Donor Advised Fund - what to contribute

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Tandoori
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Donor Advised Fund - what to contribute

Post by Tandoori » Tue Jun 11, 2019 11:22 am

I've recently opened a Donor Advised Fund. I will make a contribution from my taxable Vanguard brokerage account. The questions is how should I select the funds to contribute from my taxable account - I have some highly appreciated assets, as well as some funds with moderate/low LTCG but with high expense ratios (from a past financial advisor relationship). How to select between low cost basis and high expense ratios?

jebmke
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Re: Donor Advised Fund - what to contribute

Post by jebmke » Tue Jun 11, 2019 11:41 am

I always select something I have otherwise decided that I don't want to keep.
When you discover that you are riding a dead horse, the best strategy is to dismount.

vtjon02
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Re: Donor Advised Fund - what to contribute

Post by vtjon02 » Tue Jun 11, 2019 11:46 am

I would do what is best for each scenario.

For DAF, I'd contribute what has the highest LTCG.

For cost minimization, I'd sell the high cost investments, pay LTCG tax rate, and then reinvest into lower cost options. Low to moderate LTCG at preferential tax rates doesn't sound that bad to me. What seems worse is keeping high cost investments.

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FelixTheCat
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Re: Donor Advised Fund - what to contribute

Post by FelixTheCat » Tue Jun 11, 2019 12:13 pm

vtjon02 wrote:
Tue Jun 11, 2019 11:46 am
For DAF, I'd contribute what has the highest LTCG.
+1 I have Fidelity's DAF. The contribution tool will look for LTCG and select those share for contribution.
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jebmke
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Re: Donor Advised Fund - what to contribute

Post by jebmke » Tue Jun 11, 2019 12:21 pm

FelixTheCat wrote:
Tue Jun 11, 2019 12:13 pm
vtjon02 wrote:
Tue Jun 11, 2019 11:46 am
For DAF, I'd contribute what has the highest LTCG.
+1 I have Fidelity's DAF. The contribution tool will look for LTCG and select those share for contribution.
Interesting. I would probably have gone the other way. I am inferring from the OP a few things. The fact that the low ER funds have significant gains means that the high expense stuff has been sitting there for a while and the OP has been reluctant to simply dump them. Since there is a decent chance that I would never sell the low cost/high gain holding anyway, I'd take the opportunity to ditch the asset that is bleeding expenses by donating it to the DAF.

However, if the gains on the high ER stuff are not that significant they should be sold immediately, CG tax notwithstanding. If that is the case, then the low ER, high gain asset is the one to donate.
When you discover that you are riding a dead horse, the best strategy is to dismount.

StealthRabbit
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Re: Donor Advised Fund - what to contribute

Post by StealthRabbit » Tue Jun 11, 2019 12:44 pm

I have always used my DAF as a 'Tax Tool'.

Usually High Gain / appreciated assets with high tax liability get sent to DAF.

But... it's also a good place to send items that are dragging you down (unless that stuff can help reduce your tax obligation).

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Artsdoctor
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Re: Donor Advised Fund - what to contribute

Post by Artsdoctor » Tue Jun 11, 2019 5:17 pm

Tandoori wrote:
Tue Jun 11, 2019 11:22 am
I've recently opened a Donor Advised Fund. I will make a contribution from my taxable Vanguard brokerage account. The questions is how should I select the funds to contribute from my taxable account - I have some highly appreciated assets, as well as some funds with moderate/low LTCG but with high expense ratios (from a past financial advisor relationship). How to select between low cost basis and high expense ratios?
Great question because it makes you prioritize tax versus investment decision-making.

We have all probably had investments which are no longer tax-efficient, are too expensive, and/or are poorly performing. We want to get rid of them but we're not crazy about paying capital gains. All the while, they're painful to hold. Or, you used to buy individual stocks and you no longer want to hold that sort of exposure. Any investment that you no longer want should be transferred to your DAF (unless they have generated capital losses, of course). This should be your highest priority.

After that, you'd want to transfer over the assets that have the lowest cost basis (the highest capital gain). If you love the asset, you can always purchase the same amount from your cash reserves after the transfer, effectively resetting the cost basis.

Any asset you transfer with a gain must have been held for a year before contributing.

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Stinky
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Re: Donor Advised Fund - what to contribute

Post by Stinky » Tue Jun 11, 2019 6:36 pm

vtjon02 wrote:
Tue Jun 11, 2019 11:46 am
I would do what is best for each scenario.

For DAF, I'd contribute what has the highest LTCG.

For cost minimization, I'd sell the high cost investments, pay LTCG tax rate, and then reinvest into lower cost options. Low to moderate LTCG at preferential tax rates doesn't sound that bad to me. What seems worse is keeping high cost investments.
I like this answer.

OP, you have two separate issues, which drive two actions. First, avoid the capital gains tax entirely on the more highly appreciated assets by donating them to DAF. Second, trade out of the high expense funds as you can.

Two issues, two actions.
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inbox788
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Re: Donor Advised Fund - what to contribute

Post by inbox788 » Tue Jun 11, 2019 7:51 pm

jebmke wrote:
Tue Jun 11, 2019 12:21 pm
Interesting. I would probably have gone the other way. I am inferring from the OP a few things. The fact that the low ER funds have significant gains means that the high expense stuff has been sitting there for a while and the OP has been reluctant to simply dump them. Since there is a decent chance that I would never sell the low cost/high gain holding anyway, I'd take the opportunity to ditch the asset that is bleeding expenses by donating it to the DAF.

However, if the gains on the high ER stuff are not that significant they should be sold immediately, CG tax notwithstanding. If that is the case, then the low ER, high gain asset is the one to donate.
+1

The answer is probably BOTH. The question is WHEN. Which one NOW and what to save for LATER? If OP donates one today and in 5 or 10 years decides to donate the other, what is more beneficial? If you compare to cashing out later, then the LTCG is more beneficial, but if you simply donate later, that goes away, which favors the more cost efficient fund being kept.

The type of fund matter too, and that should be considered. Why not list the funds, amounts and cost basis (and future donating plans) so we can discuss the specifics?

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Tandoori
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Re: Donor Advised Fund - what to contribute

Post by Tandoori » Wed Jun 12, 2019 2:08 pm

Thanks to everyone for your thinking so far.

OK, more detail about the funds, amounts and cost basis...

Two Goals:
A. Minimize taxes.
B. Long term to have most assets in this account sitting in low ER broad-based passive funds like VTSAX.

I plan to move $160K into a DAF this year. I am in a high tax bracket for 2019. I'll be in the 22% bracket until 2024. Then from 2024 will only live off LTCG at zero %.

Symbol______ER_______Balance______STG________LTG
CMNIX______1.00%______$19,186_______$44______$827
MIPIX_______0.91%______$19,661______–$385
CPXIX_______0.87%______$21,019______$639
EEM________0.67%______$9,362________$247
DBLFX______0.48%______$40,379______$9_________$272
DODIX______0.42%______$36,065______$9________$271
VNQ________0.12%______$43,034______$167______$5,752
IEFA________0.08%______$92,742______$5,752
IJH_________0.07%______$48,745_______$304_______$9,399
VTSAX______0.04%______$345,276_____$3,405_____$2,693
FSSNX______0.02%______$33,169_______$3,169
FXAIX_______0.01%______$299,089_____$11,720____$34,297
WMT_______0.00%_______$78,170_______$?_________$73,266

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Stinky
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Re: Donor Advised Fund - what to contribute

Post by Stinky » Wed Jun 12, 2019 8:22 pm

Tandoori wrote:
Wed Jun 12, 2019 2:08 pm
Thanks to everyone for your thinking so far.

OK, more detail about the funds, amounts and cost basis...

Two Goals:
A. Minimize taxes.
B. Long term to have most assets in this account sitting in low ER broad-based passive funds like VTSAX.

I plan to move $160K into a DAF this year. I am in a high tax bracket for 2019. I'll be in the 22% bracket until 2024. Then from 2024 will only live off LTCG at zero %.

Symbol______ER_______Balance______STG________LTG
CMNIX______1.00%______$19,186_______$44______$827
MIPIX_______0.91%______$19,661______–$385
CPXIX_______0.87%______$21,019______$639
EEM________0.67%______$9,362________$247
DBLFX______0.48%______$40,379______$9_________$272
DODIX______0.42%______$36,065______$9________$271
VNQ________0.12%______$43,034______$167______$5,752
IEFA________0.08%______$92,742______$5,752
IJH_________0.07%______$48,745_______$304_______$9,399
VTSAX______0.04%______$345,276_____$3,405_____$2,693
FSSNX______0.02%______$33,169_______$3,169
FXAIX_______0.01%______$299,089_____$11,720____$34,297
WMT_______0.00%_______$78,170_______$?_________$73,266
Thanks for posting portfolio.

In 2019, I would suggest funding DAF with all WMT shares, plus the most highly appreciated FXAIX shares to get you up to your $160k goal. This will give you maximum tax efficiency by avoiding CG taxes on majority of your gains.

Move the rest of your assets to desired mix over time. No particular urgency.
Last edited by Stinky on Thu Jun 13, 2019 8:56 am, edited 1 time in total.
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inbox788
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Re: Donor Advised Fund - what to contribute

Post by inbox788 » Thu Jun 13, 2019 1:40 am

Tandoori wrote:
Wed Jun 12, 2019 2:08 pm
A. Minimize taxes.
B. Long term to have most assets in this account sitting in low ER broad-based passive funds like VTSAX.

I plan to move $160K into a DAF this year. I am in a high tax bracket for 2019. I'll be in the 22% bracket until 2024. Then from 2024 will only live off LTCG at zero %.
If these are all your holdings, then it's simple. It is mostly 2 separate problems.
CMNIX______1.00%______$19,186_______$44______$827
MIPIX_______0.91%______$19,661______–$385
CPXIX_______0.87%______$21,019______$639
EEM________0.67%______$9,362________$247
DBLFX______0.48%______$40,379______$9_________$272
DODIX______0.42%______$36,065______$9________$271
Sell off ALL the high ER funds and pay higher percentage on small amount of gains (~$2000 of mostly LTCG). Buy what you need with the liquidated cash to meet your AA and any particular tilts.
VNQ________0.12%______$43,034______$167______$5,752
IEFA________0.08%______$92,742______$5,752
IJH_________0.07%______$48,745_______$304_______$9,399
VTSAX______0.04%______$345,276_____$3,405_____$2,693
FSSNX______0.02%______$33,169_______$3,169
FXAIX_______0.01%______$299,089_____$11,720____$34,297
Donate WMT (>90% gains). For the rest, it can be a little trickier and you have to look at the specific lots, avoiding the STCG ones. Just looking at total percentage, FXAIX is > 10% gains, but VNQ is a bit higher, almost 15% and IJH nearly 20%. If you sell ALL WMT, ALL IJH and most of VNQ, you should arrive at your donation amount.

If you had 1) $160k in WMT with $150k LTCG AND 2) $160k in CMNIX (1% EF) also $150k LTCG AND 3) wanted to donate $160k now and the other in 2024 while you could benefit from itemizing deductions, then it becomes a trickier question. I think you would keep FXAIX/VTSAX if that were in the mix, but a wrinkle if the tax deduction was a little more now.

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Re: Donor Advised Fund - what to contribute

Post by cherijoh » Thu Jun 13, 2019 6:18 am

Tandoori wrote:
Tue Jun 11, 2019 11:22 am
I've recently opened a Donor Advised Fund. I will make a contribution from my taxable Vanguard brokerage account. The questions is how should I select the funds to contribute from my taxable account - I have some highly appreciated assets, as well as some funds with moderate/low LTCG but with high expense ratios (from a past financial advisor relationship). How to select between low cost basis and high expense ratios?
I'm assuming that it is reluctance to pay cap gains that has held you up from selling your high cost funds in the past.

Why not sell the high ERs outside of the DAF and use the proceeds to repurchase shares of the appreciated fund that you are putting in the DAF? (You would in effect be resetting your cost basis in that fund). Assuming you don't have huge amounts of high expense funds, you should have enough appreciated shares to donate and net out at least the capital gains you paid on the sale of the other shares.

EDIT: I posted before seeing the portfolio.

Do you really have 90% capital gains in Walmart? Or were you reinvesting dividends under your old manager? (In order to be at 90% capital gains you'd have to have bought it a long time ago). If you were reinvesting dividends, you will likely have a much higher cost basis in the stock.

You also need to be aware of the limitations in donating appreciated shares - you can only take a charitable contribution of up to 30% of AGI (or perhaps its MAGI). The rest would be carried forward to future years.
Last edited by cherijoh on Thu Jun 13, 2019 6:36 am, edited 1 time in total.

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Re: Donor Advised Fund - what to contribute

Post by cherijoh » Thu Jun 13, 2019 6:34 am

Stinky wrote:
Wed Jun 12, 2019 8:22 pm
Tandoori wrote:
Wed Jun 12, 2019 2:08 pm
Thanks to everyone for your thinking so far.

OK, more detail about the funds, amounts and cost basis...

Two Goals:
A. Minimize taxes.
B. Long term to have most assets in this account sitting in low ER broad-based passive funds like VTSAX.

I plan to move $160K into a DAF this year. I am in a high tax bracket for 2019. I'll be in the 22% bracket until 2024. Then from 2024 will only live off LTCG at zero %.

Symbol______ER_______Balance______STG________LTG
CMNIX______1.00%______$19,186_______$44______$827
MIPIX_______0.91%______$19,661______–$385
CPXIX_______0.87%______$21,019______$639
EEM________0.67%______$9,362________$247
DBLFX______0.48%______$40,379______$9_________$272
DODIX______0.42%______$36,065______$9________$271
VNQ________0.12%______$43,034______$167______$5,752
IEFA________0.08%______$92,742______$5,752
IJH_________0.07%______$48,745_______$304_______$9,399
VTSAX______0.04%______$345,276_____$3,405_____$2,693
FSSNX______0.02%______$33,169_______$3,169
FXAIX_______0.01%______$299,089_____$11,720____$34,297
WMT_______0.00%_______$78,170_______$?_________$73,266
Thanks for posting portfolio.

In 2019, I would suggest funding DAF at $160k with all WMT shares, and the most highly appreciated FXAIX shares. This will give you maximum tax efficiency by avoiding CG taxes on majority of your gains.

Move the rest of your assets to desired mix over time. No particular urgency.
I read the quoted post as the OP having $78K in WMT shares, $73K of which were capital gains.

stan1
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Re: Donor Advised Fund - what to contribute

Post by stan1 » Thu Jun 13, 2019 6:40 am

Tandoori wrote:
Wed Jun 12, 2019 2:08 pm
I plan to move $160K into a DAF this year. I am in a high tax bracket for 2019. I'll be in the 22% bracket until 2024. Then from 2024 will only live off LTCG at zero %.

Symbol______ER_______Balance______STG________LTG
CMNIX______1.00%______$19,186_______$44______$827
MIPIX_______0.91%______$19,661______–$385
CPXIX_______0.87%______$21,019______$639
EEM________0.67%______$9,362________$247
DBLFX______0.48%______$40,379______$9_________$272
DODIX______0.42%______$36,065______$9________$271
You want to get rid of these due to high expenses and most having capital gains distributions. Sell and pay tax since gains are small. One is even showing a loss.
VNQ________0.12%______$43,034______$167______$5,752
REITs are best in a tax advantaged account not a taxable account. REIT dividend income is taxed as ordinary income not qualified dividends. Plus REITs have higher yields. Gain is high enough that I'd probably donate it.
IEFA________0.08%______$92,742______$5,752
IJH_________0.07%______$48,745_______$304_______$9,399
VTSAX______0.04%______$345,276_____$3,405_____$2,693
FSSNX______0.02%______$33,169_______$3,169
FXAIX_______0.01%______$299,089_____$11,720____$34,297
These are fine as long term holdings if they fit into your asset allocation. You haven't told us what that is, though. For example owning a Total Stock Market Fund and S&P 500 fund causes overlap. Maybe you've had one of them for a long time or maybe you've had different advisors giving you different recommendations?
WMT_______0.00%_______$78,170_______$?_________$73,266
This is an obvious choice to donate to the DAF. It is highly appreciated and a large holding in a single stock.

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Stinky
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Re: Donor Advised Fund - what to contribute

Post by Stinky » Thu Jun 13, 2019 9:00 am

cherijoh wrote:
Thu Jun 13, 2019 6:34 am

I read the quoted post as the OP having $78K in WMT shares, $73K of which were capital gains.
Thanks for noting this.

I did not word my original response very well. So I have corrected my response, making it clear that DAF should be funded with all WMT and some FXAIX.
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Re: Donor Advised Fund - what to contribute

Post by Artsdoctor » Thu Jun 13, 2019 9:08 am

Tandoori wrote:
Wed Jun 12, 2019 2:08 pm
Thanks to everyone for your thinking so far.

OK, more detail about the funds, amounts and cost basis...

Two Goals:
A. Minimize taxes.
B. Long term to have most assets in this account sitting in low ER broad-based passive funds like VTSAX.

I plan to move $160K into a DAF this year. I am in a high tax bracket for 2019. I'll be in the 22% bracket until 2024. Then from 2024 will only live off LTCG at zero %.

Symbol______ER_______Balance______STG________LTG
CMNIX______1.00%______$19,186_______$44______$827
MIPIX_______0.91%______$19,661______–$385
CPXIX_______0.87%______$21,019______$639
EEM________0.67%______$9,362________$247
DBLFX______0.48%______$40,379______$9_________$272
DODIX______0.42%______$36,065______$9________$271
VNQ________0.12%______$43,034______$167______$5,752
IEFA________0.08%______$92,742______$5,752
IJH_________0.07%______$48,745_______$304_______$9,399
VTSAX______0.04%______$345,276_____$3,405_____$2,693
FSSNX______0.02%______$33,169_______$3,169
FXAIX_______0.01%______$299,089_____$11,720____$34,297
WMT_______0.00%_______$78,170_______$?_________$73,266
Some of these capital gains numbers are very small and not worth the effort. There's no reason to hold CMNIX, for example, and I'd just sell it. Remember that you can't really even donate appreciated shares that are held under a year and get any tax advantage so all of those short-term gains don't even warrant consideration. Also, you'd avoid donating any asset that has a loss; you'd simply sell it, take the loss on your tax form, and then donate the cash if appropriate.

Unless you have an emotional attachment to WMT, that stock would be the logical asset to donate.

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dm200
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Re: Donor Advised Fund - what to contribute

Post by dm200 » Thu Jun 13, 2019 9:23 am

Much, in my opinion, depends on how you plan on using the DAF.

For various reasons, we maintain (or try to) a fairly stable balance in our Fidelity DAF. We have a mix: domestic equity 59%, international equity 9%, fixed income 29% and money market about 3%.

Our long term goal is to pull out about 4% per year (on average) for grants to selected charities/places of worship, etc. We can drop as low as 1-2% when the value in the DAF does not go up (or goes down) - and go above 4% in years when the balance goes up more (as it did last year, as I recall).

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Tandoori
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Re: Donor Advised Fund - what to contribute

Post by Tandoori » Thu Jun 13, 2019 7:53 pm

Thanks to all for the informative responses. I am so impressed with the help you provided.

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