Bogleheads

[Ken Schwartz]

I recently joined the Vanguard Charitable Endowment Program, and I thought I'd share what I've learned. The Program is a donor-advised fund. You make a contribution, get an immediate tax deduction, and choose how to invest the money. You later suggest grants to the charities of your choosing. It is possible to make a contribution using cash, mutual fund shares, securities held at a brokerage, and even certain illiquid assets. I exploited the obvious tax and rebalancing benefits of contributing highly appreciated mutual fund shares (Emerging Markets).

The minimums associated with the Program are nontrivial: $25K initial contribution, $5K subsequent contributions, $500 per grant, and $15K total account balance to avoid an extra $100 annual maintenance fee. Smaller minimums are possible with donor-advised funds offered through other companies, though costs are higher.

The Vanguard Program's expenses are low, as you might expect. There are eight investment pools in which you can place your contributions, in any combination. The basic asset classes are well-covered. You normally pay a 0.57% annual administrative fee plus the costs of the mutual funds underlying the pools. The all-inclusive pool expense ratios vary from 0.76% to 0.89%. You pay absolutely no other fees, assuming you maintain a balance of at least $15K. Here is a list of investment pools with expenses.

The secure part of the Program's website is discussed little in the publicly accessible section, so I'll mention it here. The site is straightforward, though to users of vanguard.com, its functionality and timeliness will seem poor. Of course, the Program is about three orders of magnitude smaller than The Vanguard Group. Also, I suspect most of the clients are older folks who don't demand a state-of-the-art web presence. The Program appears to be a "normal business hours" operation which is still oriented somewhat to use of the phone and snail mail.

You have to make contributions by snail mail. This limitation is reasonable, since an original signature really ought to be required when you're giving up your money. You certainly can view the details of your contributions online.

Exchanges between investment pools are viewable on the website, but they oddly cannot be performed there. You can exchange by phone, but you should rarely need to, since rebalancing can be executed through inflows and outflows. When you make a contribution, you may specify its distribution into pools. Similarly, when you suggest a grant, you may specify its distribution from pools.

You can easily suggest grants online, supplying a good deal of detail. You can also view your grant history. Certain information is not shown, e.g., any special use you specified for the grant, or which investment pools you selected for redemption. Program documentation implies this deficiency is remedied with snail mail, though the grants I've submitted have yet to be processed (it apparently takes 5-7 business days), so I cannot provide verification. [Edit: Inaccurate statements grayed out.]

You may look at your pool balances online, but prices aren't updated until the following business day. So Friday's balances can't be viewed until Monday morning.

Quarterly statements are available on the website, though I haven't been around long enough to see their content.

I'm sure I've left out tons of important information. Overall, I'm quite satisfied with the Program; my critique of its website is just nitpicking. Questions and comments are welcome, either here or by PM.

Best wishes,
Ken

[psteinx]

I've used the Charitable Endowment Program for a few years, and have been happy with it.

Aside from the technical advantages of the program, I'll throw out one more "psychological" advantage.

A few years ago, I wanted to substantially increase my charitable giving, for various personal/ideological/spiritual reasons. But I wasn't entirely confident about where that money could be put to best use. I wanted to allow myself the time (over a number of years) to educate myself about charity and what charities do the most good with their money, but I didn't want to use my current uncertainty as an excuse to avoid significant giving to charity.

So I made a significant one-time gift to the Vanguard CEP, and have also given further sums each year since.

I am still giving money to certain charities, both directly, and from the Vanguard CEP, but when I reach a point where I feel confident enough about those (or other) charities, I will step things up further.

i.e. To a certain extent, I'm using the Vanguard CEP as a parking spot for charitable gifts. I can put the money in now, but make my ultimate decisions about what charities are most worthwhile down the road.

[dm200]

used the similar Fidelity Gift Trust for many years. We chose Fidelity because it had lower minimums for starting the fund, making donations and requesting grants.

I donated appreciated shares of stock a number of times, and it worked very well. Many years ago, I donated a few shares of stock to my church, and the church made a real mess of it. So, so much better to donate the shares to a donor advised fund, where there are experts at handling this.

With a donor advised fund, you can get the benefits of a donation (tax deduction) now, and get the funds to the organization over a period of time. In my experience, some organizations are not good at getting larger amounts of donations in a chunk now - and using them in a fiscally wise manner over a number of years.

Another nice feature of the Fidelity fund (don't know about Vanguard) is that you can make an anonymous donation (and still get the tax deduction)

[Ken Schwartz]

[Wagnerjb]

[psteinx]

Andy - what's the reason why you want to give money to charity in the first place?

If it's purely to get a tax deduction, then you're probably making a bad financial move. There may be situations where the value of tax benefits received exceeds the value of what was donated, but if so, those situations are unusual and rare. In general, the tax benefit magnifies the value of your contribution, so that you can provide value to a charity of $X, at an after-tax cost to you of $Y, where 0 < $Y < $X.

While taxes may play into your decision, presumably you actually want to see the charity in question receive a high value - to do more of whatever good works the charity is presumably doing.

[Wagnerjb]

[Ken Schwartz]

[Ken Schwartz]

[jebmke]

I think of the endowment program as a focused IRA. I use it to arbitrage tax rates. My tax rate this year and next year will max out at 35%. After that, when I retire, it should drop back to around 25% (maybe even less if I pay attention) for ten years, then will jump up again (maybe 28% at today's rates) when I start drawing my pension and social security. Approximately 5 years later, it will jump again when RMDs kick in.

I am using the endowment to prefund approximately 10 years of what I would normally make in the way of charitable contributions. I am not "making an investment decision for the charity" -- they will get the same amount whatever happens in the endowment.

In fact, I still include the value in the endowment in my asset allocation and personal balance sheet.
_________________
When you discover that you are riding a dead horse, the best strategy is to dismount.

[Wagnerjb]

Jebmke said:

[jebmke]

[alvinsch]

[dm200]

allocation breakdown in the Fidelity gift trust was done before some of the other options were added recently. We are now (for a few years anyway) not adding to the fund. We use five funds, and make some regular donations to certain charities (mostly church related).

International - 10% of total
Growth, Equity Income and Income - equal parts
Money market - about 3-5%

This target mix is easy to keep and rebalance by taking money for donations from the funds that have too much. First, I compare international to the total. If it is less than or equal to about 10%, I leave it alone. If it is more, I take money from International.

Then I take money from the other three funds so that then end up about equal. If MM is more than 3-5% of the total, I take some from there.

I can do the math in my head

[Wagnerjb]

Al said:

[gasman]

"I tend to view it like Jeb has described where it is part of ones allocation. To me this would imply that one might treat their trust as a tax sheltered vehicle where one would put their less tax efficient investments (i.e. bonds), while having more equity in their taxable non-charity portfolio."


I also use Vanguard Charitable Trust. I disagee with the above, this money is gone from your portfolio and you have no ability to use it for personal gain other than the credit you receive from donating it. It should be considered a stand alone portfolio


"Currently my charity allocation is 50/50 based on it seeming to be the optimum balance between safety and growth. However this approach would seem to fall out of the view that one has funded their charity trust and from now on it's on its own and how much one contributes to charity depends on how the trust does."


Allocation should depend on withdrawl rate. If you put a lump sum in and plan to make donations over an extended period (say 20 years) a 50-50 mix is reasonable. I think that the minimum withdrawl rate is 5% annualized over something like 5 years. This is my plan and I have approximately a 50-50 mix

[Wagnerjb]

[alvinsch]

[Ken Schwartz]

[Ken Schwartz]

The above posts present a thought provoking discussion of how to view your charitable account in the context of your entire portfolio. I need to think about this topic some more. It's certainly appealing to consider your charitable account as part of your overall portfolio. This approach allows you to take advantage of its tax exempt status and place bonds there. However, since a charitable account can be used only to make donations, this paradigm seems to work exclusively for folks who view charitable grants as a non-discretionary expense. In other words, the approach is good for people who will make their charitable donations almost without regard to their personal circumstances.

Alas, I am not that virtuous. My charitable donations will depend very much on my Vanguard Program account's performance, so I am currently choosing to view it as a standalone portfolio. My target allocation is 50% Growth Pool, 30% Total International Stock Pool, and 20% Gift Preservation Pool. In terms of the underlying mutual funds, my targets are

40% Total Stock Market Index
30% Total International Stock Index
10% Total Bond Market Index
10% Short-Term Investment-Grade
10% Prime Money Market

I am using suggested grants as a means of rebalancing back toward my targets. For fixed x and y, I intend to employ a granting decision rule of the form: When account balance exceeds $x, make $y of donations. Thoughts?

Best wishes,
Ken

[Dinero]

[Ken Schwartz]

[Wagnerjb]

Ken said:

[alvinsch]

[Wagnerjb]

Al: I am struggling to see why you used an after-tax $16,250 in the taxable case. The way I see it, you and I both are sitting - at the beginning - with cash or securities that we are willing to donate. We both have $25,000 in assets and we choose different paths.

If I am the "taxable" guy, why does my $25,000 get immediately reduced to $16,250?


The way I see it, if there is no tax arbitrage, both you and the charity are worse off. You get a lower deduction by giving it all away at once and the charity gets less because Vanguard takes a slice of the growth in fees.

I suspect that your anticipated 17.5% tax arbitrage will make the Donor Trust a no-brainer. But I am curious to see whether - from a strictly financial standpoint - a more moderate tax arbitrage is really worth it.

Best wishes.
_________________
Andy

[alvinsch]

[Ken Schwartz]

I don't mean to detract from the outstanding fundamental discussion Andy and Al are having, but I'd like to ask a technical question of experienced Vanguard Charitable Endowment Program clients. How and when are distributions credited to your pool balances?

The 10/30 price for the Gift Preservation Pool (50% Short-Term Investment Grade, 50% Prime Money Market) was $10.50 per unit. The 10/31 price was $10.49. On 10/31 Short-Term Investment Grade (Investor) Fund returned -0.19% and Prime Money Market Fund returned 0.00%. Additionally, Short-Term Investment Grade (Investor) Fund paid a dividend of 0.41%, while Prime Money Market Fund paid a dividend of 0.42%. My unit quantity in the Gift Preservation Pool has not changed. The $0.01 decrease in the Pool's per unit price seems to reflect only the underlying funds' capital returns, not their dividend payments. What gives?

Best wishes,
Ken

[Wagnerjb]

[alvinsch]

[Wagnerjb]

[Ken Schwartz]