Open a DAF?

Non-investing personal finance issues including insurance, credit, real estate, taxes, employment and legal issues such as trusts and wills
mybogledhead
Posts: 30
Joined: Wed Feb 04, 2015 10:25 pm

Open a DAF?

Postby mybogledhead » Tue Jan 10, 2017 2:06 pm

Good morning,

My wife and I would like to be more intentional about our charitable giving, as currently she just writes a check to some organization whenever they ask or the mood strikes. The amount always varies, and because of this (absent) plan we didn't approach our charitable goals for 2016. A donor advised fund with regular, monthly contributions seems like a good alternative. I've thought it might be nice to open a DAF fund now for the tax break (our tax bracket is in the 30's), dispense some of it but try grow it over the years and then use it for charitable contributions in retirement so that we don't have to take it from our retirement income (when we hopefully won't need the tax break as much), but I don't know where the rubber hits the road on that thought process.

We have about $12K in a taxable account with Schwab that I opened when I first became interested in personal finance. I left the money there (for the most part) when I moved over to Vanguard in order to avoid paying taxes on the gains.

Would you advise us to utilize the money in the taxable account to open a DAF and jumpstart our charitable giving for the year, keep it in taxable where we would add to it and donate appreciated shares directly, or something else?

User avatar
dm200
Posts: 10705
Joined: Mon Feb 26, 2007 2:21 pm
Location: Washington DC area

Re: Open a DAF?

Postby dm200 » Tue Jan 10, 2017 2:17 pm

mybogledhead wrote:Good morning,
My wife and I would like to be more intentional about our charitable giving, as currently she just writes a check to some organization whenever they ask or the mood strikes. The amount always varies, and because of this (absent) plan we didn't approach our charitable goals for 2016. A donor advised fund with regular, monthly contributions seems like a good alternative. I've thought it might be nice to open a DAF fund now for the tax break (our tax bracket is in the 30's), dispense some of it but try grow it over the years and then use it for charitable contributions in retirement so that we don't have to take it from our retirement income (when we hopefully won't need the tax break as much), but I don't know where the rubber hits the road on that thought process.
We have about $12K in a taxable account with Schwab that I opened when I first became interested in personal finance. I left the money there (for the most part) when I moved over to Vanguard in order to avoid paying taxes on the gains.
Would you advise us to utilize the money in the taxable account to open a DAF and jumpstart our charitable giving for the year, keep it in taxable where we would add to it and donate appreciated shares directly, or something else?


I am a big fan of DAFs. We use Fidelity because of the lower thresholds for opening the DAF and for "grants".

The timing of an organizations need for funds (or your desire to fund it) often vary from the best timing of tax deductions. A DAF solves that timing issue. The ability to make anonymous donations to various appeals/requests can keep you off of many added mailing lists as well.

pshonore
Posts: 4944
Joined: Sun Jun 28, 2009 2:21 pm

Re: Open a DAF?

Postby pshonore » Tue Jan 10, 2017 3:24 pm

And donating appreciated shares (held long term) is a good way to do it. Fido makes it very easy (and Schwab probably does too).

User avatar
dm200
Posts: 10705
Joined: Mon Feb 26, 2007 2:21 pm
Location: Washington DC area

Re: Open a DAF?

Postby dm200 » Tue Jan 10, 2017 3:36 pm

Especially with small organizations, there can be difficulties in donating appreciated share of stock or mutual funds.

With a small donation, the amount desired may not fit with a number of shares.
The organization may not be familiar with procedures to deal with such donations.
"delivering" a small number of shares can be more of a challenge.
If you wish to donate an exact number of dollars, the market price of the donated shares can change (up or down) every day.

J295
Posts: 823
Joined: Sun Jan 01, 2012 11:40 pm

Re: Open a DAF?

Postby J295 » Tue Jan 10, 2017 3:42 pm

Heartily recommend Fidelity.

We only contribute highly appreciated stock (as you probably know, this avoids capital gains and generates an immediate charitable contribution deduction).

We typically make larger contributions in those years where our income was particularly high (often bunching this with two years of real estate tax payments).

Note: while the forum rightfully does not engage in dialogue regarding future legislation, it is prudent to be mindful of the ongoing media coverage about the apparent possibilities of a material increase in the personal exemptions as you do your 2017 planning.

desiderium
Posts: 553
Joined: Sat Jan 04, 2014 11:08 am

Re: Open a DAF?

Postby desiderium » Wed Jan 11, 2017 9:07 am

I would not suggest using the DAF to grow a charitable nest egg at your age. Personal investing for retirement is a necessity wrought by a system where pensions have all but disappeared for most people. And it is critical that this succeeds. Better to invest for yourself, and if your savings and portfolio performance are comfortable enough, you can increase your donations later.

For now, I would give what you want to charity every year. Use the DAF as a mechanism to offload appreciated shares for this purpose. For convenience, you can make one contribution a year that corresponds with your budget, then replace that money in your taxable account through savings. You can distribute the money to your preferred organizations at your own pace.

User avatar
dm200
Posts: 10705
Joined: Mon Feb 26, 2007 2:21 pm
Location: Washington DC area

Re: Open a DAF?

Postby dm200 » Wed Jan 11, 2017 9:59 am

desiderium wrote:I would not suggest using the DAF to grow a charitable nest egg at your age. Personal investing for retirement is a necessity wrought by a system where pensions have all but disappeared for most people. And it is critical that this succeeds. Better to invest for yourself, and if your savings and portfolio performance are comfortable enough, you can increase your donations later.
For now, I would give what you want to charity every year. Use the DAF as a mechanism to offload appreciated shares for this purpose. For convenience, you can make one contribution a year that corresponds with your budget, then replace that money in your taxable account through savings. You can distribute the money to your preferred organizations at your own pace.


While there are some increased costs in a DAF, it seems to me that (where it makes sense for the person) long term growth is certainly possible in a DAF. Since the funds in a DAF are not yours, a creditor cannot take them. Asset protection is perfect! As far as age and time frame, if set up and managed properly, the funds in a DAF - and grant income to desired charities (including places of worship) - can continue indefinitely, even beyond your lifetime by designating successors to manage the funds in a DAF.

mybogledhead
Posts: 30
Joined: Wed Feb 04, 2015 10:25 pm

Re: Open a DAF?

Postby mybogledhead » Wed Jan 11, 2017 12:54 pm

Thanks for the feedback. I seems as though most would agree that opening a DAF is a good idea, and that contributing to the taxable account and then donating appreciated shares is the way to go (Ass opposed to donating cash straight to the DAF or an organization).

Of note:
desiderium wrote: Better to invest for yourself, and if your savings and portfolio performance are comfortable enough, you can increase your donations later.


We already save 25% of gross income into accounts slated for retirement. Not sure if that would change anyone's opinion.

letsgobobby
Posts: 9725
Joined: Fri Sep 18, 2009 1:10 am

Re: Open a DAF?

Postby letsgobobby » Wed Jan 11, 2017 1:20 pm

there can be some tax rate arbitrage opportunities with a DAF but you have to offset those with the ongoing costs of a DAF, which are 0.6% per year above and beyond the fees for the underlying investments. Over a very long period of time, measured in decades, that would add up to a substantial loss. Furthermore your tax deduction is maximized by donating the largest amount to charity. For example, you are better off donating $200 in appreciated securities rather than donating $100 and having it grow to $200. In either case your charity receives $200; but in the former you get a $200 deduction whereas in the latter you get only $100.

In general we do not allow funds to build up in our DAF. We did choose to make 2 years of donations to our DAF on Dec 30 2016, only because of our predictions about the direction of tax policy in 2017. It's not something we plan to do on a regular basis.

User avatar
dm200
Posts: 10705
Joined: Mon Feb 26, 2007 2:21 pm
Location: Washington DC area

Re: Open a DAF?

Postby dm200 » Wed Jan 11, 2017 1:31 pm

Although I have not used this feature of a DAF, others (perhaps friends or relatives) can also make a donation to YOUR DAF. While probably not appropriate for the majority of folks, it could be something helpful to some.

User avatar
PhysicianOnFIRE
Posts: 191
Joined: Fri Jan 08, 2016 3:46 pm
Location: Up North
Contact:

Re: Open a DAF?

Postby PhysicianOnFIRE » Wed Jan 11, 2017 4:20 pm

letsgobobby wrote:there can be some tax rate arbitrage opportunities with a DAF but you have to offset those with the ongoing costs of a DAF, which are 0.6% per year above and beyond the fees for the underlying investments. Over a very long period of time, measured in decades, that would add up to a substantial loss. Furthermore your tax deduction is maximized by donating the largest amount to charity. For example, you are better off donating $200 in appreciated securities rather than donating $100 and having it grow to $200. In either case your charity receives $200; but in the former you get a $200 deduction whereas in the latter you get only $100.

In general we do not allow funds to build up in our DAF. We did choose to make 2 years of donations to our DAF on Dec 30 2016, only because of our predictions about the direction of tax policy in 2017. It's not something we plan to do on a regular basis.


I currently consider the 0.6% fee for the DAF to be a wash when compared with the tax drag associated with holding funds in my taxable account. With a 2% dividend and ~30% tax on qualified dividends (15% + 3.8% ACA + ~10% state income tax) the tax drag on index funds is almost exactly 0.6%. If we lived in a no-income tax state or earned less, the tax drag would be lower, of course.

I donated $100,000 to our DAF this year, anticipating an early retirement in which I will be in a much lower tax bracket in the coming years. You were smart to double your contribution in 2016; there is a good chance we will see lower marginal rates soon.

User avatar
dm200
Posts: 10705
Joined: Mon Feb 26, 2007 2:21 pm
Location: Washington DC area

Re: Open a DAF?

Postby dm200 » Wed Jan 11, 2017 4:23 pm

I currently consider the 0.6% fee for the DAF to be a wash when compared with the tax drag associated with holding funds in my taxable account. With a 2% dividend and ~30% tax on qualified dividends (15% + 3.8% ACA + ~10% state income tax) the tax drag on index funds is almost exactly 0.6%. If we lived in a no-income tax state or earned less, the tax drag would be lower, of course.


Excellent point, in my opinion.

letsgobobby
Posts: 9725
Joined: Fri Sep 18, 2009 1:10 am

Re: Open a DAF?

Postby letsgobobby » Wed Jan 11, 2017 4:49 pm

PhysicianOnFIRE wrote:
letsgobobby wrote:there can be some tax rate arbitrage opportunities with a DAF but you have to offset those with the ongoing costs of a DAF, which are 0.6% per year above and beyond the fees for the underlying investments. Over a very long period of time, measured in decades, that would add up to a substantial loss. Furthermore your tax deduction is maximized by donating the largest amount to charity. For example, you are better off donating $200 in appreciated securities rather than donating $100 and having it grow to $200. In either case your charity receives $200; but in the former you get a $200 deduction whereas in the latter you get only $100.

In general we do not allow funds to build up in our DAF. We did choose to make 2 years of donations to our DAF on Dec 30 2016, only because of our predictions about the direction of tax policy in 2017. It's not something we plan to do on a regular basis.


I currently consider the 0.6% fee for the DAF to be a wash when compared with the tax drag associated with holding funds in my taxable account. With a 2% dividend and ~30% tax on qualified dividends (15% + 3.8% ACA + ~10% state income tax) the tax drag on index funds is almost exactly 0.6%. If we lived in a no-income tax state or earned less, the tax drag would be lower, of course.

I donated $100,000 to our DAF this year, anticipating an early retirement in which I will be in a much lower tax bracket in the coming years. You were smart to double your contribution in 2016; there is a good chance we will see lower marginal rates soon.

I agree that immediately prior to an extended period of lower income, such as retirement, it may be wise to frontload multiple years of donations.

The cost of the DAF vs tax drag should, of course, be calculated on an individual basis. I happen to live in a no income tax state, so my calculation favors delaying contributions.

inbox788
Posts: 3100
Joined: Thu Mar 15, 2012 5:24 pm

Re: Open a DAF?

Postby inbox788 » Thu Jan 12, 2017 5:30 am

letsgobobby wrote:there can be some tax rate arbitrage opportunities with a DAF but you have to offset those with the ongoing costs of a DAF, which are 0.6% per year above and beyond the fees for the underlying investments. Over a very long period of time, measured in decades, that would add up to a substantial loss. Furthermore your tax deduction is maximized by donating the largest amount to charity. For example, you are better off donating $200 in appreciated securities rather than donating $100 and having it grow to $200. In either case your charity receives $200; but in the former you get a $200 deduction whereas in the latter you get only $100.

In general we do not allow funds to build up in our DAF. We did choose to make 2 years of donations to our DAF on Dec 30 2016, only because of our predictions about the direction of tax policy in 2017. It's not something we plan to do on a regular basis.

I like how DAF decouples donation for tax deduction vs charity receiving funds. So when I have high tax years, I donate more, and in some years less, but can still give from funds in the DAF, and if they're not fully utilized, can grow if the market grows. But the advantage is growing in a taxable account and donating a larger amount later (vs letting it grow tax benefit free in the DAF) as long as there isn't any reduction in tax rate.
(it's also helpful at tax time where I don't have to track and report each donation separately, just those to the DAF)

desiderium
Posts: 553
Joined: Sat Jan 04, 2014 11:08 am

Re: Open a DAF?

Postby desiderium » Thu Jan 12, 2017 9:50 am

mybogledhead wrote:Thanks for the feedback. I seems as though most would agree that opening a DAF is a good idea, and that contributing to the taxable account and then donating appreciated shares is the way to go (Ass opposed to donating cash straight to the DAF or an organization).

Of note:
desiderium wrote: Better to invest for yourself, and if your savings and portfolio performance are comfortable enough, you can increase your donations later.


We already save 25% of gross income into accounts slated for retirement. Not sure if that would change anyone's opinion.


It's up to you. Donate generously. It doesn't really matter whether you accumulate funds in a daf or empty the daf to your favorite charities because the daf is itself a charity. After transferring to the daf you just moving money around that is no longer your own

User avatar
dm200
Posts: 10705
Joined: Mon Feb 26, 2007 2:21 pm
Location: Washington DC area

Re: Open a DAF?

Postby dm200 » Thu Jan 12, 2017 10:38 am

I like how DAF decouples donation for tax deduction vs charity receiving funds.


Many fine charities and places of worship, for various reasons, are not equipped or even able, to properly and efficiently utilize irregular donations. They are best off (again for various reasons) by receiving regular annual donations over longer periods. A DAF can help with this dependable stream of income over a period of years.


Return to “Personal Finance (Not Investing)”

Who is online

Users browsing this forum: athan, BashDash, Bob's not my name, communipaw, djheini, Google [Bot], jebmke, LookingForward, SurfCityBill and 64 guests