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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.
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.
There are many benefits to a DAF and one of them is time. I’ve used our DAF for many years to donate appreciated assets as a rebalancing tool. During prolonged and significant equity appreciation, it’s a great way to bring your equity risk back down to manageable levels. But once you have the assets in the DAF, you can use it as a family project to decide what charities you may want to support for the year (or longer). It’s an opportunity to teach your kids about the importance of philanthropy and gives you time to research charities properly.
Our after tax account is pretty equally divided between a total market index fund and a tax efficient fund. The performance of the two is very similar. But when doing our taxes this year, I noticed the index fund had major taxable gains; the taxable income on the tax efficient fund was zero.
I’m also concerned about leaving my kids— who are high earning professionals— taxable IRAs. We do regular major Roth conversions each year.
Contributing appreciated securities to the DAF provided a nice tax benefit. But my favorite feature of the DAF is the ability to donate anonymously. Without the DAF, the incessant marketing by email and postal mail from the charities was really discouraging to ever donate again to anybody. But since the big brokerage DAF allows anonymous donations, it’s rewarding to donate again to good causes.
(If only we could find a way to make anonymous Qualified Charitable Distributions – technically you need the receipt in case the IRS audits you.)
Great overview of DAF account benefits. I opened a DAF with Daffy.org last year and also used highly appreciated AAPL stock.
An added benefit not mentioned above, using the DAF I’m able to make donation amounts lower/different than the share price – the AAPL current price is ~$270/share it’s nice to have the flexibility, I am also able to set monthly donations.
Daffy.org has an easy App and relatively low-cost versus some of the big brokerages at $3/month and $18/donation. YE taxes also easier as my donation into Daffy.org is the only line item I need for tax filing.
DAF comparison chart: Donor-Advised Funds: How to Choose the Right Provider for You
Great topic and suggestion for those that are charitably inclined. I’d been wanting to find a way to leave a financial legacy but didn’t know how. Fidelity advised using a DAF as part of multiple strategies. I’m doing Roth conversions to reduce future excessive taxes, and I’ve started my charitable giving journey. This year we’ll update our estate plan to have final estate assets, and the DAF will start an endowment that will support our favorite causes in perpetuity. DAFs are only great to giving, they are also great for tax effeciency.
I’ve used a DAF at Fidelity for about 15 years. No fees, $50 minimum gifts to charity and easily works with my other taxable investments at Fidelity. I use appreciated stocks to fund my DAF. I am not old enough for QCDs, yet, but the flexibility that the DAF gives me to make periodic or one-off gifts is a great advantage.
DAF at Fidelity … No fees
Harold, I’m confused (apologies if I’m being dense): The Fidelity website says the DAF annual administrative fee is 0.6% on a balance up to $500k (and decreasing rates for higher account balances), plus there’s the expense ratio of the underlying investments.
I have used qualified charitable deductions instead of DAFs. Both are very beneficial for tax savings. I am not as familiar with DAFs but David describe them well.
Good article, informative and detailed. It sounds like the DAF fits well with your charitable-giving situation.
With no close family and now retired and single, I am happy just taking fee-free QCDs (qualified charitable distributions) from my Vanguard tIRA to donate to the 501(c)(3) organizations on my list. Whatever extra flexibility a DAF has, I don’t need.
And I didn’t want to have to pay a fee for a DAF to hold my money, although I know some folks mostly get around that by emptying the DAF soon after replenishing it.
I don’t use one but have considered it. In the interest of fostering conversation, here are a couple of things I DON’T like about DAFs:
Aaron, I agree with you, and I am a big believer in donating now to help those in need now. If you have funds earmarked for charity, why wait 20-30 years to give it away in your will? It’s satisfying to witness the impact of these donations now while alive. And this is true whether you use a DAF or not.
As far as the mechanics of making the donations, I start with an online portal and donations are generally sent by the DAF trustee in a week or less. It’s a pretty seamless process.
Thanks!
It depends on the amount you wish to donate to charity. Large donations require more thought about the giving and typically correlate with high income years. That’s been my experience.
Thanks, Mark! I agree the DAF can conveniently allow you to put off choosing how to distribute the gift, but then you’ve also removed much of the incentive for the giver to make their choice… and therefore potentially delayed the money reaching an actual charity (for some portion of DAF users).
If you disagree, please let me know why! Looking for a productive conversation, and maybe I’m missing something…
We created a DAF to bunch chartiable deductions and itemize for the tax year. To my happy surprise, more than the tax benefits, it turned out to be a fantastic way for the extended family to get together every year and discuss how we want to distribute our giving from the DAF. All the working adults in the extended family now contribute to the one family DAF, but the kids get to join in on the fun by nominating charities for consideration.
It’s a joyous event filled with gratitude and togetherness..
One tip for those working and considering a DAF. If your employer matches your donations to the charity of your choosing from the DAF, please make sure all listed donors apply with their individual employers for the multiplier effect! So, a $1000 donation from the DAF can be amplified dramatically.
I opened my DAF with Vanguard in late 2017 before I retired with a single gift of stock, and through it have made annual donations to a variety of charitable organizations. Due to the rising stock market, there is still a nice remaining balance available for future gifting. I appreciate the ability to take my time deciding which organizations to support. I wish the IRS would allow me to make a QCD from my IRA to the DAF, but rules are rules. For those not taking RMDs yet, the DAF is a great option to consider.
I love my DAF at Fidelity. Serves it’s purpose perfectly