Donor-Advised Funds - include in asset allocation?

[harikaried]

One way to look at Donor-Advised Funds is that you've irrevocably donated that money, and you can't use it for your own retirement or similar savings, so it doesn't seem to make sense to include it. But if you didn't donate the money now and were planning on doing so anyway, you would have probably donated appreciated assets, which would have been considered part of the asset allocation.

Another way to look at it is that the Donor-Advised Fund money sits in an investment pool that can grow to cover your charitable endeavors. Do you grant more from your fund because it grew? Or do you grant a fixed dollar amount? Or do you grant a percentage of your overall assets?

You could also look at it from the tax deduction side of things. Do you donate less because the fund has more value? Or donate a fixed dollar amount? Or donate a percentage of your assets or income?

[livesoft]

Not included in asset allocation.

But also if the point of DAF is to get the tax deduction, one gets the tax-deduction as soon at they donate. For most small-time donors, there is really no reason to have a DAF appreciate in value. Instead it should be used to donate to charity.

So if one has stocks that are appreciating and does not want to donate them right away, I say do not donate to DAF because if they continue to go up, you get a bigger tax deduction.

[Wagnerjb]

I don't include it in my asset allocation. And I don't lose sleep over how the DAF money is invested, or what the expense ratio is for the DAF account. The money belongs to charities (just not yet specified) and I cannot get it back. The charities are taking the risk and paying the ER.

Best wishes.

[Sidney]

I don't include it in my asset allocation. And I don't lose sleep over how the DAF money is invested, or what the expense ratio is for the DAF account. The money belongs to charities (just not yet specified) and I cannot get it back. The charities are taking the risk and paying the ER.

Best wishes.

Normally, I would agree with you. But here is a case where maybe not. During my last year of employment when my tax rate was very high due to NQ options exercises, we put 15 years worth of our normal run rate for charitable donations, using appreciated stock. So 15X. If the fund were invested in equity and it dropped 50% and stayed there for 15 years, I would be in a position where I would have to add another 7.5X to the fund (or do it directly) to meet my personal target of $X/year of donations.

[JDCPAEsq]

I don't include it in my asset allocation. And I don't lose sleep over how the DAF money is invested, or what the expense ratio is for the DAF account. The money belongs to charities (just not yet specified) and I cannot get it back. The charities are taking the risk and paying the ER.

Best wishes.

Normally, I would agree with you. But here is a case where maybe not. During my last year of employment when my tax rate was very high due to NQ options exercises, we put 15 years worth of our normal run rate for charitable donations, using appreciated stock. So 15X. If the fund were invested in equity and it dropped 50% and stayed there for 15 years, I would be in a position where I would have to add another 7.5X to the fund (or do it directly) to meet my personal target of $X/year of donations.

I agree entirely with Sidney. If my DAF drops in value I have to contribute more to maintain my level of charitable giving. The performance of the fund is certainly relevant.
John

[livesoft]

If your DAF is invested in a money market fund, how can it drop? So I would say don't have your DAF invest in something that will drop if you don't want it to drop.

One gets zero tax benefit from any gains in your donor-advised fund, so my point is that if you want to donate bigger bucks to charity, don't put money in a donor-advised fund. Instead put it in something that will grow outside the DAF. If it doesn't grow, don't donate it. If it does grow, donate it after it grows. In the meantime, your charities will have to be satisifed with cold hard cash.

However, the DAF is a good way to shift a donation into a give tax year.

[letsgobobby]

I'm with livesoft on this one. If the fund loses 50% that is the charity's loss, not mine; I always have the option of increasing my future charitable contributions to compensate but it is obviously not required (beyond any sense of moral obligation). Further if in fact I did donate 15X to my DAF in year 1, that precludes the "need" to make any donations to my DAF for the next 15 years.

I view my AA as the portfolio I can use, for whatever purpose. DAF does not meet this test for me.

To livesoft's point, however, it isn't a foundation; it is laundering mechanism, not a growth mechanism. I try not to let it build up so I don't have to think about this problem.

[livesoft]

^Exactly, it is a money laundering scheme.

[harikaried]

Further if in fact I did donate 15X to my DAF in year 1, that precludes the "need" to make any donations to my DAF for the next 15 years.

Curious assuming you had $0 in DAF and donated 15x, do you then grant 1/15 of the DAF balance to charities in the first year no matter what the balance happens to be? Then 1/14 the next year and 1/13 the year after. If you then donated 5 years worth to your DAF when it now has 12 years worth, you would then grant 1/17 of the balance?

[Sidney]

I wasn't suggesting putting the DAF into equities. Only commenting that whatever the risk (or lack thereof), it is mine, not the charity.

[Sidney]

Further if in fact I did donate 15X to my DAF in year 1, that precludes the "need" to make any donations to my DAF for the next 15 years.

Curious assuming you had $0 in DAF and donated 15x, do you then grant 1/15 of the DAF balance to charities in the first year no matter what the balance happens to be? Then 1/14 the next year and 1/13 the year after. If you then donated 5 years worth to your DAF, you would then donate 1/18 of the balance?

I don't view it that mechanically. The first slug is best estimate of 15X. What happens after that depends on other situations. Also, grants not uniform. So if I donate $250K the first year, the first grants aren't $17K - could be more could be less.

[letsgobobby]

Right, not that black and white. If I had 15 years in year 1 = $150,000, I would give about $10k each of the next 15 years. If the investments dropped by 1/3 I would give $7k each of the next 15 years. Diversified investments tend not to go down and stay down forever, so the exact amount would fluctuate over time. Also, there's no reason to do this except to claim the $150k deduction in a specific year. DAFs have higher fees than low cost index funds in taxable accounts so I don't push money there for no reason.

It can go the other way, too. I opened my DAF in 2006 or so and left it all in cash until February 2009. Then I moved it all to stocks. So now charities are getting twice as much as I originally planned to give. Should I not do that?

I *really* like DAFs for their cash flow predictability. Because of the way I do mental accounting, I make donations every 2nd or 3rd year from my retirement portfolio - not from my paychecks. And I try to do it after strong runs up in the market (I suppose the counterpart to livesoft's 'really bad day' would be a 'really good month.' The advantage is that at the end of the calendar year, just when I'm gearing up to fund Roth IRAs and start paying back into SS and our 403bs in January, and paying off holiday bills and holiday airfare - I don't have to pay for a deduction out of cash flow (my paychecks). And of course I avoid the capital gains taxes on appreciated securities, something that is hard for small charities to handle at times.