Daf (donor-advised fund) strategies

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RevFran
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Daf (donor-advised fund) strategies

Post by RevFran » Tue Jun 30, 2020 4:42 am

I am wondering how many years in advance people fund their DAF. Also, if you find massively in year x, do you also give for that year out if your income, not out of your DAF? I am likely to have reduced income 2021 and 2022 (because I will be taking a sabbatical at half pay) and am considering trying to get my income from my usual 24% bracket to somewhere near the bottom middle of 12 and doing large Roth conversions. But to do so would probably mean funding my giving for the next two decades! I’d like feedback on that idea (if it is germane, I am single and 43), but also a sense of how other people tax-strategize their Dafs.

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Stinky
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Re: Daf (donor-advised fund) strategies

Post by Stinky » Tue Jun 30, 2020 4:59 am

RevFran wrote:
Tue Jun 30, 2020 4:42 am
I am wondering how many years in advance people fund their DAF.
Based on prior threads, you’re going to get responses all over the place.

For us, the DAF funding came when we had a large position of highly appreciated stock in a single company, and that company was being bought out for cash. To avoid the capital gains tax at the time of the buyout, we donated a lot of the stock to a DAF, and allocated the funds within the DAF to the S&P 500 fund.

With the stock market appreciation since 2014 offsetting a lot of the grants from the DAF, we’ll likely have enough in the DAF to last two decades.
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motorcyclesarecool
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Re: Daf (donor-advised fund) strategies

Post by motorcyclesarecool » Tue Jun 30, 2020 5:44 am

RevFran wrote:
Tue Jun 30, 2020 4:42 am
I am wondering how many years in advance people fund their DAF.
It all depends on how much money I have available and what my giving intentions are.
RevFran wrote:
Tue Jun 30, 2020 4:42 am
Also, if you find massively in year x, do you also give for that year out if your income, not out of your DAF?
I would say it depends on:
1. How massively, and
2. Are you funding it with cash, or with appreciated securities held in a taxable account?

When donating appreciated shares held longer than a year, we can deduct up to 30% of our AGI in that tax year. The excess beyond that can be carried over for up to five years according to this article. https://www.forbes.com/sites/brucebrumb ... cc0e9acb3a

When donating cash, we can deduct a total of 60% of our AGI in that tax year. So, I can envision a scenario where it might make sense to make a massive contribution of appreciated shares to a DAF, deduct 30% today, and spread the remainder of that deduction out over the following (up to) five years, provided the person reasonably expects to itemize in those years. In that initial year, depending on how big one wanted to go, it appears that one could possibly donate an additional 30% of AGI in cash to the DAF to reach the 60% of AGI threshold.

But wait! There’s more! This year, under the CARES act, one can donate cash direct to charities, (but not to private foundations or Donor-Advised Funds) up to 100% of AGI, and deduct that, too. So, In this unique year, with a mountain of appreciated stock and cash in taxable accounts, it appears that you could take an immediate deduction of 100% of AGI broken down accordingly:
30% appreciated shares to DAF
30% cash to DAF
40% cash to the actual charities you support.

Article with CARES act information: https://www.forbes.com/sites/berniekent ... 09d8df58da
RevFran wrote:
Tue Jun 30, 2020 4:42 am
I am likely to have reduced income 2021 and 2022 (because I will be taking a sabbatical at half pay) and am considering trying to get my income from my usual 24% bracket to somewhere near the bottom middle of 12 and doing large Roth conversions. But to do so would probably mean funding my giving for the next two decades!
I’m a little confused. Are you intending to reduce your income in 2020, the the following two years, or all three years?
RevFran wrote:
Tue Jun 30, 2020 4:42 am
I’d like feedback on that idea (if it is germane, I am single and 43), but also a sense of how other people tax-strategize their Dafs.
I used a DAF to help me digest a windfall. I continue to use a DAF to help me punch above my weight by using money earmarked for charities to buy index fund shares in Taxable, harvest any losses they generate, and deduct the appreciated shares. I also use it to “bunch” my deductions in alternating tax years.

Does this help?

Since you’re looking at a long time horizon, you may want to take a look at Qualifying Charitable Contributions from deductible retirement accounts as a way to blunt the pain of RMDs, as well. (I’d rather take a guaranteed deduction today, but it’s worth balancing the two).
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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RevFran
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Re: Daf (donor-advised fund) strategies

Post by RevFran » Tue Jun 30, 2020 6:51 am

Motorcycles: thanks! The long-term planning of donating from RMDs is worth remembering, to be sure. To your question about the scenario I’m entertaining, I am not planning to contribute significantly to my DAF in 2020. I am thinking ahead to 2021 and 2022 (the ramification first 2020 would be that if I were sure I were going to do this in 2021, I would likely defer some of my second/half/of/2020 giving to 1-2021).

I’ll check with my CPA to confirm that one could give 30% appreciated securities *and* 30% cash.

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Re: Daf (donor-advised fund) strategies

Post by jebmke » Tue Jun 30, 2020 8:01 am

In the last year before I retired I loaded a DAF with 10 years of donations, facing 10 years of low tax rate before starting pension. About half way through the 10 years we had a remnant individual stock get bought out so I dumped the stock in the DAF rather than take the gain. With RMD moved out and the standard deduction increased, the new DAF will more than get us to RMD when we can use qualified charitable deductions from RMDs instead of the DAF. By then, the DAF will have spanned 17 years.
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Re: Daf (donor-advised fund) strategies

Post by aristotelian » Tue Jun 30, 2020 9:55 am

Two decades worth is probably too much. At that point the recurring AUM fee will offset much of the tax benefit. I think 3-4 years is the sweet spot if that's enough to itemize.

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Re: Daf (donor-advised fund) strategies

Post by lstone19 » Tue Jun 30, 2020 10:19 am

aristotelian wrote:
Tue Jun 30, 2020 9:55 am
Two decades worth is probably too much. At that point the recurring AUM fee will offset much of the tax benefit. I think 3-4 years is the sweet spot if that's enough to itemize.
Not the way I view it. Assets in the DAF are no longer yours and the fee is paid from those assets, not from your own funds. You get the tax benefit when you donate to the DAF. Even if you never recommend a grant and the entire amount you donated is consumed by fees (an extreme case to be sure), you still received the tax benefit and you personally have no fees to be paid that offset the tax benefit. Since the fees are paid out of what you donated, in the long run, the fees are paid by the charities as fees result in them receiving less than if there were no fees (whatever you donate to a DAF (plus growth/income) either goes to charities or to fees - it can never come back to you).

I think people make what is in my opinion the mistake of thinking funds in a DAF as their money (and some people then try to include in their funds for purposes of their AA). It's no longer your money. The DAFs give the illusion of it being your money by letting you recommend how it be invested and distributed but it's not your money.

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Re: Daf (donor-advised fund) strategies

Post by jebmke » Tue Jun 30, 2020 10:24 am

lstone19 wrote:
Tue Jun 30, 2020 10:19 am
Not the way I view it. Assets in the DAF are no longer yours and the fee is paid from those assets, not from your own funds.
Yes, can be looked at two different ways and neither are "wrong." In our case, we will be donating X whether or not the DAF has enough assets so if there is net leakage due to taxes and fees, we will make up the difference.
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Re: Daf (donor-advised fund) strategies

Post by Stinky » Tue Jun 30, 2020 10:39 am

aristotelian wrote:
Tue Jun 30, 2020 9:55 am
Two decades worth is probably too much. At that point the recurring AUM fee will offset much of the tax benefit. I think 3-4 years is the sweet spot if that's enough to itemize.
The way that I look at it, the AUM fee is being paid for by the taxes that I’m saving on the dividends inside the DAF fund.

At a 2% dividend rate on equities, the tax savings pretty much offsets the 60bp annual fee.
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Re: Daf (donor-advised fund) strategies

Post by aristotelian » Tue Jun 30, 2020 10:48 am

lstone19 wrote:
Tue Jun 30, 2020 10:19 am
aristotelian wrote:
Tue Jun 30, 2020 9:55 am
Two decades worth is probably too much. At that point the recurring AUM fee will offset much of the tax benefit. I think 3-4 years is the sweet spot if that's enough to itemize.
Not the way I view it. Assets in the DAF are no longer yours and the fee is paid from those assets, not from your own funds. You get the tax benefit when you donate to the DAF. Even if you never recommend a grant and the entire amount you donated is consumed by fees (an extreme case to be sure), you still received the tax benefit and you personally have no fees to be paid that offset the tax benefit. Since the fees are paid out of what you donated, in the long run, the fees are paid by the charities as fees result in them receiving less than if there were no fees (whatever you donate to a DAF (plus growth/income) either goes to charities or to fees - it can never come back to you).

I think people make what is in my opinion the mistake of thinking funds in a DAF as their money (and some people then try to include in their funds for purposes of their AA). It's no longer your money. The DAFs give the illusion of it being your money by letting you recommend how it be invested and distributed but it's not your money.
But if the stocks had stayed in your own brokerage account, there would be no AUM fee and you'd have more funds to donate to the DAF in the future than if you donated everything at once and waited 20 years while Fidelity is scraping .6% every year. If you are seeking to maximize the amount you are going to donate, you want to balance the AUM fees versus the tax savings. The longer the funds sit in the DAF, the more time the AUM has to catch up to the one-time tax saving.

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Re: Daf (donor-advised fund) strategies

Post by aristotelian » Tue Jun 30, 2020 10:52 am

Stinky wrote:
Tue Jun 30, 2020 10:39 am
aristotelian wrote:
Tue Jun 30, 2020 9:55 am
Two decades worth is probably too much. At that point the recurring AUM fee will offset much of the tax benefit. I think 3-4 years is the sweet spot if that's enough to itemize.
The way that I look at it, the AUM fee is being paid for by the taxes that I’m saving on the dividends inside the DAF fund.

At a 2% dividend rate on equities, the tax savings pretty much offsets the 60bp annual fee.
Even in the 15% bracket for qualified dividends, 60 bps is double the tax on dividends.

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Re: Daf (donor-advised fund) strategies

Post by Stinky » Tue Jun 30, 2020 11:40 am

aristotelian wrote:
Tue Jun 30, 2020 10:52 am
Stinky wrote:
Tue Jun 30, 2020 10:39 am
aristotelian wrote:
Tue Jun 30, 2020 9:55 am
Two decades worth is probably too much. At that point the recurring AUM fee will offset much of the tax benefit. I think 3-4 years is the sweet spot if that's enough to itemize.
The way that I look at it, the AUM fee is being paid for by the taxes that I’m saving on the dividends inside the DAF fund.

At a 2% dividend rate on equities, the tax savings pretty much offsets the 60bp annual fee.
Even in the 15% bracket for qualified dividends, 60 bps is double the tax on dividends.
15 + 5 (qualified divs surcharge) + 3.8 (Medicare surtax) = 23.8%

Plus state tax for many of us.

It can easily get right up to 30% tax rate on qualified dividends.
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Re: Daf (donor-advised fund) strategies

Post by willthrill81 » Tue Jun 30, 2020 12:00 pm

As it stands right now, I'm thinking that for a few years before I retire, we'll make substantial contributions to a DAF, up to the 50% limit that is typical in most years (it's 100% this year as a result of the CARES act). This is in order to overcome the 'hurdle' of the much higher than historical standard deduction these days. If we didn't do this, we wouldn't be able to deduct any of our charitable contributions until age 72, when you become eligible to make qualified charitable distributions (QCDs). This will also enable us to do much larger Roth conversions than we could otherwise because the contributions to the DAF will bring down our AGI considerably. It should be a big win-win.
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Re: Daf (donor-advised fund) strategies

Post by FelixTheCat » Tue Jun 30, 2020 12:07 pm

I fund my DAF based on how the market is doing. I trim a little off my taxable account and send it to my DAF during good years. I have about 9 years funded based on my auto scheduled grants.
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RevFran
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Re: Daf (donor-advised fund) strategies

Post by RevFran » Tue Jun 30, 2020 12:16 pm

lstone19 wrote:
Tue Jun 30, 2020 10:19 am
I think people make what is in my opinion the mistake of thinking funds in a DAF as their money (and some people then try to include in their funds for purposes of their AA).
Perhaps rather than thinking about the DAF$ as part of one's AA, it would be instructive to think of that money as reducing one's expenses. If one would otherwise give, say, $1.000/month to charity, money in a DAF reduces one's expense line by 1k/month.

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Re: Daf (donor-advised fund) strategies

Post by afan » Tue Jun 30, 2020 12:19 pm

AUM fees: Except for charities that immediately spend every dollar as soon as it comes in, they have management costs for their assets as well. A better comparison might be whether your DAF fees are higher or lower than those of the charity. That is, the charity might be better off if you held the money in your DAF for 5 years then donated the initial amount plus growth to the charity than if the charity held it.

According to this report for some colleges for three years, the mean cost of managing endowments was bout 1.4%. Your 0.6 in a DAF looks pretty good in comparison. I suppose you could get the DAF costs up if you put the investments in private equity and hedge funds like many endowments do. But if you stick with index funds, you may be beating your charities by a mile.

The ideal strategy will depend on your circumstances. If you itemize every year, then putting money into the DAF every year is fine.
If you need to bunch donations to get enough to itemize then you should do that. No ideal number of years. Give as much as you would like for a period of time. That could be every other year or every 20 years. As others have noted using the DAF could also protect you from realizing taxable gains.
Depends on your overall finances.
Last edited by afan on Tue Jun 30, 2020 12:29 pm, edited 1 time in total.
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Re: Daf (donor-advised fund) strategies

Post by lstone19 » Tue Jun 30, 2020 12:20 pm

aristotelian wrote:
Tue Jun 30, 2020 10:48 am
But if the stocks had stayed in your own brokerage account, there would be no AUM fee and you'd have more funds to donate to the DAF in the future than if you donated everything at once and waited 20 years while Fidelity is scraping .6% every year. If you are seeking to maximize the amount you are going to donate, you want to balance the AUM fees versus the tax savings. The longer the funds sit in the DAF, the more time the AUM has to catch up to the one-time tax saving.
But in the meantime, you'd be paying taxes on dividends and if mutual funds, capital gains distributions. Couple that with, at least for our situation, thanks to the change in the standard deduction, it made sense to donate a large chunk of appreciated securities to cover several (but not 20) years worth of donations. The only deductions we currently have are SALT (limited to $10k) and donations so that's a $14k nut to cover every year we want to make deductible donations.

I suppose part of the difference is your approach. It sounds like many people have their donation plans set for several years to the extent of they will donate $X each year with the plan to make up any shortfall in the DAF with other funds. Therefore they see themselves as paying the AUM. Our plans are much looser and if the DAF balance is smaller than we hoped, we'll revise our giving plans. The AUM causes us to have less to donate but will not cause us to make it up with other funds. We'll north of 60 so QCDs are in our later plans but between now and then, the DAF with whatever it currently has will be our donation vehicle. So to us, the charitable recipients are the ones paying the AUM as it causes less to be available for them to receive.

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Re: Daf (donor-advised fund) strategies

Post by FIREchief » Tue Jun 30, 2020 4:30 pm

willthrill81 wrote:
Tue Jun 30, 2020 12:00 pm
If we didn't do this, we wouldn't be able to deduct any of our charitable contributions until age 72, when you become eligible to make qualified charitable distributions (QCDs).
Didn't the QCD age remain at 70 1/2, despite the RMD age moving to 72?
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Re: Daf (donor-advised fund) strategies

Post by FIREchief » Tue Jun 30, 2020 4:34 pm

RevFran wrote:
Tue Jun 30, 2020 4:42 am
I am wondering how many years in advance people fund their DAF.
I was awake at the wheel in December of 2017 and we funded our DAF to support planned contributions to QCD age. Had we not done so, the larger standard deduction coupled with declining Roth conversions would have robbed us of a lot of the tax advantages of charitable deductions.
I am not a lawyer, accountant or financial advisor. Any advice or suggestions that I may provide shall be considered for entertainment purposes only.

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Re: Daf (donor-advised fund) strategies

Post by jebmke » Tue Jun 30, 2020 4:46 pm

FIREchief wrote:
Tue Jun 30, 2020 4:30 pm
willthrill81 wrote:
Tue Jun 30, 2020 12:00 pm
If we didn't do this, we wouldn't be able to deduct any of our charitable contributions until age 72, when you become eligible to make qualified charitable distributions (QCDs).
Didn't the QCD age remain at 70 1/2, despite the RMD age moving to 72?
yes; but it is less compelling if not coupled with RMD requirement.
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Re: Daf (donor-advised fund) strategies

Post by Vanguard Fan 1367 » Tue Jun 30, 2020 4:59 pm

jebmke wrote:
Tue Jun 30, 2020 4:46 pm
FIREchief wrote:
Tue Jun 30, 2020 4:30 pm
willthrill81 wrote:
Tue Jun 30, 2020 12:00 pm
If we didn't do this, we wouldn't be able to deduct any of our charitable contributions until age 72, when you become eligible to make qualified charitable distributions (QCDs).
Didn't the QCD age remain at 70 1/2, despite the RMD age moving to 72?
yes; but it is less compelling if not coupled with RMD requirement.
Thanks for that info. I have an inherited IRA with a RMD. I probably will do a QCD at 70.5 years for that RMD.
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Re: Daf (donor-advised fund) strategies

Post by FIREchief » Tue Jun 30, 2020 5:04 pm

jebmke wrote:
Tue Jun 30, 2020 4:46 pm
FIREchief wrote:
Tue Jun 30, 2020 4:30 pm
willthrill81 wrote:
Tue Jun 30, 2020 12:00 pm
If we didn't do this, we wouldn't be able to deduct any of our charitable contributions until age 72, when you become eligible to make qualified charitable distributions (QCDs).
Didn't the QCD age remain at 70 1/2, despite the RMD age moving to 72?
yes; but it is less compelling if not coupled with RMD requirement.
That all depends upon the situation. If somebody doesn't have the first world problem of being "forced" to take RMDs that are larger than the withdrawals they would otherwise be making, than the RMD aspect is irrelevant.
I am not a lawyer, accountant or financial advisor. Any advice or suggestions that I may provide shall be considered for entertainment purposes only.

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Re: Daf (donor-advised fund) strategies

Post by willthrill81 » Tue Jun 30, 2020 6:12 pm

FIREchief wrote:
Tue Jun 30, 2020 5:04 pm
jebmke wrote:
Tue Jun 30, 2020 4:46 pm
FIREchief wrote:
Tue Jun 30, 2020 4:30 pm
willthrill81 wrote:
Tue Jun 30, 2020 12:00 pm
If we didn't do this, we wouldn't be able to deduct any of our charitable contributions until age 72, when you become eligible to make qualified charitable distributions (QCDs).
Didn't the QCD age remain at 70 1/2, despite the RMD age moving to 72?
yes; but it is less compelling if not coupled with RMD requirement.
That all depends upon the situation. If somebody doesn't have the first world problem of being "forced" to take RMDs that are larger than the withdrawals they would otherwise be making, than the RMD aspect is irrelevant.
Yes, I forgot about RMDs being pushed back to 72. Good catch.

We would probably do QCDs starting at 70.5. It would depend on many factors.
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Re: Daf (donor-advised fund) strategies

Post by johnny » Wed Jul 01, 2020 8:47 am

Funded our DAF with two years planned contributions last year as I had the cash and a high income year. The contribution dropped us to a lower tax bracket. Now I'm slowly drawing down. Depending on income in 2021 we may add to it again.

I do not consider it part of our overall portfolio as the time horizon is much shorter (so far).

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