund
In the example above, you will see I had a lot of 162 shares of the Vanguard S&P 500 ETF (VOO) purchased on 3/23/2020. The shares had appreciated substantially. I could have received a deduction of $66,408.66* against my income taxes without incurring capital gain taxes on the appreciated sum of $32,613.84. Thus, I would have saved capital gains taxes equal to $4,892.08 since I am in the 15% long-term capital gains tax bracket.
*Assuming that $66,408.66 does not exceed 60% of my AGI
Dispersing & Investing Donor-Advised Funds
Once your donation is complete and your account is funded, you can recommend a grant. I say recommend because technically, you aren't directing donations after the initial contribution is made. The DAF Sponsor is responsible for the funds after your donation and makes all decisions subsequently. However, when you recommend grants, they choose whether to approve them or not.
While technically, the Sponsor could deny your recommendation, the chances remain unlikely this would occur. If it did, the Sponsor would lose future benefactors that would instead go to a more honorable DAF. Similarly, when it comes to investment choices, your selections are recommendations, too.
Thus, a level of trust is required. Fidelity Charitable has publicly stated they do not interfere with the grant-making process, nor does Vanguard. If you can accept these terms, you are nearly ready to complete a donation. But first we must discuss fees and minimums!
Minimum Amount Recommended To Open A Donor-Advised Fund
There is no minimum donation with Fidelity Charitable. However, it only makes sense to open a donor-advised fund if you plan to give a sum that exceeds ~$10,000 during that year. Why? Because of taxes, fees, and minimums.
Under the current tax code, every filer(s) qualifies for a standard deduction of up to $12,950 annually. Therefore, many taxpayers do not itemize their deductions anymore.
Because of the standard deduction, utilizing a DAF is likely not worthwhile unless you plan to invest the money in it or if your itemized deductions exceed $13,000 annually. (Common itemized deductions include qualified charitable donations and mortgage interest expenses, the latter of which may be subject to limitations.)
The Fee And Cost For Having A Donor-Advised Fund
To open and operate a donor-advised fund at Fidelity will cost 0.60% of assets or $100, whichever is greater. At Vanguard Charitable, the minimum charitable pledge is $25,000, and administrative fees start at 0.60%.
Fidelity and Vanguard Charitable lower their administrative costs as the donated sums/balances increase. They draw 1/365 of their 0.60% fee for daily collections. At year-end, Fidelity Charitable assesses a $100 prorated fee for the days used if billing was sub-$100.
While administrative fees may seem peculiar for a DAF, Fidelity and Vanguard Charitable are non-profit intermediaries. They must sustain their organizations to continue day-to-day operations. One such activity is exchanging donations from various asset types into cash. This is notable since most charities will not accept securities, bitcoin, or other in-kind assets.
Invest Your Donation Before Dispersement
If you recommend investing your donation before dispersing the funds to a selected charity, the investment will have an expense ratio (i.e., a hidden fee that you cannot see).
Fidelity offers indexed and active fund choices, while Vanguard offers indexed ones. While these investments provide the opportunity for growth, they can lose money. If you don't plan to invest the donation before dispersing the funds to an end charity, select the money market option (which has an expense ratio, too).
One way to offset these fees is by rounding up your donation to neutralize any fees paid so that your end charities get the intended amount. On both Fidelity and Vanguard's sites, you can read how and when these fees are deducted.
If DAF Sponsors can help you time a tax benefit to receive a valuable deduction while helping others, the fees are worthwhile. Still, this is a decision that only you can make.
As an aside, Fidelity Charitable has created over $21 billion in excess grant dollars through investing donations. Vanguard does not release figures on donation growth.
How To Open A Donor-Advised Fund With Fidelity Charitable
Step 1: To open a Giving Account with Fidelity Charitable, you must provide your name, address, and other information regularly used when opening a bank account. Additionally, you should select a successor who would take control if you die before the funds are fully dispersed.
Step 2: Next, you will fund your Giving Account by donating cash, securities, or other assets. Certain asset classes require you to work with a representative to assist with donations (such as artwork or private business ownership). I will show you how to donate existing appreciated equities. Select “Maximize the tax advantages of your donation” and choose an account and an approximate dollar amount you want to donate.
Step 3: Choose the number of shares you wish to donate from your different lots (i.e., prior purchases). During this step, you can see how much your different securities have appreciated and their original cost basis.
Step 4: Choose an investment strategy for your donated securities. Once given, the DAF will sell your assets and convert them to this investment strategy.
Because the Fidelity and Vanguard brokerages run these funds, they will make money off the expense ratio of the chosen fund. Choose wisely, as these funds can lose money during market downturns if invested in stocks or bonds.
I plan to donate these proceeds immediately, so investing these into the stock market would be reckless. I selected the conservative income fund, but you can choose a money market fund under “Create a customized investment strategy.”
Step 5: Confirm the details are correct and submit.
You will receive a confirmation when complete; the process usually takes 3 to 6 business days.
Step 6: Once your donation is processed, and your Giving Account is funded, you can recommend a grant. This waiting period took 3 business days for my gift.
The next step is finding a charity or charities to which you want to send funds.
Select “Find a charity” and enter the charity's tax ID number or search for it by name.
Step 7: Once you select a charity, you can name the intended use for the donation. The default option is “Where it's most needed.” If you designate a specific use or cause, it can slow down the donation process. I chose the no-kill shelter from which I adopted my tabby cat and left a thank you message in the use box.
For the timing section, you can donate now, in the future, or make your donation recurring. I decided to donate now/ASAP.
Once you have settled on these details, add the transaction to your charity list using the “Add to list” button seen in the previous image. After selecting the “Add to list” button, it will transition to say “Added.” Your donation will then appear on the “Grant list” section on the right.
You can now click the “Next step” button.
Step 8: You will now select where your recommended grant funds from in your Giving Account. Choose whichever holdings you wish to sell and move on to the next step once set.
Step 9: A summary screen will now list the grant details so you can confirm everything is accurate. Once you have reviewed the details, you must agree that the selected charity provides you with no impermissible benefits for your generosity.
Step 10: Woo-hoo! You have now recommended a grant using your Giving Account.
Now, you wait, log in, and view the “Recent grant activity” screen on the landing screen to see the status of your grant. Eventually, it will switch from final processing to check mailed to check deposited.
Step 11: When you file your taxes the following year, visit the History section to access your statements to download tax receipts, annual donation amounts, and IRS Form 8283.
A Donor-Advised Fund Is A Tax-Efficient Way To Give
Congratulations! You now know how donor-advised funds work and how to contribute to them while maximizing the tax benefits for the impact you want to make! The world is in need, so where will you donate? Have a great day!
Related posts:
What It's Like Attending A Fancy Private School Fundraiser
The Amount Donated to Charity Can Improve
Author bio: Olaf lives in Colorado and runs the blog MileHighFinanceGuy.com, where he shares personal finance knowledge with others. Previously, he specialized in retirement planning at the US's largest 401(k) provider. Olaf now works two part-time jobs as a financial advisor and winery consultant. He enjoys his financially independent life with his fiancée exploring other cultures and the great outdoors.
How does DAF compare to the CRT (Charitable Remainder Trust) or CLT (Charitable Living Trust). In my research, CRT / CLT were superior in that the Trust kicks back some money to you as annually (as in CRT) or at the end of the term (as in CLT).
Hi PSS,
I am not overly familiar with CRTs & CLTs, as they are more complex strategies that benefit from using a legal firm to establish. But, I will try to answer your question to the best of my ability.
CRTs and CLTs can be a worthwhile strategy for donors if they are okay with the end charity not receiving as impactful of a gift, and they require an income stream and a way to liquidate appreciated assets.
Still, I understand that they are less flexible than DAFs since the charity must be named in advance and cannot be changed after implementing them. Further, once donated, the donor has no control over the investments and usually can only deduct a portion of the donation since they are directly benefiting from the income returned to them either during (CRT) or after (CLT) their duration completes.
However, pairing a CRT or CLT with a DAF could be beneficial since it gives the donor or their family time to select an end charity and further control over the donation.
I would argue CRTs and CLTs are less beneficial to charities since they do not provide the entire donation to them and instead provide the donor with an income stream or payday down the road after receiving a substantial deduction.
Nevertheless, I know that CRTs are a new strategy for IRA beneficiaries to stretch out the RMDs they would otherwise be required to take faster and more significantly under the SECURE Act.
Thanks for commenting and exposing readers to another giving strategy! Have you employed a CRT/CLT? How did the process go?
Regards,
Olaf, the Mile High Finance Guy
Sam, thanks for having Olaf do the guest post!
Olaf, great information and incentive to give.
We initiated our DAF in 2011 with Schwab Charitable. While not in the group of top donors our appreciated stock donations of ~100K, with basis of ~20K, saved ~80K of cap gains taxes. As an added benefit my company foundation has provide matching gifts from the DAF. We’ve turned ~20K basis into ~150K in donations while maximizing the timing of DAF donations for tax benefits, and still have a hefty balance to continue our giving.
Thank you again.
Wow! Way to go! Got a love the corporate match as well. So sweet.
LandS,
That is incredible. I’m sure your donation and the match it received helped the charity/charities in question immensely!
Olaf, the Mile High Finance Guy
I have a different take on charity donations. I am an immigrant who accomplished the american dream, I have great appreciation for this country and I have decided to never itemize for any of my charity donations. I want the US goverment to be the recipient of my charity as well, if i donate $7k to a charity, i will think that i have donated $10k and 3k went to the goverment in form of taxes. This country’s system has allowed me to be much more succesful than if i would have stayed back in my home country and i will always be thankful for that
Hospitalist,
Congratulations on achieving the American Dream. Your story sounds terrific, and I applaud your successes and admire your gratuitous outlook. I wish you continued success!
Olaf, the Mile High Finance Guy
Hi Olaf,
Thank you for this post.
I’m a board member of AUYA – American Ukrainian Youth Association – a non-profit organization designed to develop American Youth of Ukrainian descent while engaging them in social, educational, cultural, athletic, and charitable activities. We typically host fund-raising events meant to bring in funds for various larger scale projects surrounding upkeep of our building, out campground, etc. Typically money raised gets spent immediately. One idea floating around was creating an Investment Fund within the organization (or externally, but for the benefit of this particular organization…depending on best way to set this up), where we have a large fund-raising event, not for a particular project, but to get the initial capital required for the fund. The idea is that as the money in the fund is invested, the long-term growth and appreciation will provide the necessary future capital for various projects/initiatives, and in a way the organization will be able to sustain itself in a much more efficient manner.
I guess my question is, do you think a Donor-Advised Fund would be a good avenue for something like this and if one person sets a DAF up, are other individuals able to donate their assets to this one particular account? The tax-deduction for donors would obviously be a great draw, as well as the fact that any future gains would be tax-free since the money would go to a non-profit organization.
I’m not well versed on this, so if there’s a better way to set up an investment fund of sorts that is dedicated to one particular non-profit organization, I’d appreciate the feedback. Thank you
Hi Bohdan,
Thanks for chiming in, as that is an interesting question.
While I cannot say with certainty what would work best for the AUYA since I am not familiar enough with its workings and various goals, it sounds like what you are inquiring about is an endowment fund.
Non-profit endowment funds allow the organization to draw income from asset appreciation, interest, and dividends. These funds have no contribution limits or maximum life span, meaning the fund can last indefinitely and receive unlimited gifts.
Still, there are some downsides to endowments, with the largest being it takes time for them to grow.
FirstCitizens Bank has a short article on endowment funds I found beneficial located here:
https://www.firstcitizens.com/commercial/insights/industry-expertise/nonprofit-endowment
A branded AUYA DAF is something you could look into for the organization. Still, I am unsure how much benefit it would provide since DAFs act as an intermediary to hold the funds until a donor is ready to advise the sponsor where, when, and how to gift an end-charity.
The downsides to running an organization-specific DAF are the fees and associated difficulties of accepting in-kind donations. Therefore, encouraging donors to use their DAF to gift your endowment fund could work better unless you find an institution that can help you affordably manage your DAF.
Here is some information on branded DAFs by one such company:
https://www.reninc.com/is-a-branded-daf-program-right-for-your-nonprofit-organization/
The AUYA sounds like a great organization, and I hope this helps! I had to research the answer to this question as I am not familiar with the operations of running a DAF if you go the route of creating one without the help of Fidelity or Vanguard Charitable. Further, I am not well versed in endowment funds.
So, please look into these further and use the information I provided as a stepping stone on your journey into exploring this potential fundraising avenue for the AUYA.
All the best,
Olaf, the Mile High Finance Guy
My wife and I created a non-profit to raise money for pediatric cancer research in honor of our son. From the charity’s perspective, donor advised funds are great. A prospective donor just needs our EIN # to confirm 501(c)3 status and the DAF sends a paper check a week or two later. In fact, we just received a Fidelity DAF check Saturday. Thank you for the write up and encouraging charitable giving in a tax efficient manner.
Will,
Thank you for sharing your personal experience as a charity operator with readers of FS. It is nice to hear from the receiving side of the gifting process.
It is admirable and touching that you and your wife started a charity to honor your son and to help others. I extend my condolences for the experience you both went through. I can’t imagine the difficulty you faced
I wish your charity success in funding pediatric oncology research. I hope your efforts will provide medical advancements.
Olaf, the Mile High Finance Guy
Thank you
Thanks for this, though I’m still having a hard time figuring out why this is better than donating appreciated stock directly to a charity (other than the opportunity for future growth).
Hi Zubin,
I’m happy to clarify this point for you!
With the appreciated securities, if you went to sell them, you would owe capital gains taxes. By donating them, you avoid this taxation and can deduct the total amount against your income.
Further, you would donate appreciated securities only when ready for the tax deduction.
If you have no need for the tax deduction and have no urgency to donate, you would continue to hold the securities if you believe they have future growth potential.
You can always donate securities that haven’t appreciated to offset your income. However, you don’t receive the same double tax benefit since you have no capital gains owed.
Does this help clarify that point?
Olaf, the Mile High Finance Guy
He’s asking why can’t he just donate appreciated stock from his taxable brokerage account provide the same benefit? Are you saying that if I donate $100,000 worth of Apple stock that I bought for $30,000, I still have pay taxes on the $70,000 in unrealized gains? Doesn’t seem right.
Hi Jack,
I apologize for any confusion. It is not easy to understand questions online without qualifiers sometimes.
You can only donate appreciated securities in-kind from your brokerage account if the selected charity accepts non-cash donations, specifically equities in this case.
If the charity does accept the donation in kind, you would not have to sell the stocks and, therefore, would receive the double tax benefit of zero capital gains taxes and an offset of $100k against your income taxes.
But, if the charity does not accept stocks and you do not want to use a DAF, you would incur capital gains taxes on the $70k in this example. This is because you were the one who sold the stocks and experienced the gain.
Resultantly, DAFs incentivize people to donate assets and wealth that otherwise would not be granted.
Please let me know if this makes sense now. Thanks!
Olaf, the Mile High Finance Guy
Thank you for the explanation Olaf, But wouldn’t I get the same benefit if I had donated my appreciated stock directly to the charity instead of to the donor advised fund? I would not pay cap gains and would get the income tax deduction same as the DAF
Zubin,
You would get the same benefit if you donated directly if that charity can accept appreciated stock in-kind. That is the caveat.
Some charities welcome various asset classes in-kind, while many only take dollars. Hence, DAFs can be a medium for donating non-cash assets to your charity of choice.
Olaf, the Mile High Finance Guy
Thank you for clarifying! Now I understand that the main advantage of the DAF only comes into play when you are considering donating to a charity that does not accept securities.
I would double check the comment regarding RMD’s. In my research RMD’s cannot go to DAF’s but DAF’s can be the beneficiary of an IRA.
Hey Noone,
Thanks for the comment! I just rechecked this point, and RMDs can go straight to a charity but not to a DAF. Thanks for catching this, and you are correct that an IRA can be used as an IRA beneficiary. I will get this point updated!
Olaf, the Mile High Finance Guy
Thanks for sharing the details of the DAF. Curious about a couple questions:
* If you donate your shares and change your mind later due to the quality issues or whatever, can you get your shares back?
* If you are really bullish on your shares, would it be best to hold onto the shares as long as possible and then donate? Because once you donate the shares, the charitable organization could choose to sell it ASAP right? If that’s the case, wouldn’t the propensity for most people to hold off on donating to their DAF for as long as possible?
* Once you donate the shares into a DAF, you can sit on the shares and recommend where to donate whenever you want right?
Thanks!
Hey Andy,
Once a donation occurs, it is irreversible since you no longer own the shares.
Correct! If you are bullish on specific holdings or shares owned and don’t need the tax savings, then keeping them until a later date is the best option since they would create a more significant tax offset if they appreciate further. Further, once the holdings go into the DAF, the sponsor will liquidate them into one of the DAF’s proprietary investments.
I hope that answers your questions fully!
Olaf, the Mile High Finance Guy
“ Further, once the holdings go into the DAF, the sponsor will liquidate them into one of the DAF’s proprietary investments.”
Can you elaborate on this? So the sponsor it would just reinvested in an index fund or an active fun at their discretion? What if you want to donate the shares to a charity immediately? Do you have the power to tell the sponsor not to reinvest it to donate the shares?
Andy,
Absolutely! When setting up the DAF, you must select an investment for your donation to be reinvested into, whether active or passive. The sponsor doesn’t hold onto your donated holdings for a prolonged period. Fidelity made the news about this in the recent past, and you can read about it here:
https://www.wsj.com/articles/fidelitys-charitable-arm-wins-in-hedge-fund-founders-lawsuit-11614391480
Unfortunately, using a DAF requires you to accept the terms that your donation will be reinvested. As of now, there is no way around this. The sponsor likely doesn’t want to take on the non-systemic risk of holding individual securities. They also likely want to streamline the holding process for ease of management. After all, they are technically in control of the funds once the donation occurs.
Olaf, the Mile High Finance Guy
Oh wow I had no idea something like that existed. Very helpful to know and the things to look out for. I also use Fidelity so nice to know it’s an easy option to add! Thanks!
Untemplater,
I didn’t learn about them until I joined the finance industry a few years back. They are a great option to consider if you are donating larger sums of money. Fidelity makes the process simple, as does Vanguard.
I’m glad you found the post helpful!
Olaf, the Mile High Finance Guy
Thanks for sharing this helpful info, Olaf and Sam. If I wanted to give to a college or university, could I do that using a DAF?
Hey Logan
Generally, the answer is yes. You can give to a college or university, so long as they are registered appropriately.
You would want to check with the institution in question regarding their tax-ID number and confirm where to direct the funds.
You can search by the entity on the Fidelity Charitable demo site to locate your desired institution using the link I have included below.
https://www.demo-charitablegift.com/cgfweb/CGFLogon.cgfdo#/Grants/grant-selection/
Once you have done this, I would call the selected institution to confirm which specific sub-organization to which you should direct the funds. My alma matta, CU, has over two dozen selections depending on where the donor wants to grant.
I hope this helps, Logan, and if you have a follow-up question, I am happy to answer it.
Olaf, the Mile High Finance Guy
This is great. Thank you for the step-by-step walkthrough! This seems like a really easy way to donate appreciated stock to a charity, and it’s nice that you can set it up and then give (or “recommend”) gifts to charities periodically, especially if you can use up your RMDs with it. Thank you for the great ideas!
Yetisaurus, it definitely is easy to utilize a DAF and I am glad you found it helpful!
Olaf, the Mile High Finance Guy
I really appreciate you featuring my writing, Sam. I hope those who have been fortunate will take the opportunity to give back to society.
I look forward to answering any reader questions in the comment section here.
All the best,
Olaf, the Mile High Finance Guy
Thanks for writing! Any thoughts on how a revocable living trust and a DAF would work? Would I put the DAF in the trust event though there is a director for the DAF?
Hey Sam!
When I dug around on Fidelity Charitable’s site, I found that one’s will and estate plan does not cover their Giving Account. They also recommend that an individual name a successor to carry forward their charitable legacy, which must be a person. So, at first glance, it does not look like a DAF could be placed into a trust, at least with Fidelity.
If you are concerned about probate, there should be no issue since the DAF would receive monies while you are alive (from your living trust). However, probate could be required if you don’t name a successor to the DAF (from what I have read, though I am not a lawyer).
Notably, if your revocable living trust owns the brokerage account or assets, it is as if you own them for tax purposes. Therefore, any donations to a DAF offset your income for tax purposes.
I will look further into this and leave another comment if I find more information on it.
Olaf, the Mile High Finance Guy