Donor-advised fund versus direct stock donation

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grabiner
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Donor-advised fund versus direct stock donation

Post by grabiner »

Suppose you want to make regular gifts to charities of several thousand dollars each, and you have appreciated stock. Two reasonable ways to do this are by directly donating the stock to charities, or setting up a small donor-advised fund now and using that to make the donations for several years.

For this comparison, I will assume you are using Vanguard Charitable. The minimum amount to open a donor-advised fund at Vanguard is $25K. There is a 0.60% fee on accounts up to $500K. The investments themselves have the same expenses as the Admiral shares of Vanguard funds. (There is a $250 annual fee if the account drops below $15K, so you will want to either make another contribution when that happens or liquidate the last $15K within a single year.)

The donor-advised fund has some investment advantages; if you want to get your future charitable contributions out of individual stock, or invest some of them in a bond fund for more steady distributions, you can do that by donating to the donor-advised fund and changing the investments.

The donor-advised fund is slightly more expensive unless you are in very high federal and state tax brackets, or the fund you are using for the donations is less tax-efficient than the total-market indexes. If you keep the investments yourself in Vanguard Total Stock Market, you pay tax only on the 1.84% dividend yield (no capital-gains tax since you will donate to charity eventually). This costs less than 0.60% annually unless your tax rate on the dividends is 33%, which would require 23.8% federal plus at least 9% state tax. In a 15% qualified dividend tax bracket and no state taxes, the expense of keeping the fund yourself is 0.28%. That is a difference of $33 per year for every $10K in the donor-advised fund.

More important is likely to be the tax difference. Most taxpayers who donate to a donor-advised fund in a single year will take the standard deduction in other years; only single taxpayers with a mortgage, married couples with a large mortgage (need $360K at 4%), or taxpayers with very high medical expenses are likely to itemize.

If your non-charitable deductions are under the standard deduction, lumping your donations into one year will have a tax benefit. For example, if you are $5K under the standard deduction, you deduct only $25K if you make a $10K donation every year for five years, but $45K (as long as that is less than 30% of your adjusted gross income) if you make a $50K donation and then distribute $10K every year for five years. Conversely, if you would be itemizing anyway, lumping is slightly less desirable; you might deduct so much in one year that some of your deduction is in the next lower tax bracket. Donating $10K in a 24% tax bracket this year rather than a 32% tax bracket next year costs you $800.

There are two other minor tax disadvantages for the donor-advised fund. If you go over 30% of adjusted gross income in one year, the deduction gets postponed to the next year, which means you lose one year of investment returns on the donation. And if you still have money in the donor-advised fund when you turn 70-1/2, you need to use that money for your charitable donations, rather than getting the more favorable tax treatment of qualified charitable distributions. (You can always take advantage of your good market returns to do both.)

And then there is the administrative side, which favors the donor-advised fund. Some charities may not be able to accept stock donations. Even those which do, particularly small charities, may have problems with the paperwork (I have had this several times, including one charity which took several months to return the proper form). And I would expect that the brokerage is more likely to get things wrong with many charitable donations than with a single transaction to set up the donor-advised fund.

My own decision is to stick with the direct donations for now, because my tax situation favors it. My state taxes and mortgage are enough that I itemize deductions even without charity, and if I made a huge donation in one year, it would drop me one federal and one state tax bracket, so I would get less tax benefit from lumping. But if I decide to pay off my mortgage (currently not worthwhile, but close), that will give me a good reason to open a donor-advised fund. And I might also use a donor-advised fund in the years immediately before I retire, in order to benefit from deducting in a higher tax bracket.
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Re: Donor-advised fund versus direct stock donation

Post by 1955Chevy »

grabiner wrote: Wed Jul 24, 2019 11:20 pm if you make a $50K donation and then distribute $10K every year for five years.
I realize this is just a hypothetical, buy why not donate all $50k from the DAF in one year instead of $10k over five years? This would seem to save fees and be less of a "jerk move*".

*WCI shoutout
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Re: Donor-advised fund versus direct stock donation

Post by Leesbro63 »

And for those with large estates, the donor advised fund is out of your estate. While monies used for future direct donations remain in your estate.
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Re: Donor-advised fund versus direct stock donation

Post by Gill »

Leesbro63 wrote: Thu Jul 25, 2019 10:37 am And for those with large estates, the donor advised fund is out of your estate. While monies used for future direct donations remain in your estate.
...but of course are deductible if you leave the monies to charity at your death.
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Re: Donor-advised fund versus direct stock donation

Post by Leesbro63 »

Gill wrote: Thu Jul 25, 2019 10:43 am
Leesbro63 wrote: Thu Jul 25, 2019 10:37 am And for those with large estates, the donor advised fund is out of your estate. While monies used for future direct donations remain in your estate.
...but of course are deductible if you leave the monies to charity at your death.
Gill
Good point, Gill (hitting myself on the forehead) :oops:
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Re: Donor-advised fund versus direct stock donation

Post by dm200 »

It all depends on the details of the target charities, but:

1. It can be inconvenient for both you and the charity to process appreciated stock donations

2. Sometimes (happened to me once) the target charity really messes up the processing of appreciated stock

3. The target charity may incur some degree of costs in processing donated appreciated stock. Why impost such costs?

4. I do not see any tax advantage of funding the DAF and direct appreciated stock donations?

5. There are some (not many) kinds of donations that cannot be done to a DAF
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Re: Donor-advised fund versus direct stock donation

Post by mchampse »

1955Chevy wrote: Thu Jul 25, 2019 10:35 am
grabiner wrote: Wed Jul 24, 2019 11:20 pm if you make a $50K donation and then distribute $10K every year for five years.
I realize this is just a hypothetical, buy why not donate all $50k from the DAF in one year instead of $10k over five years? This would seem to save fees and be less of a "jerk move*".

*WCI shoutout
+1

I can see an argument for having a DAF for administrative simplicity, but I don’t see a good reason to keep money in a DAF long term. The fees are outrageous and the money is better used at the charity. Schwab has lower minimums and would cost about $100/year.
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Re: Donor-advised fund versus direct stock donation

Post by dm200 »

May not apply to this specific situation, but - in my experience - there are many, fine charities (including religious based) that do a good job - both financially and serving their purpose - that are very worthy of our support.

If, as a donor, for tax or many other reasons, you wish to make a large lump sum donation to such a charity (including religious based) - and then consider that large lump sum to be used by the charity over a multiple of years - it is often the case that, for many reasons, that charity (including religious based) cannot do this. [My primary "charity" that I support is in this category] In such cases, then, by use of a DAF, you can separate the actual donation to charity (the DAF) and the distribution of funds to the desired target charity.

There are several reasons that many charities (including religious based) cannot spread a large donation you make directly over multiple years:

1. The organization does not have the financial/accounting knowledge/expertise to do this
2. The organization does not want its financial reports/statements to show accumulated unspent funds
3. There may be actual restrictions on the organization to limit the amount of finds not spent to a small amount
4. The governing folk(s) of the organization just want the money spent ASAP

So, it may actually be, on balance, harmful to the goals of the target charity (including religious based) to receive such larger lump sums that will not recur. So, foe example, if you make a large, lump sum donation this year - the organization may, incorrectly, believe that this year's donations are indicative of future income and make a spending budget accordingly. Then, next year , when that does not occur - there is a budget mess.

If you are a known "member" or affiliate of such an organization (including religious), and made this large lump sum donation this year, and not next year, etc. - you might get on a "list" of non-supporters.

Let me add a family experience of religious donations. Back many years ago, when I was growing up, the local religious entity we belonged to actually published an annual book (distributed to all 'members') listing what every member actually donated every year. This was in great detail - enumerating regular donations, the fuel collection, the "monthly" collection, and so on. This detail was for adults. For children (as young as first grade), this published book listed the amounts given by every such child - one total for the year. Our family kept these annual books going back many years. On those cold and snowy winter periods, reading these books was very informative and entertaining.

There were some common patterns in this list. For most folks who were regular donors every week through the year, usually the amounts were not nice round even numbers - whether large or small. Sometimes, for those very committed to weekly donations, you might see an annual regular donation of, say, $104.00, which is $2 per week - every week. Then - there were nice, very round number totals - say $50.00 or $100.00. When you saw this, you knew (with near certainty) that the person probably came in and just made this amount one time. It was common that some folks made these one time donations just before the end of the calendar year. One of my great aunts, for example, was in this category. She did not attend services, she said, because she had trouble getting up the steps to the church - about 5 or 6 small ones. However, when there was Bingo in the school building, on the second floor (before elevators), she was very able to get up the stairs to play Bingo. The stairway had about 25-30 very steep steps.

In the mid 1960's, a new Pastor came in after the death of the previous pastor. He thought this practice was terrible, etc. and stopped it. Guess what? The collection amount went down a lot. :oops: He then had to become more "creative" and use some other method(s) of "encouraging" donations.
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Re: Donor-advised fund versus direct stock donation

Post by dm200 »

mchampse wrote: Thu Jul 25, 2019 11:21 am
1955Chevy wrote: Thu Jul 25, 2019 10:35 am
grabiner wrote: Wed Jul 24, 2019 11:20 pm if you make a $50K donation and then distribute $10K every year for five years.
I realize this is just a hypothetical, buy why not donate all $50k from the DAF in one year instead of $10k over five years? This would seem to save fees and be less of a "jerk move*".
*WCI shoutout
+1

I can see an argument for having a DAF for administrative simplicity, but I don’t see a good reason to keep money in a DAF long term. The fees are outrageous and the money is better used at the charity. Schwab has lower minimums and would cost about $100/year.
In my opinion, it all depends on your situation and what you want to accomplish.

As I had posted, my wife and I want to have, and maintain, a long term use of our Fidelity DAF to fund annual grants mostly to one of our favorite charities. Although there are no guarantees that they will continue it after we are gone - we hope and plan that our son and daughter-in-law will continue this annual funding - although there are not any guarantees that our current destination will continue indefinitely either.
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Re: Donor-advised fund versus direct stock donation

Post by TN_Boy »

mchampse wrote: Thu Jul 25, 2019 11:21 am
1955Chevy wrote: Thu Jul 25, 2019 10:35 am
grabiner wrote: Wed Jul 24, 2019 11:20 pm if you make a $50K donation and then distribute $10K every year for five years.
I realize this is just a hypothetical, buy why not donate all $50k from the DAF in one year instead of $10k over five years? This would seem to save fees and be less of a "jerk move*".

*WCI shoutout
+1

I can see an argument for having a DAF for administrative simplicity, but I don’t see a good reason to keep money in a DAF long term. The fees are outrageous and the money is better used at the charity. Schwab has lower minimums and would cost about $100/year.
The reason to keep money in a DAF long term is to batch donations, for those of us who cannot otherwise itemize. Fidelity's fees work out to .6%, which I'd rather not pay, but will for the convenience factor (fee cost should be well below the tax savings I can get batching donations).
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Re: Donor-advised fund versus direct stock donation

Post by mchampse »

TN_Boy wrote: Thu Jul 25, 2019 1:04 pm
mchampse wrote: Thu Jul 25, 2019 11:21 am
1955Chevy wrote: Thu Jul 25, 2019 10:35 am
grabiner wrote: Wed Jul 24, 2019 11:20 pm if you make a $50K donation and then distribute $10K every year for five years.
I realize this is just a hypothetical, buy why not donate all $50k from the DAF in one year instead of $10k over five years? This would seem to save fees and be less of a "jerk move*".

*WCI shoutout
+1

I can see an argument for having a DAF for administrative simplicity, but I don’t see a good reason to keep money in a DAF long term. The fees are outrageous and the money is better used at the charity. Schwab has lower minimums and would cost about $100/year.
The reason to keep money in a DAF long term is to batch donations, for those of us who cannot otherwise itemize. Fidelity's fees work out to .6%, which I'd rather not pay, but will for the convenience factor (fee cost should be well below the tax savings I can get batching donations).
Rather than batch donations just make a large donation to the charities of your choice rather than into a DAF and then giving them the money over a period of years. The charities get the money sooner and you aren’t paying 0.6% on it.
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Re: Donor-advised fund versus direct stock donation

Post by mchampse »

dm200 wrote: Thu Jul 25, 2019 12:10 pm
mchampse wrote: Thu Jul 25, 2019 11:21 am
1955Chevy wrote: Thu Jul 25, 2019 10:35 am
grabiner wrote: Wed Jul 24, 2019 11:20 pm if you make a $50K donation and then distribute $10K every year for five years.
I realize this is just a hypothetical, buy why not donate all $50k from the DAF in one year instead of $10k over five years? This would seem to save fees and be less of a "jerk move*".
*WCI shoutout
+1

I can see an argument for having a DAF for administrative simplicity, but I don’t see a good reason to keep money in a DAF long term. The fees are outrageous and the money is better used at the charity. Schwab has lower minimums and would cost about $100/year.
In my opinion, it all depends on your situation and what you want to accomplish.

As I had posted, my wife and I want to have, and maintain, a long term use of our Fidelity DAF to fund annual grants mostly to one of our favorite charities. Although there are no guarantees that they will continue it after we are gone - we hope and plan that our son and daughter-in-law will continue this annual funding - although there are not any guarantees that our current destination will continue indefinitely either.
Have you considered just giving this organization your money outright instead of putting into a DAF and then giving it yearly?
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Re: Donor-advised fund versus direct stock donation

Post by TN_Boy »

mchampse wrote: Thu Jul 25, 2019 2:51 pm
TN_Boy wrote: Thu Jul 25, 2019 1:04 pm
mchampse wrote: Thu Jul 25, 2019 11:21 am
1955Chevy wrote: Thu Jul 25, 2019 10:35 am
grabiner wrote: Wed Jul 24, 2019 11:20 pm if you make a $50K donation and then distribute $10K every year for five years.
I realize this is just a hypothetical, buy why not donate all $50k from the DAF in one year instead of $10k over five years? This would seem to save fees and be less of a "jerk move*".

*WCI shoutout
+1

I can see an argument for having a DAF for administrative simplicity, but I don’t see a good reason to keep money in a DAF long term. The fees are outrageous and the money is better used at the charity. Schwab has lower minimums and would cost about $100/year.
The reason to keep money in a DAF long term is to batch donations, for those of us who cannot otherwise itemize. Fidelity's fees work out to .6%, which I'd rather not pay, but will for the convenience factor (fee cost should be well below the tax savings I can get batching donations).
Rather than batch donations just make a large donation to the charities of your choice rather than into a DAF and then giving them the money over a period of years. The charities get the money sooner and you aren’t paying 0.6% on it.
No, I want to give appreciated stock, not cash. [Edited for clarity]. The substantial extra hassle of trying to give appreciated securities to multiple charities (some of which will not take stock donations in the first place) is something I want to avoid. Furthermore, some of the appreciated securities are in mutual funds (versus ETFs or stocks) and at one point in the past I found that while I could give appreciated common stocks or ETFs to a charities, I could not give them mutual funds.

I get that you don't like the .6 cost. It is not a problem for me, and the other large advantages (to me) of DAFs mean that is the route I go.
Last edited by TN_Boy on Thu Jul 25, 2019 3:33 pm, edited 1 time in total.
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Re: Donor-advised fund versus direct stock donation

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1955Chevy wrote: Thu Jul 25, 2019 10:35 am
grabiner wrote: Wed Jul 24, 2019 11:20 pm if you make a $50K donation and then distribute $10K every year for five years.
I realize this is just a hypothetical, buy why not donate all $50k from the DAF in one year instead of $10k over five years? This would seem to save fees and be less of a "jerk move*".

*WCI shoutout
Because the charities will put you on a HNW donor list and start soliciting big time. :wink:

In addition, they probably use the current year's donations +/- for planning purposes, so donating large once every 5 years might be the "jerk move" from their perspective.
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Re: Donor-advised fund versus direct stock donation

Post by 1955Chevy »

cherijoh wrote: Thu Jul 25, 2019 3:22 pmBecause the charities will put you on a HNW donor list and start soliciting big time. :wink:
If that’s the concern, just give anonymously through the DAF.
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Re: Donor-advised fund versus direct stock donation

Post by Artsdoctor »

David,

There are a lot of moving pieces in your outline. Let me see if I can answer some of your questions, admittedly based on my own experiences, as well as some of the questions posted above.

First, you used Vanguard Charitable in your example. This is fine although Fidelity's and Schwab's DAFs have lower grant minimums so you'll use those firms' DAFs even more than Vanguard's.

Second, what you donate makes a big difference. You're going to always do better by donating highly appreciated assets rather than cash. Some of the posters above may not have taxable accounts or taxable gains which diminished the attractiveness of a DAF although there's still merit in using them for some. Donating appreciated assets will dovetail nicely with the tax-loss harvesting done during market swoons, of course.

Third, donating appreciated assets directly to a charity is fine, but I've found the experience to be everything from extremely easy to impossible. In fact, the reason I opened my first DAF was when I really wanted to donate to a particular charity and after two months of going back and forth (they just couldn't figure it out), the DAF was the only option. And not to bring up market timing, but if you donate to a DAF, you can generally do it any day you want. Giving directly to a charity can sometimes add unpredictable timing to the transaction.

Fourth, it's true that you have restrictions on appreciated assets: 30% of your AGI. However, you may be able to control your AGI more than you think. If you're going to really make a very large contribution to your DAF in proportion to your AGI, consider also converting money from an IRA to a Roth if that's possible. That way, you can possibly increase your AGI to a level where your DAF contribution can be deducted for that one year.

Fifth, if you want to play around marginal tax brackets and you're concerned a theoretical penalty by pushing you down into a lower bracket with a large DAF donation, the same consideration for a Roth conversion might help assuage those concerns.

There are other advantages to a DAF which have been discussed previously. (Don't forget that you can make donations anonymously which can be a nice feature.) And from my personal experience, I find that I have increased my philanthropic giving significantly after having a DAF, so the concerns about the "outrageous fees" mentioned above are overblown; my net giving increased despite those relatively insignificant fees.

One last thing. Giving to a DAF on August 1 and giving directly to a charity on August 1 will result in the same number of shares donated. However, I've always used my contributions to a DAF as a rebalancing move. During very strong bull markets, this is an important tool. However, during a brutal bear market, it becomes more challenging and for some impossible to donate strikingly appreciated assets. When you use a DAF, you have total control over when you donate. A year from now when you're ready to donate to your charity, no one can possibly predict what the market might be like which could make that donation far less appealing to you. (You have full control over your DAF investments so you can protect assets as much as you like once donated. For example, you'd like to donate $5,000 per year to a particular charity for the next 5 years, who cares if the $25,000 you've put in a simple money market makes very little money during that 5-year period?)
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Re: Donor-advised fund versus direct stock donation

Post by dm200 »

1955Chevy wrote: Thu Jul 25, 2019 3:34 pm
cherijoh wrote: Thu Jul 25, 2019 3:22 pmBecause the charities will put you on a HNW donor list and start soliciting big time. :wink:
If that’s the concern, just give anonymously through the DAF.
One of the nice benefits of using a DAF to fund charities!
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Re: Donor-advised fund versus direct stock donation

Post by 1955Chevy »

Artsdoctor wrote: Thu Jul 25, 2019 4:05 pm For example, you'd like to donate $5,000 per year to a particular charity for the next 5 years, who cares if the $25,000 you've put in a simple money market makes very little money during that 5-year period?)
This is how I view it, too.
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Re: Donor-advised fund versus direct stock donation

Post by grabiner »

Artsdoctor wrote: Thu Jul 25, 2019 4:05 pm Fourth, it's true that you have restrictions on appreciated assets: 30% of your AGI. However, you may be able to control your AGI more than you think. If you're going to really make a very large contribution to your DAF in proportion to your AGI, consider also converting money from an IRA to a Roth if that's possible. That way, you can possibly increase your AGI to a level where your DAF contribution can be deducted for that one year.
This is a useful suggestion for retirees, or people who have changed jobs. If you are still with the same employer and considering a DAF, you won't have a traditional IRA to convert (you are almost surely above the deduction limit), and unless your employer plan offers in-plan conversions, you can't convert that plan to a Roth IRA until you turn 59-1/2 or leave the employer.
1955Chevy wrote: Thu Jul 25, 2019 10:35 am I realize this is just a hypothetical, buy why not donate all $50k from the DAF in one year instead of $10k over five years? This would seem to save fees and be less of a "jerk move*".
To retain the option of donating to different charities. Your interests might change, or there might be a new charity you want to support.
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Re: Donor-advised fund versus direct stock donation

Post by rrscha22 »

What if you hold your stock in a taxable account and then put it into a Vanguard DAF right when you want to donate? Your donation would then bring the account right back to zero. Is that allowed? Would that avoid the fees but provide the ease of donating made possible by a DAF? I have a hard time justifying paying fees but it’s been a pain to donate stock in the past to the charity I contribute to. They seem to have a hard time doing it, but I have been able to get it done. So I wonder if I should just suck up the inconvenience, suck up the fees, or if a DAF could be a short-term intermediary.
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Re: Donor-advised fund versus direct stock donation

Post by venkman »

mchampse wrote: Thu Jul 25, 2019 2:51 pm
TN_Boy wrote: Thu Jul 25, 2019 1:04 pm The reason to keep money in a DAF long term is to batch donations, for those of us who cannot otherwise itemize. Fidelity's fees work out to .6%, which I'd rather not pay, but will for the convenience factor (fee cost should be well below the tax savings I can get batching donations).
Rather than batch donations just make a large donation to the charities of your choice rather than into a DAF and then giving them the money over a period of years. The charities get the money sooner and you aren’t paying 0.6% on it.
There's no guarantee that a charity you want to support this year will be one you want to support next year. I may be committed to supporting the local religious institution I attend, but what if I unexpectedly end up moving to a different state? I'll probably want to find a religious institution in my new area and start supporting that instead.

The whole point of using a DAF is to do what you were going to do anyway, but in a more tax-efficient manner. If I had been writing a monthly check to charity, I have the DAF start writing that monthly check instead.

A 0.6% annual fee seems huge compared to the cheap index funds ER's we're all used to; but it's tiny compared to the 22-37% most people are saving in taxes when they bunch donations to go over the standard deduction.
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Re: Donor-advised fund versus direct stock donation

Post by FIREchief »

venkman wrote: Fri Jul 26, 2019 12:28 am A 0.6% annual fee seems huge compared to the cheap index funds ER's we're all used to; but it's tiny compared to the 22-37% most people are saving in taxes when they bunch donations to go over the standard deduction.
+1000! It is not good to try to apply the same principles we use for retirement investing to charitable giving. I bunched 10 - 15 years worth of DAF contributions in Dec 2017 when the tax law changes indicated that my years of itemizing deductions were over. That 0.6% annual fee will never come close to offsetting those tax savings. Beyond that, it just doesn't matter. I don't make charitable contributions to optimize taxes and fees... 8-)
I am not a lawyer, accountant or financial advisor. Any advice or suggestions that I may provide shall be considered for entertainment purposes only.
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Re: Donor-advised fund versus direct stock donation

Post by 1955Chevy »

FIREchief wrote: Fri Jul 26, 2019 12:52 am I don't make charitable contributions to optimize taxes and fees... 8-)
Agreed, but those fees remove from what the charity receives.
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Re: Donor-advised fund versus direct stock donation

Post by White Coat Investor »

grabiner wrote: Wed Jul 24, 2019 11:20 pm Suppose you want to make regular gifts to charities of several thousand dollars each, and you have appreciated stock. Two reasonable ways to do this are by directly donating the stock to charities, or setting up a small donor-advised fund now and using that to make the donations for several years.

For this comparison, I will assume you are using Vanguard Charitable. The minimum amount to open a donor-advised fund at Vanguard is $25K. There is a 0.60% fee on accounts up to $500K. The investments themselves have the same expenses as the Admiral shares of Vanguard funds. (There is a $250 annual fee if the account drops below $15K, so you will want to either make another contribution when that happens or liquidate the last $15K within a single year.)

The donor-advised fund has some investment advantages; if you want to get your future charitable contributions out of individual stock, or invest some of them in a bond fund for more steady distributions, you can do that by donating to the donor-advised fund and changing the investments.

The donor-advised fund is slightly more expensive unless you are in very high federal and state tax brackets, or the fund you are using for the donations is less tax-efficient than the total-market indexes. If you keep the investments yourself in Vanguard Total Stock Market, you pay tax only on the 1.84% dividend yield (no capital-gains tax since you will donate to charity eventually). This costs less than 0.60% annually unless your tax rate on the dividends is 33%, which would require 23.8% federal plus at least 9% state tax. In a 15% qualified dividend tax bracket and no state taxes, the expense of keeping the fund yourself is 0.28%. That is a difference of $33 per year for every $10K in the donor-advised fund.

More important is likely to be the tax difference. Most taxpayers who donate to a donor-advised fund in a single year will take the standard deduction in other years; only single taxpayers with a mortgage, married couples with a large mortgage (need $360K at 4%), or taxpayers with very high medical expenses are likely to itemize.

If your non-charitable deductions are under the standard deduction, lumping your donations into one year will have a tax benefit. For example, if you are $5K under the standard deduction, you deduct only $25K if you make a $10K donation every year for five years, but $45K (as long as that is less than 30% of your adjusted gross income) if you make a $50K donation and then distribute $10K every year for five years. Conversely, if you would be itemizing anyway, lumping is slightly less desirable; you might deduct so much in one year that some of your deduction is in the next lower tax bracket. Donating $10K in a 24% tax bracket this year rather than a 32% tax bracket next year costs you $800.

There are two other minor tax disadvantages for the donor-advised fund. If you go over 30% of adjusted gross income in one year, the deduction gets postponed to the next year, which means you lose one year of investment returns on the donation. And if you still have money in the donor-advised fund when you turn 70-1/2, you need to use that money for your charitable donations, rather than getting the more favorable tax treatment of qualified charitable distributions. (You can always take advantage of your good market returns to do both.)

And then there is the administrative side, which favors the donor-advised fund. Some charities may not be able to accept stock donations. Even those which do, particularly small charities, may have problems with the paperwork (I have had this several times, including one charity which took several months to return the proper form). And I would expect that the brokerage is more likely to get things wrong with many charitable donations than with a single transaction to set up the donor-advised fund.

My own decision is to stick with the direct donations for now, because my tax situation favors it. My state taxes and mortgage are enough that I itemize deductions even without charity, and if I made a huge donation in one year, it would drop me one federal and one state tax bracket, so I would get less tax benefit from lumping. But if I decide to pay off my mortgage (currently not worthwhile, but close), that will give me a good reason to open a donor-advised fund. And I might also use a donor-advised fund in the years immediately before I retire, in order to benefit from deducting in a higher tax bracket.
Even if it costs a little more it's worth it for the reduction in hassle. I've found it costs VERY little more for what I do. 0.6% doesn't matter when the money is only there for a few days between donation and contribution. You can even avoid the annual fee by leaving $15K there during March.
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Re: Donor-advised fund versus direct stock donation

Post by fposte »

1955Chevy wrote: Fri Jul 26, 2019 8:41 am
FIREchief wrote: Fri Jul 26, 2019 12:52 am I don't make charitable contributions to optimize taxes and fees... 8-)
Agreed, but those fees remove from what the charity receives.
I would disagree. It's not deducted from the donation to the charity; if I say "give $5000 to the Bogle Center," they get $5000. I wasn't going to give $5030.

I also think it's an oddly narrow way of looking at charitable donations. Everything we do that isn't charity means money that's not being given to charity. Why focus on a choice to spend .6% on charitable management rather than tens of thousands on a luxury car or vacation?
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Re: Donor-advised fund versus direct stock donation

Post by 1955Chevy »

I did word that poorly - the fees reduce what available to donate in general, since they come from the DAF money, not paid from some outside account.

My point, as expressed in my first post, is to donate the funds, don't keep them in the DAF. The fees aren't bad, and certainly worth the hassle reduction, but ultimately, I think it's about donating to the charity, not keeping funds in the DAF. My 0.02¢
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Re: Donor-advised fund versus direct stock donation

Post by stan1 »

I don't value my time at zero. There's always something I'd rather be doing than watching Vanguard like a hawk to make sure they handle cost basis correctly. Some people do value their time at zero, enjoy tracking details and feel a positive sense of accomplishment when they get Vanguard to correct an error. I'd rather minimize the likelihood of Vanguard making an error. With cost basis that means minimizing the number of times I initiate a transaction they can make an error on.

I made a large DAF contribution in late 2017 to take advantage of the last year of using itemized deductions under current tax law (no mortgage, SALT limited). The investment returns of the DAF have exceeded the fees. Were it not for the tax law changes I'd be donating to the DAF about once every two years until I could do RMDs.

I also donate $100-250 anonymously to a number of charities which would really be a hassle for direct donations. If I only gave to one charity a year a direct donation would be less time consuming on my part.
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Re: Donor-advised fund versus direct stock donation

Post by Artsdoctor »

grabiner wrote: Thu Jul 25, 2019 7:49 pm
Artsdoctor wrote: Thu Jul 25, 2019 4:05 pm Fourth, it's true that you have restrictions on appreciated assets: 30% of your AGI. However, you may be able to control your AGI more than you think. If you're going to really make a very large contribution to your DAF in proportion to your AGI, consider also converting money from an IRA to a Roth if that's possible. That way, you can possibly increase your AGI to a level where your DAF contribution can be deducted for that one year.
This is a useful suggestion for retirees, or people who have changed jobs. If you are still with the same employer and considering a DAF, you won't have a traditional IRA to convert (you are almost surely above the deduction limit), and unless your employer plan offers in-plan conversions, you can't convert that plan to a Roth IRA until you turn 59-1/2 or leave the employer.

To retain the option of donating to different charities. Your interests might change, or there might be a new charity you want to support.
This is certainly true. If you only have one tax-deferred account and it's a 401k, then your options are severely limited.
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Re: Donor-advised fund versus direct stock donation

Post by TN_Boy »

1955Chevy wrote: Fri Jul 26, 2019 8:59 am I did word that poorly - the fees reduce what available to donate in general, since they come from the DAF money, not paid from some outside account.

My point, as expressed in my first post, is to donate the funds, don't keep them in the DAF. The fees aren't bad, and certainly worth the hassle reduction, but ultimately, I think it's about donating to the charity, not keeping funds in the DAF. My 0.02¢
I'll take one more crack at this. Your "point" seems to ignore a key reason people have given for holding funds in a DAF, i.e. batching donations so that one can itemize.

Do you believe that batching donations to optimize tax management is a bad idea? If so, why? The charities wind up with the same amount of money.

Do you believe that given a plan to give X dollars to charities, it is always better to give that in one year rather than stretching it out over say 3 years? (Note that several of us have reasons we do not wish to do that).

Or something else? I genuinely don't understand the point here. I can batch donations and the charities wind up with the same amount of money and I windup with more (versus non-batching).
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Re: Donor-advised fund versus direct stock donation

Post by Dottie57 »

1955Chevy wrote: Thu Jul 25, 2019 10:35 am
grabiner wrote: Wed Jul 24, 2019 11:20 pm if you make a $50K donation and then distribute $10K every year for five years.
I realize this is just a hypothetical, buy why not donate all $50k from the DAF in one year instead of $10k over five years? This would seem to save fees and be less of a "jerk move*".

*WCI shoutout
I really don’t see DAF contribution distributed over multiple years as a jerk move. It simply takes advantage of current tax law.
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Re: Donor-advised fund versus direct stock donation

Post by 1955Chevy »

TN_Boy wrote: Sat Jul 27, 2019 8:32 am I'll take one more crack at this.
Thanks for stooping down.
TN_Boy wrote: Sat Jul 27, 2019 8:32 am Do you believe that batching donations to optimize tax management is a bad idea?
No.
TN_Boy wrote: Sat Jul 27, 2019 8:32 amDo you believe that given a plan to give X dollars to charities, it is always better to give that in one year rather than stretching it out over say 3 years?
No.
TN_Boy wrote: Sat Jul 27, 2019 8:32 amI genuinely don't understand the point here.
Please remember that personal finance is personal and there are many ways to view and do things. I personally keep the money I’m donating in my taxable account as long as I can for reasons like flexibility, lower fees, larger deductions, TLH reasons, etc. Money is still fungible in my taxable.

Some wish to batch? Great. Some feel a charity can't handle big doses? Great. But leaving large sums in the DAF over many years is something I chose not to do because of fees, possible loss (unless kept in very safe funds), and because I feel the charities would do better with it than I would fussing over it in a DAF.

You can read the WCI link I shared for other ideas on the subject, or look at POF to see the other view - holding funds long term in the DAF. Both have more wealth and experience than I do. Cheers
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Re: Donor-advised fund versus direct stock donation

Post by TN_Boy »

1955Chevy wrote: Sat Jul 27, 2019 9:10 am
TN_Boy wrote: Sat Jul 27, 2019 8:32 am I'll take one more crack at this.
Thanks for stooping down.
TN_Boy wrote: Sat Jul 27, 2019 8:32 am Do you believe that batching donations to optimize tax management is a bad idea?
No.
TN_Boy wrote: Sat Jul 27, 2019 8:32 amDo you believe that given a plan to give X dollars to charities, it is always better to give that in one year rather than stretching it out over say 3 years?
No.
TN_Boy wrote: Sat Jul 27, 2019 8:32 amI genuinely don't understand the point here.
Please remember that personal finance is personal and there are many ways to view and do things. I personally keep the money I’m donating in my taxable account as long as I can for reasons like flexibility, lower fees, larger deductions, TLH reasons, etc. Money is still fungible in my taxable.

Some wish to batch? Great. Some feel a charity can't handle big doses? Great. But leaving large sums in the DAF over many years is something I chose not to do because of fees, possible loss (unless kept in very safe funds), and because I feel the charities would do better with it than I would fussing over it in a DAF.

You can read the WCI link I shared for other ideas on the subject, or look at POF to see the other view - holding funds long term in the DAF. Both have more wealth and experience than I do. Cheers
Thanks for the snark!

Yes, personal finance is personal, but your posts obviously imply "I think it is wrong to keep things in a DAF," not "it depends." I don't have a problem with YOU not keeping funds in a DAF, but your posts certainly let us know you aren't impressed by our value system:

'buy why not donate all $50k from the DAF in one year instead of $10k over five years? This would seem to save fees and be less of a "jerk move*".'

I read the WCI post. His objection to leaving the money in the DAF versus giving multiple years worth at once seems to be rooted in the tunnel vision that (based on his response to one question in the comments) there is no reason not to give all at once. He also worries more about the fees than I do.

By the way, the reason I don't want to provide multiple years of giving to a charity in one calendar year is not because they "can't handle it." I have other reasons.

And there are times we contribute outside the DAF, though we "lose" any deduction, because we think it the right thing to do. But overall, I try and minimize my taxes.

And one final thing remark about WCI's "jerk move" view. This is a very strange way of looking at things. Sure I get a deduction if I donate. But no matter what tax bracket I'm in, there is more money for TN_Boy if I DON'T donate than if I do. Giving $1,000 to save $330 in taxes? That's .... not a way to maximize my wealth ..... so I can't see why putting money in a DAF is ever a "jerk move" if it ultimately goes to real charities. And for us, the math works out in favor of batching donations even accounting for the DAF fees.
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Re: Donor-advised fund versus direct stock donation

Post by 1955Chevy »

TN_Boy wrote: Sat Jul 27, 2019 11:25 am your posts obviously imply "I think it is wrong to keep things in a DAF," not "it depends."
Not wrong, just less efficient, imo, for the reasons I've already shared.

Cheers
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Re: Donor-advised fund versus direct stock donation

Post by wickywack »

grabiner wrote: Wed Jul 24, 2019 11:20 pm And if you still have money in the donor-advised fund when you turn 70-1/2, you need to use that money for your charitable donations, rather than getting the more favorable tax treatment of qualified charitable distributions. (You can always take advantage of your good market returns to do both.)
I'm confused by this statement. If I have a DAF, does that limit my ability to do a QCD instead in a given year? I know you cannot do a QCD to a DAF, but I'm not aware of any other interactions.
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Re: Donor-advised fund versus direct stock donation

Post by FIREchief »

1955Chevy wrote: Sat Jul 27, 2019 9:10 am Some wish to batch? Great. Some feel a charity can't handle big doses? Great. But leaving large sums in the DAF over many years is something I chose not to do because of fees, possible loss (unless kept in very safe funds), and because I feel the charities would do better with it than I would fussing over it in a DAF.
I don't believe that the bolded statement is true, certainly not in all cases. My DAF balance is invested 100% in US TMI. The charities I donate to will wind up with more money than if I had just given them lump sums on the front end. Even if they were able to "invest the excess," (which I don't believe they can), they would certainly utilize much lower yielding investments.
I am not a lawyer, accountant or financial advisor. Any advice or suggestions that I may provide shall be considered for entertainment purposes only.
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Re: Donor-advised fund versus direct stock donation

Post by dm200 »

There's no guarantee that a charity you want to support this year will be one you want to support next year. I may be committed to supporting the local religious institution I attend, but what if I unexpectedly end up moving to a different state? I'll probably want to find a religious institution in my new area and start supporting that instead.
Very good point.

It might also be that something, significant to you, changes about this charity.
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Re: Donor-advised fund versus direct stock donation

Post by informal guide »

One other benefit of a direct stock donation, for those who work (or whose spouse works for) for organizations that match charitable gifts. Many firms will not match DAF contributions, either to the DAF or grants from the DAF. So my direct stock contributions, while a bigger hassle than one contribution to a DAF, were matched by my employer.
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Re: Donor-advised fund versus direct stock donation

Post by TN_Boy »

informal guide wrote: Sat Jul 27, 2019 2:10 pm One other benefit of a direct stock donation, for those who work (or whose spouse works for) for organizations that match charitable gifts. Many firms will not match DAF contributions, either to the DAF or grants from the DAF. So my direct stock contributions, while a bigger hassle than one contribution to a DAF, were matched by my employer.
Good point. My employers have never matched contributions to organizations I particularly cared about, but if one's employer did, that would be a great way to leverage giving (even if you couldn't donate appreciated securities and had to go with cash).
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Re: Donor-advised fund versus direct stock donation

Post by friar1610 »

A long tine ago I used to transfer appreciated shares of VG mutual funds to my major charity's VG account. Simply filled out a VG form, sent it to the charity so they could indicate they would accept the transfer (as if!) and they would send it on to VG who would transfer the shares. Not a viable alternative for lesser donations and/or charities that didn't have VG accounts. But worked great for this one particular charity which got my major donation every year.

Then I figured out it was simpler to convert the MF shares to ETF shares, fill out a form to have VG transfer the converted shares to the charity's (non-VG) brokerage account and be done with it. This would work for any charity that has a brokerage account, although there probably are practical reasons that would make it hard for relatively small donations.

Now that I'm a really old retired guy taking RMDs, I feel the best way (for me) is to go the QCD route. I call VG and tell them to cut checks for various amounts for various charities and send them to me. I send them on to the charities. (VG would send them to the charities directly if I wished but I choose to do it my way.) Then I take whatever money is left over as my annual RMD distribution.

I considered a DAF and I think I understand both the advantages and disadvantages but decided the QCD procedure accomplishes my goals more efficiently. YMMV.

Edited to add: I forgot to add that the QCD route has the additional advantage of providing a de-facto deduction (via a reduction in taxable income) while still maintaining the full standard deduction.
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Re: Donor-advised fund versus direct stock donation

Post by JackoC »

I have not done DAF yet but am thinking of doing so, with Vanguard. Now we donate our most appreciated ETF shares=~$45k per year to two main charities plus ~$7k in cash to another significant one and 2-3 nominal donations to other things. Under the new tax law our only other deduction is $10k for state and local tax (unless we run into high OOP medical bills, but not currently). So if we give steadily annually we burn up ~$14k of the donations each year just getting over the $24k+ joint standard deduction. With DAF we'd batch 2 yrs of donations to DAF in odd years, no donations to DAF in even years, DAF pays out similar annual amounts to the charities as now (but we'd either bring up to $500/yr or drop small charities, Vang min payout $500). I model in Turbotax that that saves ~$1k/yr in federal taxes (our state doesn't have charitable donation deduction so moot), IOW $2k over each 2 yr cycle of 2x and 0 donations, lower/higher tax. That's less savings than a back of envelope calculation assuming a fixed marginal rate, but still worthwhile IMO.

How about batch *to* the charities? It's just not very practical IMO. They just aren't geared for that. I'd have to field inquiries why I'd stopped giving and/or am I now going to give steadily at the 2x rate? It's worth something to me to avoid that.

How about costs? I would donate the 2x shares late in the odd calendar years and have the DAF give the proceeds to the charities right at the end of the odd year and beginning of the following even year say a week later. 0.6% fee on that main corpus of donations would be negligible. Separately, I'd put and keep $15k extra in the DAF, the Vang minimum, to avoid the extra $250 annual fee accounts <$15k. But 0.6% on $15k is $90/yr, not significant in the overall picture IMO.

Plus, the DAF would give flexibility for larger multi-X batches if there's a big unexpected bump in income, say an eventual cg distribution, or we sell our house (far over $500k cg exclusion) where again 0.60% is only one half the equation, the other being the reduction in annual burning of charitable donations between $10k and $24k. However in normal years the ~$45k is ~15% of AGI so a 2x batch is at the 30% AGI limit for deducting donation of appreciated assets. So, use of the DAF wouldn't actually allow us to shift away from cash donations toward stock donations. The mix would probably have to be same as now or even slightly more cash than now to stay under the 30% limit (though any excess above 30% technically carries over, again up to $14k of the carry over would be swallowed, defeating the purpose of batching).

Not to bore everyone with personal details, but some of the slightly contentious exchange above could be, as often seems the case, people thinking about their own different cases and arguing past one another. In our case I'm pretty convinced the DAF is the way to go.
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Re: Donor-advised fund versus direct stock donation

Post by TN_Boy »

JackoC wrote: Sat Jul 27, 2019 4:14 pm I have not done DAF yet but am thinking of doing so, with Vanguard. Now we donate our most appreciated ETF shares=~$45k per year to two main charities plus ~$7k in cash to another significant one and 2-3 nominal donations to other things. Under the new tax law our only other deduction is $10k for state and local tax (unless we run into high OOP medical bills, but not currently). So if we give steadily annually we burn up ~$14k of the donations each year just getting over the $24k+ joint standard deduction. With DAF we'd batch 2 yrs of donations to DAF in odd years, no donations to DAF in even years, DAF pays out similar annual amounts to the charities as now (but we'd either bring up to $500/yr or drop small charities, Vang min payout $500). I model in Turbotax that that saves ~$1k/yr in federal taxes (our state doesn't have charitable donation deduction so moot), IOW $2k over each 2 yr cycle of 2x and 0 donations, lower/higher tax. That's less savings than a back of envelope calculation assuming a fixed marginal rate, but still worthwhile IMO.

How about batch *to* the charities? It's just not very practical IMO. They just aren't geared for that. I'd have to field inquiries why I'd stopped giving and/or am I now going to give steadily at the 2x rate? It's worth something to me to avoid that.

How about costs? I would donate the 2x shares late in the odd calendar years and have the DAF give the proceeds to the charities right at the end of the odd year and beginning of the following even year say a week later. 0.6% fee on that main corpus of donations would be negligible. Separately, I'd put and keep $15k extra in the DAF, the Vang minimum, to avoid the extra $250 annual fee accounts <$15k. But 0.6% on $15k is $90/yr, not significant in the overall picture IMO.

Plus, the DAF would give flexibility for larger multi-X batches if there's a big unexpected bump in income, say an eventual cg distribution, or we sell our house (far over $500k cg exclusion) where again 0.60% is only one half the equation, the other being the reduction in annual burning of charitable donations between $10k and $24k. However in normal years the ~$45k is ~15% of AGI so a 2x batch is at the 30% AGI limit for deducting donation of appreciated assets. So, use of the DAF wouldn't actually allow us to shift away from cash donations toward stock donations. The mix would probably have to be same as now or even slightly more cash than now to stay under the 30% limit (though any excess above 30% technically carries over, again up to $14k of the carry over would be swallowed, defeating the purpose of batching).

Not to bore everyone with personal details, but some of the slightly contentious exchange above could be, as often seems the case, people thinking about their own different cases and arguing past one another. In our case I'm pretty convinced the DAF is the way to go.
Yes, everyone's situation is different and people make different choices.

I will point out that with the Fidelity DAF, you don't have to worry about a minimum balance requirement. And I don't know what Vanguard does when you contribute, but Fidelity has a very nice setup where it shows your tax lots in your brokerage account and suggests ones to donate.

DAF contributions also make a nice complement to ROTH IRA conversions.
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Re: Donor-advised fund versus direct stock donation

Post by grabiner »

wickywack wrote: Sat Jul 27, 2019 12:02 pm
grabiner wrote: Wed Jul 24, 2019 11:20 pm And if you still have money in the donor-advised fund when you turn 70-1/2, you need to use that money for your charitable donations, rather than getting the more favorable tax treatment of qualified charitable distributions. (You can always take advantage of your good market returns to do both.)
I'm confused by this statement. If I have a DAF, does that limit my ability to do a QCD instead in a given year? I know you cannot do a QCD to a DAF, but I'm not aware of any other interactions.
It doesn't limit your ability; this is why I mentioned you could do both in the next sentence. However, if you have already put as much money in the DAF as you want to donate to charity, then you won't make QCDs because you don't intend to make the additional donation.

But if the reason that you have enough money in the DAF is that the market performed well, then you can probably afford to donate more to charity, so you may well make your regular DAF donation and also make a QCD.
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