Donor Advised funds

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jdilla1107
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Donor Advised funds

Post by jdilla1107 » Sat Nov 11, 2017 1:03 pm

Let's say I am faced with the choice between:

1) Donating $X per year over 10 years to charity
2) Donating $10X all in one year to a donor advised fund and dispersing $X to charity annually

I didn't think of it this way before, but #2 seems better for the following reasons:

- It expands my limited tax deferred space.
- It allows for tax free growth. (Put in 10 years worth, probably get 12 years worth out)
- A tax deduction now is more valuable than one in the future (ie: I would rather have $10 today than $1 per year for 10 years)

The only reason I can think of where a donor advised fund would not end up better, is if the tax deduction would be worth more in the future than it is today. (ie: substantial increase to my own income or change in tax rates)

Am I missing anything? Are these a pretty clear win for people who can pre-fund their annual giving? Does anyone have any strong preference between Fidelity and Vanguard charitable for a DAF?

Thanks.

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TheTimeLord
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Re: Donor Advised funds

Post by TheTimeLord » Sat Nov 11, 2017 1:07 pm

jdilla1107 wrote:
Sat Nov 11, 2017 1:03 pm
Let's say I am faced with the choice between:

1) Donating $X per year over 10 years to charity
2) Donating $10X all in one year to a donor advised fund and dispersing $X to charity annually

I didn't think of it this way before, but #2 seems better for the following reasons:

- It expands my limited tax deferred space.
- It allows for tax free growth. (Put in 10 years worth, probably get 12 years worth out)
- A tax deduction now is more valuable than one in the future (ie: I would rather have $10 today than $1 per year for 10 years)

The only reason I can think of where a donor advised fund would not end up better, is if the tax deduction would be worth more in the future than it is today. (ie: substantial increase to my own income or change in tax rates)

Am I missing anything? Are these a pretty clear win for people who can pre-fund their annual giving? Does anyone have any strong preference between Fidelity and Vanguard charitable for a DAF?

Thanks.
There is no guarantee it will go up in value and a small percentage of the assets that you donated to the foundation running the donor advised fund goes to them annually. Personally, I would go with Fidelity for a DAF.
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cherijoh
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Re: Donor Advised funds

Post by cherijoh » Sat Nov 11, 2017 1:19 pm

jdilla1107 wrote:
Sat Nov 11, 2017 1:03 pm
Let's say I am faced with the choice between:

1) Donating $X per year over 10 years to charity
2) Donating $10X all in one year to a donor advised fund and dispersing $X to charity annually

I didn't think of it this way before, but #2 seems better for the following reasons:

- It expands my limited tax deferred space.
- It allows for tax free growth. (Put in 10 years worth, probably get 12 years worth out)
- A tax deduction now is more valuable than one in the future (ie: I would rather have $10 today than $1 per year for 10 years)

The only reason I can think of where a donor advised fund would not end up better, is if the tax deduction would be worth more in the future than it is today. (ie: substantial increase to my own income or change in tax rates)

Am I missing anything? Are these a pretty clear win for people who can pre-fund their annual giving? Does anyone have any strong preference between Fidelity and Vanguard charitable for a DAF?

Thanks.
Could you please explain how it expands your limited tax deferred space? I think I must be mising something - I don't see the connection between the two.

I opened a DAF this year and chose Fidelity because you can recommend smaller grants(?) to charities.

I decided to do a DAF because:
  • I had appreciated shares in a taxable investment account and it is a hassle to donate them to a charity directly and some smaller non-profits may not be able to handle it at all
  • I will be retiring soon and expect to be in a lower tax bracket but want to continue my charitable giving
  • I expect to leave at least part of my estate to charity

J295
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Re: Donor Advised funds

Post by J295 » Sat Nov 11, 2017 1:33 pm

Bunch them with a DAF, then take the standard deduction in other years (especially if you have essentially no other Schedule A deductions -- and note the possibility that the standard deduction may be increasing materially).

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Artsdoctor
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Re: Donor Advised funds

Post by Artsdoctor » Sat Nov 11, 2017 2:10 pm

DAFs are the way to go for all the reasons you outlined and more. The only small obstacle is that you can't really legally commit to donating $X each year (as in, "I pledge to donate $X each year over the next 10 years). However, if it's a non-binding and recurrent donation, no problem.

One thing I'd recommend regarding mental accounting. You mentioned that the DAF would increase YOUR tax-deferred space but I'm not sure what you mean. It's true that your DAF may increase in value depending on how you invest it and that you'd pay no tax on the appreciation. But in reality, once you fund the DAF, it's no longer your money. It's the DAF's money and you are essentially advising the fund to make a charitable distribution from time to time.

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dm200
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Re: Donor Advised funds

Post by dm200 » Sat Nov 11, 2017 2:21 pm

#2 increases "asset protection" in that, since the money is gone from you - no judgment, lawsuit or stupid financial decision can take any money from you.

Of course, if it turned out you really needed the money - it is long gone.

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dm200
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Re: Donor Advised funds

Post by dm200 » Sat Nov 11, 2017 2:23 pm

Artsdoctor wrote:
Sat Nov 11, 2017 2:10 pm
DAFs are the way to go for all the reasons you outlined and more. The only small obstacle is that you can't really legally commit to donating $X each year (as in, "I pledge to donate $X each year over the next 10 years). However, if it's a non-binding and recurrent donation, no problem.
One thing I'd recommend regarding mental accounting. You mentioned that the DAF would increase YOUR tax-deferred space but I'm not sure what you mean. It's true that your DAF may increase in value depending on how you invest it and that you'd pay no tax on the appreciation. But in reality, once you fund the DAF, it's no longer your money. It's the DAF's money and you are essentially advising the fund to make a charitable distribution from time to time.
In the last few years, our Fidelity DAF has "clarified" the distinction between a legally binding "pledge" and what is often requested in certain fundraising campaigns of a non-binding pledge or intent.

Also, I have never had a requested "grant" denied by Fidelity either.

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GerryL
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Re: Donor Advised funds

Post by GerryL » Sat Nov 11, 2017 2:24 pm

Being very conscious (now) of the importance of expenses in investing, I do not sock away money in my DAF, which, by its nature, is more expensive thant my Boglehead-ish portfolio. At some point each year I donate to the DAF around the amount that I expect to give to various charities in the next 12 months. At some point in the future I may double up my annual donations and skip every other year to manage taxes, but I don't regard the DAF as an investment vehicle.

Braumeister
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Re: Donor Advised funds

Post by Braumeister » Sat Nov 11, 2017 2:28 pm

I love my FIDO DAF. Had it for quite a few years because it's much more flexible than Vanguard's version.

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dm200
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Re: Donor Advised funds

Post by dm200 » Sat Nov 11, 2017 2:31 pm

Braumeister wrote:
Sat Nov 11, 2017 2:28 pm
I love my FIDO DAF. Had it for quite a few years because it's much more flexible than Vanguard's version.
Yes - we chose FIDO DAF for the same reasons - lower donation threshold to fund initially, lower added donation minimum and being able to request grants in lower amounts. Of course, the FIDO expense added ratio is a little higher, though --- BUT well worth the capabilities and flexibility we get.

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FIREchief
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Re: Donor Advised funds

Post by FIREchief » Sat Nov 11, 2017 2:33 pm

jdilla1107 wrote:
Sat Nov 11, 2017 1:03 pm
- It allows for tax free growth. (Put in 10 years worth, probably get 12 years worth out)
This one is not valid. Consider this example. I intend to contribute $100K of appreciated shares to a DAF over the next ten years. I will be in the 25% tax bracket for all funds involved.

A) I contribute $100K immediately. I receive a tax deduction worth $25K.

b) I contribute $50K now ($12,500 tax deduction) and leave the remaining $50K invested for ten years. That $50K grows to $100K (but I've paid no taxes on the capital gains). I now contribute that $100K and receive a $25K deduction.

I've received $37,500 in deductions by delaying half of the DAF contribution vs. $25,000 if I contribute it all immediately.

note: I ignored inflation and dividends, but they won't change the decision in this example

Now, if for some reason you won't be able to fully deduct the future contribution; then the correct decision could change.
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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FIREchief
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Re: Donor Advised funds

Post by FIREchief » Sat Nov 11, 2017 2:34 pm

dm200 wrote:
Sat Nov 11, 2017 2:31 pm
Braumeister wrote:
Sat Nov 11, 2017 2:28 pm
I love my FIDO DAF. Had it for quite a few years because it's much more flexible than Vanguard's version.
Yes - we chose FIDO DAF for the same reasons - lower donation threshold to fund initially, lower added donation minimum and being able to request grants in lower amounts. Of course, the FIDO expense added ratio is a little higher, though --- BUT well worth the capabilities and flexibility we get.
Another thumbs up for Fidelity Charitable. The VG DAF is only slightly cheaper in a very narrow (meaningless) range.
Last edited by FIREchief on Sat Nov 11, 2017 5:39 pm, edited 1 time in total.
I am not a lawyer, accountant or financial advisor. Any advice or suggestions that I may provide shall be considered for entertainment purposes only.

motorcyclesarecool
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Re: Donor Advised funds

Post by motorcyclesarecool » Sat Nov 11, 2017 2:34 pm

jdilla1107 wrote:
Sat Nov 11, 2017 1:03 pm
Does anyone have any strong preference between Fidelity and Vanguard charitable for a DAF?
Fidelity has a lower minimum initial donation, a lower minimum grant amount, and I have found their customer service and app to be excellent. Have a look at Schwab DAF as well.
Understand that choosing an HDHP is very much a "red pill" approach. Most would rather pay higher premiums for a $20 copay per visit. They will think you weird for choosing an HSA.

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dm200
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Re: Donor Advised funds

Post by dm200 » Sat Nov 11, 2017 2:37 pm

There are also some "niche" DAFs - often associated with particular religious denominations. An entity associated with my denomination has one, but I do not participate.

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Re: Donor Advised funds

Post by Gill » Sat Nov 11, 2017 2:54 pm

I recently moved mine from Fidelity to Vanguard to consolidate everything at Vanguard and also it is considerably easier to make contributions to the DAF from my taxable Vanguard account.
Gill

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Peter Foley
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Re: Donor Advised funds

Post by Peter Foley » Sat Nov 11, 2017 3:16 pm

Just to emphasize a couple of the DAF advantages mentioned here.

It allows you to donate appreciated shares and not pay taxes.
You can donate specific amounts to the DAF in a given year that provide additional tax relief elsewhere: e.g., donate enough to remain in the 15% tax bracket so dividends and long term capital gains (tax gain harvesting?) in one's taxable account are not taxed.
Donate amounts that help you to bunch deductions and itemize in one year and take a standard deduction in another year.

I've not understood the argument to not use a DAF because the expenses are slightly higher. After the donation, as artsdoctor states, "it's no longer your money." So as long as the expenses aren't outrageous, why would one care?

I use the Schwab DAF and it is very user friendly with low minimums and the ability to grant relatively small amounts.

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Re: Donor Advised funds

Post by jebmke » Sat Nov 11, 2017 3:34 pm

Peter Foley wrote:
Sat Nov 11, 2017 3:16 pm
It allows you to donate appreciated shares and not pay taxes.
You don't need a DAF to do this but it can make the process simpler once the DAF is set up.

Donor Advised Funds also have value for making donations (grants) anonymously.
Peter Foley wrote:
Sat Nov 11, 2017 3:16 pm


I've not understood the argument to not use a DAF because the expenses are slightly higher. After the donation, as artsdoctor states, "it's no longer your money." So as long as the expenses aren't outrageous, why would one care?
For the same reason I would look at the administrative expenses in a charity. I want the ultimate recipient to get the most possible.
Last edited by jebmke on Sat Nov 11, 2017 3:38 pm, edited 1 time in total.
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dm200
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Re: Donor Advised funds

Post by dm200 » Sat Nov 11, 2017 3:38 pm

Another advantage is the ability to make anonymous "grants". If, for example, you were to donate even a small amount to a charity, chances are you would be bombarded by US Mail, email and possibly phone calls for regular and/or future donations.

While I agree that expenses matter in the slightly higher expense ratios of money in a DAF, I believe that, depending on details, the benefits can be well worth the cost.

If, for tax or other reasons, you wish to make relatively large "charitable" donations and have a desired entity to support over many years with that one time large donation, it is often the fact that, for many reasons, excellent "charities" are not able to use a relatively big chunk of money over a multi-year term. The obstacles might be organizational, denominational, philosophical, legal or that the folks running the entity are incapable or incompetent in this financial/budgetary task. I am a big supporter of such an "entity" which is outstanding in what it does (outreach/support of folks in remote third world country). I fund it through several times a year grant requests from a lump sum FIDO DAF made many years ago. For multiple reasons, this very deserving entity could not or would not spread my larger donation over many years. In addition, to elaborate, since this entity is 100% transparent to donors about the income, assets retained and funds remitted/spent - there would be the appearance (and fact) that these funds were sitting "in the bank" (this entity cannot do anything else with retained funds) - and would/could cause requested donations/fundraising to be harmed.

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dm200
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Re: Donor Advised funds

Post by dm200 » Sat Nov 11, 2017 3:39 pm

dm200 wrote:
Sat Nov 11, 2017 2:37 pm
There are also some "niche" DAFs - often associated with particular religious denominations. An entity associated with my denomination has one, but I do not participate.
I wonder if any folks have funded such a "denominational" DAF and how it worked out? I believe such DAFs really want you to use the funds for denominational causes. How much they can or cannot restrict other grants is something that I do not know -- and why I stay with FIDO.

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Re: Donor Advised funds

Post by jebmke » Sat Nov 11, 2017 3:41 pm

dm200 wrote:
Sat Nov 11, 2017 2:37 pm
There are also some "niche" DAFs - often associated with particular religious denominations. An entity associated with my denomination has one, but I do not participate.
Community Foundations also have a niche here. They are a good way to make endowments to community organizations that do not have the organization or other skills to manage endowment-type fund raising.
When you discover that you are riding a dead horse, the best strategy is to dismount.

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dm200
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Re: Donor Advised funds

Post by dm200 » Sat Nov 11, 2017 3:42 pm

Some otherwise fine charitable or religious entities are also not good (actually might be terrible) at accepting and processing appreciated shares of stock and mutual funds. DAFs are experts and do this all the time.

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dm200
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Re: Donor Advised funds

Post by dm200 » Sat Nov 11, 2017 3:46 pm

Every year, I make small ($50) grants to places of worship (2 different denominations) in my hometown (400 miles away) in memory of deceased members of those families (my parents, grandparents) that were members of those places of worship. While the amounts are small - these places really need every penny they can get because of the overall economic decline in that area of the country. Some years, when the DAF balances go up (as in 2017), I double or triple what I send these places. To one, I might say "General donation in memory of deceased members of the Smith and Jones families" and the other "deceased members of the Johnson and Harris families".
Last edited by dm200 on Sat Nov 11, 2017 3:48 pm, edited 1 time in total.

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Artsdoctor
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Re: Donor Advised funds

Post by Artsdoctor » Sat Nov 11, 2017 3:47 pm

dm200 wrote:
Sat Nov 11, 2017 2:23 pm
Artsdoctor wrote:
Sat Nov 11, 2017 2:10 pm
DAFs are the way to go for all the reasons you outlined and more. The only small obstacle is that you can't really legally commit to donating $X each year (as in, "I pledge to donate $X each year over the next 10 years). However, if it's a non-binding and recurrent donation, no problem.
One thing I'd recommend regarding mental accounting. You mentioned that the DAF would increase YOUR tax-deferred space but I'm not sure what you mean. It's true that your DAF may increase in value depending on how you invest it and that you'd pay no tax on the appreciation. But in reality, once you fund the DAF, it's no longer your money. It's the DAF's money and you are essentially advising the fund to make a charitable distribution from time to time.
In the last few years, our Fidelity DAF has "clarified" the distinction between a legally binding "pledge" and what is often requested in certain fundraising campaigns of a non-binding pledge or intent.

Also, I have never had a requested "grant" denied by Fidelity either.
This is true. I have met with several charities who have no problem "releasing" the legal commitment to annual contributions. I think where this would really come into play is a capital fund (perhaps a very large pledge for a building) where the charity will really rely on that steady contribution. The charities realistically would have this happen rarely and for people like you and me, the DAF will serve our purposes perfectly.

I've used both Fidelity and Vanguard, and both are excellent. The reason I've had two is only because it is easier (and perhaps less error-prone) to transfer over specific lots of appreciated shares. People have sworn that it's extremely easy to transfer over specific shares from one institution to another but I never wanted to take the chance.

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dm200
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Re: Donor Advised funds

Post by dm200 » Sat Nov 11, 2017 3:55 pm

This is true. I have met with several charities who have no problem "releasing" the legal commitment to annual contributions. I think where this would really come into play is a capital fund (perhaps a very large pledge for a building) where the charity will really rely on that steady contribution. The charities realistically would have this happen rarely and for people like you and me, the DAF will serve our purposes perfectly.
I've used both Fidelity and Vanguard, and both are excellent. The reason I've had two is only because it is easier (and perhaps less error-prone) to transfer over specific lots of appreciated shares. People have sworn that it's extremely easy to transfer over specific shares from one institution to another but I never wanted to take the chance.
On the other side of the fence, I have been part of an entity's building fund and later Capital campaign where we really pressed a multi-year pledge (3-5 years). There were several reasons: 1. Out excellent consultant (worth every penny) advised we would do much better speaking of, say, $1,000 not and each year for the next 3 years vs asking for $4,000 now and 2. The bureaucratic reasons of being contractually able to proceed with the expenditures and contracts and bids and 3. being able to draw on a denominational "line of credit" to be part of the plan. We made it 100% clear that such "pledges" were not, in any way, a legally enforceable one.

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Re: Donor Advised funds

Post by aristotelian » Sat Nov 11, 2017 4:05 pm

Do you already itemize? If X small amount barely gets you over, the 10 small donations don't get you anything. However, 90% of the 10X would be deductible. Note that standard deduction may increase which would further arguing for you taking it now.

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Re: Donor Advised funds

Post by letsgobobby » Sat Nov 11, 2017 4:08 pm

jdilla1107 wrote:
Sat Nov 11, 2017 1:03 pm
Let's say I am faced with the choice between:

1) Donating $X per year over 10 years to charity
2) Donating $10X all in one year to a donor advised fund and dispersing $X to charity annually

I didn't think of it this way before, but #2 seems better for the following reasons:

- It expands my limited tax deferred space.
- It allows for tax free growth. (Put in 10 years worth, probably get 12 years worth out)
- A tax deduction now is more valuable than one in the future (ie: I would rather have $10 today than $1 per year for 10 years)

The only reason I can think of where a donor advised fund would not end up better, is if the tax deduction would be worth more in the future than it is today. (ie: substantial increase to my own income or change in tax rates)

Am I missing anything? Are these a pretty clear win for people who can pre-fund their annual giving? Does anyone have any strong preference between Fidelity and Vanguard charitable for a DAF?

Thanks.
You've got it backwards. It doesn't expand your tax deferred space, but the charity's. It's not your tax deferred space, but the charity's. For exactly that reason, not to mention the costs, you proposal is inferior.

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Re: Donor Advised funds

Post by jebmke » Sat Nov 11, 2017 4:25 pm

letsgobobby wrote:
Sat Nov 11, 2017 4:08 pm
You've got it backwards. It doesn't expand your tax deferred space, but the charity's. It's not your tax deferred space, but the charity's. For exactly that reason, not to mention the costs, you proposal is inferior.
Right. Absent administrative or other reasons such as those DM200 elaborated on, bunching usually only make sense if there is a tax-rate play.
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Re: Donor Advised funds

Post by Artsdoctor » Sat Nov 11, 2017 5:55 pm

jebmke wrote:
Sat Nov 11, 2017 4:25 pm
letsgobobby wrote:
Sat Nov 11, 2017 4:08 pm
You've got it backwards. It doesn't expand your tax deferred space, but the charity's. It's not your tax deferred space, but the charity's. For exactly that reason, not to mention the costs, you proposal is inferior.
Right. Absent administrative or other reasons such as those DM200 elaborated on, bunching usually only make sense if there is a tax-rate play.
This is a good point, but there are other things to consider as well.

Over the years, I've come to appreciate donating appreciated shares as a rebalancing method. During prolonged bull markets, I'll make relatively large contributions to my DAFs; during bear markets, I'll make few to none. My decision to make grant recommendations will then be based on "my" DAF balance, and not my individual portfolio balance.

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Re: Donor Advised funds

Post by jebmke » Sat Nov 11, 2017 6:13 pm

Artsdoctor wrote:
Sat Nov 11, 2017 5:55 pm
Over the years, I've come to appreciate donating appreciated shares as a rebalancing method. During prolonged bull markets, I'll make relatively large contributions to my DAFs; during bear markets, I'll make few to none. My decision to make grant recommendations will then be based on "my" DAF balance, and not my individual portfolio balance.
I agree. There is a factor to consider regarding how you view the DAF. We use ours strictly as a vehicle. If we are going to give a charity $10,000 then they are going to get $10,000 regardless of what the balance is in the DAF. To the extent that there is cost leakage, then it matters -- but not to them. I want to deliver $10K in a cost effective way. So, without a financial reason to carry a balance in the DAF I'm likely to wait. In our case, there is a carry advantage. We had a window post retirement with a very low tax rate. So the carry is primarily to cover that window. Once that window closes, it will be back to using it primarily in pass-through mode.
When you discover that you are riding a dead horse, the best strategy is to dismount.

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Re: Donor Advised funds

Post by letsgobobby » Sat Nov 11, 2017 6:24 pm

Artsdoctor wrote:
Sat Nov 11, 2017 5:55 pm
jebmke wrote:
Sat Nov 11, 2017 4:25 pm
letsgobobby wrote:
Sat Nov 11, 2017 4:08 pm
You've got it backwards. It doesn't expand your tax deferred space, but the charity's. It's not your tax deferred space, but the charity's. For exactly that reason, not to mention the costs, you proposal is inferior.
Right. Absent administrative or other reasons such as those DM200 elaborated on, bunching usually only make sense if there is a tax-rate play.
This is a good point, but there are other things to consider as well.

Over the years, I've come to appreciate donating appreciated shares as a rebalancing method. During prolonged bull markets, I'll make relatively large contributions to my DAFs; during bear markets, I'll make few to none. My decision to make grant recommendations will then be based on "my" DAF balance, and not my individual portfolio balance.
There are other points to consider and a lot to like about DAFs (we use one, as well). But OP’s points aren’t among them.

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Re: Donor Advised funds

Post by Sidney » Sat Nov 11, 2017 6:31 pm

Anonymity is probably the number one reason we use one. Much of our giving is local. The only way to stay off lists, getting called and having to go to local events is to make the donations anonymously. Even the local financial firms (wealth management) tap into the donor lists for client prospecting.
I always wanted to be a procrastinator.

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Re: Donor Advised funds

Post by Artsdoctor » Sat Nov 11, 2017 6:46 pm

Sidney wrote:
Sat Nov 11, 2017 6:31 pm
Anonymity is probably the number one reason we use one. Much of our giving is local. The only way to stay off lists, getting called and having to go to local events is to make the donations anonymously. Even the local financial firms (wealth management) tap into the donor lists for client prospecting.
Could not agree with you more.

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Re: Donor Advised funds

Post by jdilla1107 » Sat Nov 11, 2017 9:01 pm

letsgobobby wrote:
Sat Nov 11, 2017 4:08 pm

You've got it backwards. It doesn't expand your tax deferred space, but the charity's. It's not your tax deferred space, but the charity's. For exactly that reason, not to mention the costs, you proposal is inferior.
Either the money sits in my taxable account or the DAF. If the money sits in my taxable account, then I will pay taxes on the interest.

The point here is that once I decide to give money to charity (now or over 10 years), the money is no longer mine in both senses. It can either grow in my taxable account (where I pay taxes) or in the DAF (where I don't).

I realize this is a bit of mental accounting, but I still maintain that it expands my tax deferred space. (Because I will pay less in taxes each year, if I use a DAF) '

The second idea is that I get to "keep" growth in a DAF because that growth can be used to pay for future years charitable payments.
Last edited by jdilla1107 on Sat Nov 11, 2017 9:19 pm, edited 1 time in total.

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Re: Donor Advised funds

Post by jdilla1107 » Sat Nov 11, 2017 9:05 pm

jebmke wrote:
Sat Nov 11, 2017 4:25 pm
letsgobobby wrote:
Sat Nov 11, 2017 4:08 pm
You've got it backwards. It doesn't expand your tax deferred space, but the charity's. It's not your tax deferred space, but the charity's. For exactly that reason, not to mention the costs, you proposal is inferior.
Right. Absent administrative or other reasons such as those DM200 elaborated on, bunching usually only make sense if there is a tax-rate play.
This statement simply ignores the time value of money. $10 now is worth more than $10 in the future. Either the federal govt can give me $10 today, or $1 over 10 years. (through a tax deduction)

letsgobobby
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Re: Donor Advised funds

Post by letsgobobby » Sat Nov 11, 2017 9:26 pm

jdilla1107 wrote:
Sat Nov 11, 2017 9:01 pm
letsgobobby wrote:
Sat Nov 11, 2017 4:08 pm

You've got it backwards. It doesn't expand your tax deferred space, but the charity's. It's not your tax deferred space, but the charity's. For exactly that reason, not to mention the costs, you proposal is inferior.
Either the money sits in my taxable account or the DAF. If the money sits in my taxable account, then I will pay taxes on the interest.

The point here is that once I decide to give money to charity (now or over 10 years), the money is no longer mine in both senses. It can either grow in my taxable account (where I pay taxes) or in the DAF (where I don't).

I realize this is a bit of mental accounting, but I still maintain that it expands my tax deferred space. (Because I will pay less in taxes each year, if I use a DAF) '

The second idea is that I get to "keep" growth in a DAF because that growth can be used to pay for future years charitable payments.
You’ve missed something essential, which is that in your account, it grows - tax deferred capital gains, too, as long as you don’t sell - and then when you donate you get a larger deduction. That’s money in your pocket.

Your example: donate $10,000 to DAF. It grows to $20,000 over ten years. You give $20,000 to charity and get a 25% deduction worth $2500 in your pocket (in the 25% bracket).

My example: keep $10,000 in taxable, It grows to $19,500 over ten years (granting you the 0.5% tax drag along the way). You then donate that to charity. Your charities get $19,500. You get a $4875 tax break.

I’ll take $4875 in my pocket over $2500 any day. The charities are short $500 but I can make that up to them out of the $2375 difference I have in my pocket.

jdilla1107
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Re: Donor Advised funds

Post by jdilla1107 » Sat Nov 11, 2017 9:35 pm

letsgobobby wrote:
Sat Nov 11, 2017 9:26 pm
jdilla1107 wrote:
Sat Nov 11, 2017 9:01 pm
letsgobobby wrote:
Sat Nov 11, 2017 4:08 pm

You've got it backwards. It doesn't expand your tax deferred space, but the charity's. It's not your tax deferred space, but the charity's. For exactly that reason, not to mention the costs, you proposal is inferior.
Either the money sits in my taxable account or the DAF. If the money sits in my taxable account, then I will pay taxes on the interest.

The point here is that once I decide to give money to charity (now or over 10 years), the money is no longer mine in both senses. It can either grow in my taxable account (where I pay taxes) or in the DAF (where I don't).

I realize this is a bit of mental accounting, but I still maintain that it expands my tax deferred space. (Because I will pay less in taxes each year, if I use a DAF) '

The second idea is that I get to "keep" growth in a DAF because that growth can be used to pay for future years charitable payments.
You’ve missed something essential, which is that in your account, it grows - tax deferred capital gains, too, as long as you don’t sell - and then when you donate you get a larger deduction. That’s money in your pocket.

Your example: donate $10,000 to DAF. It grows to $20,000 over ten years. You give $20,000 to charity and get a 25% deduction worth $2500 in your pocket (in the 25% bracket).

My example: keep $10,000 in taxable, It grows to $19,500 over ten years (granting you the 0.5% tax drag along the way). You then donate that to charity. Your charities get $19,500. You get a $4875 tax break.

I’ll take $4875 in my pocket over $2500 any day. The charities are short $500 but I can make that up to them out of the $2375 difference I have in my pocket.
True. I was imaging keeping only bonds in the DAF. So, I guess timeframe, risk profile, and investment choice does matter. Also, your point assumes stock growth and not a loss. It also makes me question whether I or the charity would be responsible for "making up" the loss.

However, this thread has made me realize that it would be best to donate appreciated shares regardless of what I end up holding in the DAF.

letsgobobby
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Re: Donor Advised funds

Post by letsgobobby » Sat Nov 11, 2017 9:59 pm

jdilla1107 wrote:
Sat Nov 11, 2017 9:35 pm
letsgobobby wrote:
Sat Nov 11, 2017 9:26 pm
jdilla1107 wrote:
Sat Nov 11, 2017 9:01 pm
letsgobobby wrote:
Sat Nov 11, 2017 4:08 pm

You've got it backwards. It doesn't expand your tax deferred space, but the charity's. It's not your tax deferred space, but the charity's. For exactly that reason, not to mention the costs, you proposal is inferior.
Either the money sits in my taxable account or the DAF. If the money sits in my taxable account, then I will pay taxes on the interest.

The point here is that once I decide to give money to charity (now or over 10 years), the money is no longer mine in both senses. It can either grow in my taxable account (where I pay taxes) or in the DAF (where I don't).

I realize this is a bit of mental accounting, but I still maintain that it expands my tax deferred space. (Because I will pay less in taxes each year, if I use a DAF) '

The second idea is that I get to "keep" growth in a DAF because that growth can be used to pay for future years charitable payments.
You’ve missed something essential, which is that in your account, it grows - tax deferred capital gains, too, as long as you don’t sell - and then when you donate you get a larger deduction. That’s money in your pocket.

Your example: donate $10,000 to DAF. It grows to $20,000 over ten years. You give $20,000 to charity and get a 25% deduction worth $2500 in your pocket (in the 25% bracket).

My example: keep $10,000 in taxable, It grows to $19,500 over ten years (granting you the 0.5% tax drag along the way). You then donate that to charity. Your charities get $19,500. You get a $4875 tax break.

I’ll take $4875 in my pocket over $2500 any day. The charities are short $500 but I can make that up to them out of the $2375 difference I have in my pocket.
True. I was imaging keeping only bonds in the DAF. So, I guess timeframe, risk profile, and investment choice does matter. Also, your point assumes stock growth and not a loss. It also makes me question whether I or the charity would be responsible for "making up" the loss.

However, this thread has made me realize that it would be best to donate appreciated shares regardless of what I end up holding in the DAF.
A loss would be good, too. Then I could tax loss harvest, subtracting $3000 from my taxable income each year (or more, if I had gains to offset those losses).

And yes, donating appreciated shares is the only way to go with DAFs!

IowaFarmBoy
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Re: Donor Advised funds

Post by IowaFarmBoy » Sun Nov 12, 2017 6:26 am

You may want to take tax brackets into consideration, too. For example, if you are $5000 into a higher tax bracket and you want to contribute a total of $50k over the ten years, if you do it all in year one, $5k will offset the higher bracket but $45 will reduce income in the lower bracket. If you donate $5k each year, it all counts at the higher bracket.

Another thing to keep in mind are the IRS limits on deduction for donations. Roughly, you can deduct 30% of AGI if donating property like appreciated stocks and 50% if donating cash. I think you can carry excess deductions forward.
IRS document 526 discsusses charitable contributions: https://www.irs.gov/pub/irs-pdf/p526.pdf


I am generally doing what you are proposing, I'm just a few years out from retirement so I am using a donor advised fund to keep me out of the 25% bracket. I'm not going too crazy with this because of loss of flexibility and expenses, but I should have several years of donation covered which will help bridge the income gap until I start drawing SS.

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dm200
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Re: Donor Advised funds

Post by dm200 » Sun Nov 12, 2017 8:24 am

Artsdoctor wrote:
Sat Nov 11, 2017 6:46 pm
Sidney wrote:
Sat Nov 11, 2017 6:31 pm
Anonymity is probably the number one reason we use one. Much of our giving is local. The only way to stay off lists, getting called and having to go to local events is to make the donations anonymously. Even the local financial firms (wealth management) tap into the donor lists for client prospecting.
Could not agree with you more.
It is amazing how just one or two small donations can end up filling your mailbox with solicitations and your email with junk. These things grow like rabbits. Same with political donations and even inquiries. Unfortunately, I do not believe you can donate (legally) anonymously to a candidate.

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dm200
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Re: Donor Advised funds

Post by dm200 » Sun Nov 12, 2017 8:27 am

In our FIDO DAF we now aim for 59% US Equity, 9% International, 29% Fixed Income and 3% Money market. It is our intent and plan to use the DAF for much or most of our religious and charitable giving over many years - and, perhaps, pass it on to our adult child(ren) after we are unable to be active and are gone.

cherijoh
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Re: Donor Advised funds

Post by cherijoh » Sun Nov 12, 2017 10:46 am

jdilla1107 wrote:
Sat Nov 11, 2017 9:01 pm
letsgobobby wrote:
Sat Nov 11, 2017 4:08 pm

You've got it backwards. It doesn't expand your tax deferred space, but the charity's. It's not your tax deferred space, but the charity's. For exactly that reason, not to mention the costs, you proposal is inferior.
Either the money sits in my taxable account or the DAF. If the money sits in my taxable account, then I will pay taxes on the interest.

The point here is that once I decide to give money to charity (now or over 10 years), the money is no longer mine in both senses. It can either grow in my taxable account (where I pay taxes) or in the DAF (where I don't).

I realize this is a bit of mental accounting, but I still maintain that it expands my tax deferred space. (Because I will pay less in taxes each year, if I use a DAF) '

The second idea is that I get to "keep" growth in a DAF because that growth can be used to pay for future years charitable payments.
"Tax deferred space" refers to the maximum contribution limits related to traditional IRAs and workplace retirement plans - NOT at all what you are talking about. That's why everyone is either confused or disagreeing with you.

jdilla1107
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Re: Donor Advised funds

Post by jdilla1107 » Sun Nov 12, 2017 12:51 pm

cherijoh wrote:
Sun Nov 12, 2017 10:46 am
"Tax deferred space" refers to the maximum contribution limits related to traditional IRAs and workplace retirement plans - NOT at all what you are talking about. That's why everyone is either confused or disagreeing with you.
I think this forum commonly accepts that EE boonds and I Bonds expand tax deferred space. I think it's also reasonable to consider a 529 plan an extension of one's tax deferred space. So, if I hold bonds in a DAF, that seems like a logical extension to me. I personally visit this forum to be challenged about thinking in new ways. I have saved a ton of money by thinking critically through what people post here.

For a DAF, whether it's "legally my money" or "legally not my money" doesn't matter to me. I can consider myself equally committed to a charity, my child's education, or my retirement funding. They are all future liabilities in my mind.
Last edited by jdilla1107 on Sun Nov 12, 2017 5:02 pm, edited 1 time in total.

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dm200
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Re: Donor Advised funds

Post by dm200 » Sun Nov 12, 2017 12:55 pm

For a DAF, whether it's "legally my money" or "legally not my money" doesn't matter to me. I can consider myself equally committed to a charity, my child's education, or my retirement funding. They are all future liabilities in my mind.
In my opinion, this is a reasonable way of thinking.

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GerryL
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Re: Donor Advised funds

Post by GerryL » Sun Nov 12, 2017 5:29 pm

dm200 wrote:
Sun Nov 12, 2017 8:24 am
Artsdoctor wrote:
Sat Nov 11, 2017 6:46 pm
Sidney wrote:
Sat Nov 11, 2017 6:31 pm
Anonymity is probably the number one reason we use one. Much of our giving is local. The only way to stay off lists, getting called and having to go to local events is to make the donations anonymously. Even the local financial firms (wealth management) tap into the donor lists for client prospecting.
Could not agree with you more.
It is amazing how just one or two small donations can end up filling your mailbox with solicitations and your email with junk. These things grow like rabbits. Same with political donations and even inquiries. Unfortunately, I do not believe you can donate (legally) anonymously to a candidate.
Have you tried telling the charity NOT to add you to their mailing list? It may not always work, but some do have a do-not-mail list.

I was using the anonymity feature of my DAF with a couple of charities I was starting to give to and did not want to start getting their mailings. Then last year I wanted to apply for a special double match from my former employer for Homes for Our Troops and needed to get an acknowledgement from them. So I called and explained that I needed an acknowledgement but did not want to get mailings from them. They told me that was not a problem and would make sure I would be on their do-not-mail list -- which they did not sell. Smart fund raisers will realize that if they want you to continue giving, the last thing they should do is irritate you by ignoring a reasonable request.

jebmke
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Re: Donor Advised funds

Post by jebmke » Sun Nov 12, 2017 5:37 pm

GerryL wrote:
Sun Nov 12, 2017 5:29 pm
Then last year I wanted to apply for a special double match from my former employer for Homes for Our Troops and needed to get an acknowledgement from them. So I called and explained that I needed an acknowledgement but did not want to get mailings from them. They told me that was not a problem and would make sure I would be on their do-not-mail list -- which they did not sell. Smart fund raisers will realize that if they want you to continue giving, the last thing they should do is irritate you by ignoring a reasonable request.
I have been able to do this with the national/regional charities. One problem with the locals is that the people who are in charge of fundraising know who the major donors are and you are then in a whisper control mode. It is the word-of-mouth "lists" that can't be well controlled. And sometimes these are people you know and associate with in a different venue.
When you discover that you are riding a dead horse, the best strategy is to dismount.

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