Donor advised fund (DAF) vs. Charitable Lead Trust ( CLT) vs Periodic donation from brokerage

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James123
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Donor advised fund (DAF) vs. Charitable Lead Trust ( CLT) vs Periodic donation from brokerage

Post by James123 »

I was thinking of putting some money in a donor advised fund for current and future charity. My tax consultant suggested that I opt for a CLT instead of a DAF. I was told that with a CLT I might be able to get an almost similar tax deduction and also get significant money back at the end of the life of the trust.
I have done some basic research on internet and I will consult a trust lawyer in case I decide to opt for a CLT. But I do want to ask experienced members of this forum for their opinion. As a subcategory of CLT, any personal advantages of CLAT (annuity trust) compared to CLUT (Unitust).
Thank you for your advice.

Addendum

I have broadened the scope of the question based on some of the replies to the initial question. I would like to compare DAF vs CLT vs Periodic donation from brokerage account. Who ends up with most money in each strategy after 20 years - Donor/ grantor vs charity vs IRS
Last edited by James123 on Mon Oct 18, 2021 9:48 pm, edited 3 times in total.
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Re: Donor advised fund (DAF) vs. Charitable Lead Trust ( CLT)

Post by James123 »

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Last edited by James123 on Mon Oct 18, 2021 2:19 pm, edited 1 time in total.
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Re: Donor advised fund (DAF) vs. Charitable Lead Trust ( CLT)

Post by James123 »

I will appreciate any advice on this topic.
Thanks
Warm regards, | James
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Re: Donor advised fund (DAF) vs. Charitable Lead Trust ( CLT)

Post by 123 »

The trust options give some ability to "hold onto" some of principle of the trust in certain circumstances. DAFs are pretty simple and often more cost-effective, depending on the donor's agenda and the amount being funded. Trusts are often suggested to provide revenue for lawyers, accountants, investment managers, and insurance product salespeople with a carrot of some "money back" for the grantor (or their beneficiary). The IRS has tax regulations to cover any scenario, pick your poison.

The best suggestion might be to determine the amount that will be funded and compare the costs of a DAF at Fidelity, Schwab, and Vanguard versus the set-up and maintenance costs of a CLT.

How much would you expect the DAF/CLT to be funded with?

Of course you could have both. DAFs make it real easy to donate appreciated stock for funding purposes.
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Re: Donor advised fund (DAF) vs. Charitable Lead Trust ( CLT)

Post by senex »

Hi James, there may be only a handful of bogleheads qualified to comment on the nitty gritty of CLTs, and they might not have seen your message yet.

If you want the charity to receive money over time, and you want to keep any growth or residual after the stream of donations, it seems easiest to just donate annually to charity, rather than fund a DAF. What problem are you trying to solve by doing it upfront?
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Re: Donor advised fund (DAF) vs. Charitable Lead Trust ( CLT)

Post by bsteiner »

A charitable lead annuity trust provides an annuity to charity for a term of years. If the present value of the annuity payments is equal to the initial contribution, any assets remaining at the end of the term will go to (or, preferably, in further trust for) the younger generation, free of estate and gift tax.

It's especially attractive at current interest rates.

For example, at current interest rates, if you contribute $1 million, the trust could pay $55,415.18 per year to charity for 20 years. The present value of the annuity payments would be $1 million. So if there's anything left in the trust after 20 years, it will go to or in trust for the younger generation free of estate and gift taxes.

Of course, this only makes sense for someone who would otherwise make substantial charitable contributions.
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Re: Donor advised fund (DAF) vs. Charitable Lead Trust ( CLT)

Post by James123 »

Thanks to 123, Senex & Bsteiner for your replies.
I have broadened the scope of the question based on your replies to the initial question. I would like to compare DAF vs CLT vs Periodic donation from brokerage account. Who ends up with most money in each strategy after 20 years - Donor/grantor vs charity vs IRS
Warm regards, | James
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Re: Donor advised fund (DAF) vs. Charitable Lead Trust ( CLT) vs Periodic donation from brokerage

Post by senex »

James, you haven't mentioned heirs -- is that a deliberate omission?
Getting back to my question, what problem are you trying to solve? Are you trying to reduce estate tax, or income tax, or both?
The calculations you're seeking will vary depending on that point.
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Re: Donor advised fund (DAF) vs. Charitable Lead Trust ( CLT) vs Periodic donation from brokerage

Post by James123 »

Senex,
You ask a very good question - about the problem I'm trying to solve... My primary intention was to decrease taxes at the same time donate to charity. It will be an added bonus, if after 20 years my children (not a deliberate omission) can get some money. BTW its unlikely that our estate will be large enough that my children will have to pay inheritance tax. My tax consultant made CLT sound very attractive, but based on rough calculations I'm confused if using CLT is worth the additional headache. I'm trying to game out different scenarios, it seems to me that periodically donating to charity from my brokerage account might not be a bad option.
Warm regards, | James
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Re: Donor advised fund (DAF) vs. Charitable Lead Trust ( CLT)

Post by inbox788 »

bsteiner wrote: Mon Oct 18, 2021 3:35 pmFor example, at current interest rates, if you contribute $1 million, the trust could pay $55,415.18 per year to charity for 20 years. The present value of the annuity payments would be $1 million. So if there's anything left in the trust after 20 years, it will go to or in trust for the younger generation free of estate and gift taxes.
I'm not very familiar with CLTs, but it looks like basically an annuity with bond-like returns. Presumably, you have $1M to start the CLT. What's the initial tax break? Expected remainder? A CLUT might be worth looking into for higher returns.

If you put $1M in a DAF and invested it in a bond fund, you could subtract out the expected return, or choose 5-6% for Conservative Income Pool or Income Pool. I can't seem to think of what calculator to use, but you can probably make it taking out 5-10% for bonds and 20-25% mixed pool of the initial amount. Cash stream to charity isn't guaranteed, but likely.
https://www.fidelitycharitable.org/givi ... tion-pools

DAF is a brokerage, so not much difference other than who owns/controls the funds and tax benefits timing. What tax advantage do you have donating today vs. 3 years from now or a later date? All things being equal, if the investments/equities grow, you'd get a bigger tax deduction down the road.

Is the taxable brokerage investment in a diversified holding? Keeping it there is probably the best option as long as you're not running out of high tax bracket income to write off anytime soon.
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Re: Donor advised fund (DAF) vs. Charitable Lead Trust ( CLT) vs Periodic donation from brokerage

Post by grabiner »

If you are planning to donate the same amount either way direct stock donation from an index fund is slightly more efficient, as you lose less to dividend taxes than to fees on the DAF: Donor-advised fund versus direct stock donation If you need to bunch deductions, or want to contribute a lot to the DAF now and decide later where to donate it, then the DAF is a better deal.
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Re: Donor advised fund (DAF) vs. Charitable Lead Trust ( CLT)

Post by bsteiner »

inbox788 wrote: Tue Oct 19, 2021 7:41 pm
bsteiner wrote: Mon Oct 18, 2021 3:35 pmFor example, at current interest rates, if you contribute $1 million, the trust could pay $55,415.18 per year to charity for 20 years. The present value of the annuity payments would be $1 million. So if there's anything left in the trust after 20 years, it will go to or in trust for the younger generation free of estate and gift taxes.
I'm not very familiar with CLTs, but it looks like basically an annuity with bond-like returns. Presumably, you have $1M to start the CLT. What's the initial tax break? Expected remainder? A CLUT might be worth looking into for higher returns.
...
It would work in the same proportion if you contributed more or less than $1 million.

If it's a grantor trust, the initial tax benefit in my example would be a $1 million charitable deduction. You would be taxable on the trust's future income and gains. If it's not a grantor trust (you can set it up either way), there would be no initial deduction, the trust would be a separate taxpayer, and the trust would get a deduction for the annuity payments to charity.

The principal benefit of a charitable lead trust is that if the trust earns more than a 1% return (based on the interest rates currently in effect), there will be assets remaining at the end of the annuity term, which will go to (or, preferably, in further trust for) your family free of estate and gift tax.

An annuity trust is preferable to a unitrust since with a unitrust the required payments to charity will increase (assuming the trust earns more than 1% a year (based on current interest rates)).
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Re: Donor advised fund (DAF) vs. Charitable Lead Trust ( CLT) vs Periodic donation from brokerage

Post by James123 »

Thank you for all your replies. Are there any expenses for administering a CLT other than annual tax filing
Warm regards, | James
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Re: Donor advised fund (DAF) vs. Charitable Lead Trust ( CLT) vs Periodic donation from brokerage

Post by senex »

James, given that you don't expect to pay estate tax, it reduces to an income tax question.

If there were no standard deduction, or if you itemize every year, then donating annually would be, I believe, the best of all worlds (income-tax-wise and optionality-wise). But there *is* a large-ish standard deduction, which creates some situations (possibly yours, if you don't normally itemize) that significantly favor a one-time large donation.

If that's your case, and given your desire to distribute funds over several years, then it's a question of DAF vs CLT. If your one-time donation is $X, and the money grows faster than you expect, the main difference is what happens to the surplus: with the DAF, the surplus must go to a 501c3; with a CLT, the surplus can go to whomever you want (including, it seems, back to yourself). The potential estate benefits of the CLT are irrelevant to your case.

The DAF is very easy: enroll online, distribute funds online, no new tax filings, pretty low expenses. I've never used a CLT, but presumably has drafting cost and possibly annual tax filings.

I personally go the DAF route, for its simplicity. If my lump sum donation grows faster than I expected, great, I'm happy to keep the surplus in the charity world. If you value (a) a large deduction today AND (b) a "ceiling" on the amount the charity will receive, then maybe CLT is for you. If you go that route, please report back with your real world experience.
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Re: Donor advised fund (DAF) vs. Charitable Lead Trust ( CLT) vs Periodic donation from brokerage

Post by Lee_WSP »

As the CRT is an estate planning tool and your primary concern (possibly only concern) is to reduce your income tax today, I am confused as to why your tax professional even suggested it. Perhaps there is some pecuniary interest on their part? I don’t know, but it really doesn’t make any sense from where I sit.

You do not have to choose between a DAF & giving once a year or once a month or whatever you choose. The DAF is very flexible like that. In fact, there is no practical difference between annually giving to the DAF and directly to the charity of choice as far as your deductible amount goes. The DAF has a number of other benefits, but you didn’t ask that question.

I think you need to dig deep into whether you have any estate planning goals, any charitable giving goals, and determine whether the CRT makes more sense, whether a GRAT makes more sense, or whether continual giving to a DAF or direct to charity makes more sense.
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Re: Donor advised fund (DAF) vs. Charitable Lead Trust ( CLT) vs Periodic donation from brokerage

Post by senex »

Lee_WSP wrote: Wed Oct 20, 2021 1:44 pm As the CRT is an estate planning tool and your primary concern (possibly only concern) is to reduce your income tax today, I am confused as to why your tax professional even suggested it.
Lee, that was my instinct, but not being an attorney myself, I wasn't certain enough to say so. Thanks for pointing it out.

I'm imaging there may be an net worth benefit to the OP if a bunch of conditions hold: he wants annual gifts to charity, the annual amount is not income tax deductible to him, the sum would be deductible, he is willing to put the "money for charity" in risk assets that may go down in value, and if they go down, he's ok with the charity receiving less, but if they go up, he doesn't want the charity to keep the upside (he wants to keep the upside himself, with a ceiling on what the charity gets).

Say he wants to give max 5k/year to charity for 10 years, never more than that, and less if the market drops. Say direct giving 5k/year gives no tax benefit (he doesn't itemize) but a one time 50k gift would allow him to itemize.

Say he puts 50k in the DAF today. If he instructs the DAF to hold cash, the charity gets 5k/year, no more, no less. If he instructs the DAF to invest in VOO, he can disburse 5k/year to the charity, and he might run out before 10 years (too bad for the charity), or might have surplus. If surplus, it's locked in the DAF and must go to charity (any charity he chooses; good for the charity).

If instead he puts 50k into a CLAT, with himself as beneficiary (if you can do that), and puts the CLAT funds into VOO, he's in a similar situation, but if there is a surplus at year 10, he can transfer in kind back to his brokerage. If I understand it correctly (I may not).

I may be way off base. It isn't the sort of thing I personally would do. But maybe there's a place for it, if you want to bunch contributions while putting a ceiling on the charitable part, and have a chance of getting "some money back."
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Re: Donor advised fund (DAF) vs. Charitable Lead Trust ( CLT) vs Periodic donation from brokerage

Post by James123 »

Senex,
We did itemize for 2020. I have to see if we will also itemize this year. But your explanation really helped me understand the difference between various choices. I will keep you updated. Thank you!

Lee_WSP
I’m also not sure why my tax consultant suggested CLT. We did make a irrevocable trust a few years ago, at that time we didn’t go with a GRAT. You’re right, I do need to figure out my estate planning & charitable goals - I have only recently started thinking about this subject. Now that you mention it, GRAT is better than CLT for estate planning if charitable giving is not the primary goal.
Can you elaborate on some of things you mentioned:
- other advantages of DAF
- standard deduction having no role in making the decision to give annually directly to charity vs contributing a large lump sum to a DAF
Thank you for taking the time to answer my queries.
Warm regards, | James
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Re: Donor advised fund (DAF) vs. Charitable Lead Trust ( CLT) vs Periodic donation from brokerage

Post by Lee_WSP »

senex wrote: Wed Oct 20, 2021 3:45 pm Say he wants to give max 5k/year to charity for 10 years, never more than that, and less if the market drops. Say direct giving 5k/year gives no tax benefit (he doesn't itemize) but a one time 50k gift would allow him to itemize.

Say he puts 50k in the DAF today. If he instructs the DAF to hold cash, the charity gets 5k/year, no more, no less. If he instructs the DAF to invest in VOO, he can disburse 5k/year to the charity, and he might run out before 10 years (too bad for the charity), or might have surplus. If surplus, it's locked in the DAF and must go to charity (any charity he chooses; good for the charity).

If instead he puts 50k into a CLAT, with himself as beneficiary (if you can do that), and puts the CLAT funds into VOO, he's in a similar situation, but if there is a surplus at year 10, he can transfer in kind back to his brokerage. If I understand it correctly (I may not).

I may be way off base. It isn't the sort of thing I personally would do. But maybe there's a place for it, if you want to bunch contributions while putting a ceiling on the charitable part, and have a chance of getting "some money back."
A few facts might help you make more sense of the planning and work through it.

Naming yourself as beneficiary defeats the point.

The DAF allows an immediate deduction for the value when donated.

The CLAT allows a deduction of present value of the annuity stream.

The cost to setup the CLAT itself is not free, whereas the DAF is pretty close to free.
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Re: Donor advised fund (DAF) vs. Charitable Lead Trust ( CLT) vs Periodic donation from brokerage

Post by prd1982 »

If you go the DAF route, I would suggest only contributing enough to fund your charitable contributions until you have to take RMDs (currently 72). Then switch to using QCDs (Qualified Charitable Distribution) from your IRA. The money given as a QCD wasn’t taxed going into the IRA, and isn’t taxed coming out of the IRA.
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Re: Donor advised fund (DAF) vs. Charitable Lead Trust ( CLT) vs Periodic donation from brokerage

Post by Lee_WSP »

James123 wrote: Wed Oct 20, 2021 3:54 pm Senex,
We did itemize for 2020. I have to see if we will also itemize this year. But your explanation really helped me understand the difference between various choices. I will keep you updated. Thank you!

Lee_WSP
I’m also not sure why my tax consultant suggested CLT. We did make a irrevocable trust a few years ago, at that time we didn’t go with a GRAT. You’re right, I do need to figure out my estate planning & charitable goals - I have only recently started thinking about this subject. Now that you mention it, GRAT is better than CLT for estate planning if charitable giving is not the primary goal.
Can you elaborate on some of things you mentioned:
- other advantages of DAF
- standard deduction having no role in making the decision to give annually directly to charity vs contributing a large lump sum to a DAF
Thank you for taking the time to answer my queries.
DAF is cheaper. You can change charitable beneficiaries. It survives you. You'r successor can change the beneficiary. You get a larger deduction. The charity gets more present value. Etc.

If your itemized deductions are less than the standard, you receive no benefit from itemizing.
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Re: Donor advised fund (DAF) vs. Charitable Lead Trust ( CLT) vs Periodic donation from brokerage

Post by James123 »

As per my tax consultant, the initial plan was to put $ 1000 (example) in a CLD FOR 20 years. The charity will get approximately $1000 over20 years. The rest based on current interest rates and on 6% annual appreciation, about $1600 will go my heirs. Again in a grantor trust, I would have to pay the taxes.
After reading all the replies, my thoughts were as follows: Since I allready have irrevocable trust for my heirs, I thought simpler idea might be to put about $400 in DAF ( less tax deduction but no payment of future taxes) and put rest of the money in the existing irrevocable trust. Please let me know what you think.
Warm regards, | James
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Re: Donor advised fund (DAF) vs. Charitable Lead Trust ( CLT) vs Periodic donation from brokerage

Post by Lee_WSP »

Seems like a far simpler way to achieve your goals
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Re: Donor advised fund (DAF) vs. Charitable Lead Trust ( CLT) vs Periodic donation from brokerage

Post by James123 »

Thank you for helping me figure out a simple strategy for charity
Warm regards, | James
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Re: Donor advised fund (DAF) vs. Charitable Lead Trust ( CLT) vs Periodic donation from brokerage

Post by inbox788 »

James123 wrote: Fri Oct 22, 2021 8:53 pm As per my tax consultant, the initial plan was to put $ 1000 (example) in a CLD FOR 20 years. The charity will get approximately $1000 over20 years. The rest based on current interest rates and on 6% annual appreciation, about $1600 will go my heirs. Again in a grantor trust, I would have to pay the taxes.
After reading all the replies, my thoughts were as follows: Since I allready have irrevocable trust for my heirs, I thought simpler idea might be to put about $400 in DAF ( less tax deduction but no payment of future taxes) and put rest of the money in the existing irrevocable trust. Please let me know what you think.
I like how you're trying to make equivalent reductions and compare differences in tax treatment. It's a little like the lease or finance question and the size of the down payment, where like taxes, returns, interest rates and fees are really the differences.

The 400 in DAF seemed off when I was estimating 25% discount on a 6% pool return (more like 750 in DAF), though that was very rough guess. I think you got that from 1000/(1000+1600), but I don't think it's been discounted.

Future Value: $1,282.85 (400 PV @ 6% return)
https://www.calculator.net/future-value ... &x=59&y=33

Future Value: $1,839.28 (50/year x 20 years @ 6%)
https://www.calculator.net/future-value ... &x=87&y=14

Depending on which taxes and fees have been included in the $1600 CLD estimate, once you've adjusted and corrected for any different risks other differences will tell you whether there is any benefit to the complexity and restrictions.

Anyway, you might have to put in nearly $599 in the DAF to give the charity the equivalent amount (either cash stream or end value).
https://www.calculator.net/future-value ... &x=30&y=15

So this means the heirs only get about 1200 in the end, and that may still be taxable. Where the 400 difference from your 1600 CLD is still a mystery to me. [could it be the added tax deduction from the larger initial donation? FV($401 @ 32% marginal rate)?] FWIW, a 1% difference in returns or costs is also ballpark 400 FV difference.
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Re: Donor advised fund (DAF) vs. Charitable Lead Trust ( CLT) vs Periodic donation from brokerage

Post by shess »

I find the biggest advantage of a DAF is that you are leveraging a provider's overall system. Making repeat grants to any charity I have previously made a grant to is very easy, takes like a minute and involves no other people. It's not quite Amazon one-click ordering, but it's really clean, to the point where I have had cases where someone talked about a charity which improved their life and I made a contribution simply because it was easy. We use Vanguard Charitable, but I think Fidelity and Schwab and the other big ones are basically the same.

Contributions of assets direct from your brokerage isn't super hard, but IMHO it does involve more overhead, and only part of the overhead is amortized over multiple years (maybe you learn who to contact, but you have to contact them each year). Again, I can't emphasize enough how little effort it takes me to make a contribution using my DAF.

Yes, the expense ratio of the investments is higher in a DAF than the expense ratio of the underlying, and I would definitely consider this for charitable gifts which are far in the future. For something like a CLT or a private foundation, I think the real consideration is whether you are able to basically convert AUM-style costs into semi-fixed costs. If you have $10M to donate, that certainly is likely. At $1M, I'd guess it gets more ambiguous after you trade off costs against the infrastructure of an established DAF, at $100k I have troubles imagining any case where a CLT wins out unless you offload it onto the charity (colleges make it easy to do this kind of thing). The DAF would still win in that case on flexibility, though.

WRT to valuing the contribution, hopefully other posts have helped with that, but personally I find that comparing them is a little like attempting to compare an annuity to purchasing a bond (or stock). I can grant that there might be cases where the annuity is the better deal, but my baseline assumption is that the added complexity is something to be avoided for the relatively minor amounts gained. I'd rather spend focus on complexity in other areas where it can have higher benefits, and where it won't cause my executor and/or heirs to roll their eyes.
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Re: Donor advised fund (DAF) vs. Charitable Lead Trust ( CLT) vs Periodic donation from brokerage

Post by James123 »

Inbox788,
I did not understand your math, although I sort of roughly understand the principles. Could you compare $ 1000 in CLAT/ CLUT grantor trust with highest federal and NYC state , in a DAF(? $ 599)with the reminder gifted to a irrevocable trust vs periodic gifting if I Itemize. Thank you for crunching numbers!
Warm regards, | James
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Re: Donor advised fund (DAF) vs. Charitable Lead Trust ( CLT) vs Periodic donation from brokerage

Post by James123 »

Shess,
You make a valid point. Although you can also leverage existing infrastructure from providers such as Vanguard by opening brokerage account for a trust.
My understanding is that CLT can be paired with DAF
Warm regards, | James
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Re: Donor advised fund (DAF) vs. Charitable Lead Trust ( CLT) vs Periodic donation from brokerage

Post by shess »

James123 wrote: Mon Oct 25, 2021 8:20 am You make a valid point. Although you can also leverage existing infrastructure from providers such as Vanguard by opening brokerage account for a trust.
My understanding is that CLT can be paired with DAF
Just to be clear, I don't mean the investing infrastructure, I mean the granting infrastructure. The Vanguard Charitable DAF is kind of like a 401k or 529, where you have a limited number of portfolios available, which are mostly wrappers around an underlying (like a total-market portfolio which is a wrapper around VTI plus a small fee). Admittedly, I don't have a CLT, so I can't compare the granting experience, but my impression is that if you want to redirect the annuity benefit, you would likely contact an actual CLT administrator, who would then contact the charity, etc, etc. I guess if you were using something like Foundation Source, perhaps they have an automated checkout-style system in place with a pre-loaded database, since they're in the same granting ballpark as the big providers (I see they've granted almost $7B since inception, Vanguard Charitable grants almost $2B/year, Fidelity's DAF $9B/year).

I guess I'd say go do a CLT and report back so that we can have decision material. I have more highly-appreciated shares available that will want to fund something in the future :-).
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Re: Donor advised fund (DAF) vs. Charitable Lead Trust ( CLT) vs Periodic donation from brokerage

Post by James123 »

Admittedly, I don't have a CLT, so I can't compare the granting experience, but my impression is that if you want to redirect the annuity benefit, you would likely contact an actual CLT administrator, who would then contact the charity, etc, etc
Shess,
I think the trustee has that power. My understanding is that the grantor can be the trustee in a CLT.
Warm regards, | James
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