FREE NEWSLETTER
About 10 years ago, my financial advisor suggested I open a Donor-Advised Fund (DAF). I had never heard of one—and assumed it was something only the very wealthy used. I was wrong.
In essence, a DAF allows you to give to charities more effectively by taking advantage of federal tax deductions—assuming you itemize rather than take the standard deduction.
A DAF is simple to operate. You can contribute cash or, in my case, appreciated securities, take the deduction in the year of the contribution (if you itemize), and then recommend grants to charities over time. There’s no required timetable for making those grants.
For example, if I donate $10,000 worth of long-held Apple shares with a $2,000 cost basis to a DAF, I can deduct the full $10,000 and avoid paying capital gains tax on the appreciation. In practical terms, more of those dollars go to charity instead of to taxes.
Most major firms—Vanguard, Fidelity, Schwab and many others—offer DAFs with modest minimums and fees. I use I-Gift Fund, based in Ohio, which is low cost and interfaces easily with my Fidelity account.
Over the years, I’ve come to appreciate several benefits of having a DAF.
A very significant benefit for me has been the ability to contribute before deciding exactly where the money will go. Earlier in our working years, my wife and I weren’t entirely sure which organizations would matter most to us long term. The DAF allowed us to begin building a charitable pool of assets while we figured that out.
Once inside the account, the assets can remain invested and grow tax-free. That growth has increased what we’re able to give. You can also buy and sell investments within the DAF without triggering capital gains taxes.
Administratively, it’s simple. Ours has a $100 minimum grant. The trustee maintains a database of most 501(c)(3) charities. If one is missing, they will typically add it, assuming it’s legitimate.
There is a management and administrative fee—generally around 0.5% annually—but for us, the ability to give thoughtfully and efficiently has made it worthwhile.
A DAF isn’t just for the wealthy. It’s a practical way to donate to the causes you care about on your timetable, while also making the most of available tax benefits.
I have a contribution question but not regarding a DAF. I am starting to make larger charitable contributions, and have a dilemma about what account of mine to use to make those contributions. I’m finding it hard to resolve.
I have a very large SEP and am taking pretty large RMDs. I also have a brokerage account with one mutual fund that has grown greatly over 40 years and I have a lot of fund shares there with a very low basis. It dwarfs most of my other holdings.
Is it better for me to donate from my SEP and count it toward my RMD, or is it better to donate from my mutual fund to make that fund (and my portfolio) incrementally more tax-efficient and limit the large capital gains taxes that may be looming over those low-basis shares? Last year, I donated some low-basis shares directly and took the large deduction. But this year, I’m trying to find the “optimal” answer. I don’t even have a good way to start this analysis. Suggestions are welcome!
This is the second comment in a while that’s caused me to channel John Yeigh’s old article. Do some of each and think about something else. You can only be half wrong 🙂
https://humbledollar.com/?s=Half+wrong+
Great article. I also took SS at 67 (or maybe 68) – the “lost” dollars either way seemed to be insignificant and I didn’t have to tap my investments the first few years (which then promptly grew tremendously with the market run-up.)
I’m a big fan of blended solutions in lots of areas. I’m known in my family for that. For example, no 100% cotton or polyester shirts – I need a blended fabric of both.
I’ve thought about a blend here, but I’m not yet sure it works. The article makes me reconsider. I’ll noodle some more. Thanks.
One other benefit I didn’t appreciate is since I am no longer able to remove these funds for our benefit, I am more likely to invest them in Equities , and not worry about a market decline. We have sent out more than our original investment since we initially funded it
Being unable to deduct charitable donations makes funding it with more stock limited, but the $2000 next year will help, although we will probably send that amount out on it’s own.
Your $10,000 Apple example would not be deductible unless you were higher than the standard deduction. I don’t really want to fund the DAF again with enough in one year to be able to itemize at this point.