Donor Advised Fund: Am I thinking about this correctly?

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InvestorThom
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Donor Advised Fund: Am I thinking about this correctly?

Post by InvestorThom » Mon Sep 18, 2017 5:16 pm

In 2017 I will have an unusually high income year due to having to sell RSUs and stock options. All count as ordinary income along with salary and annual bonus. This throws me into the highest tax brackets. There doesn't appear to be a way to offset this year's income to lower the tax impact. I will consider myself fortunate and grin and bear it.

I am thinking however about opening a DAF and have read the wiki and several threads (along with other sources) on the topic. I am considering an initial funding of $100,000. While this amount will not put me in lower tax brackets, therefore reducing my tax obligations, it does allow me to at least control allocating some of my income where I want it vs. turning it over to the government to spend.

The simplified illustrative rationale:

Alternative A: Income of $800,000. Pay gobs of taxes.
Alternative B: Income of $800,000, reduced by $100,000 (contribution to DAF).

In Alternative A, I would net ~$50,000 of the $100,000 because of the high tax brackets. The other $50,000 would go to government coffers.In Alternative B, I will net $0 of the $100,000 but I will be able to control how all of the $100,000 is distributed.

I currently donate ~$5,000 to charitable organizations annually. Alternative B would establish a source for me to give more/longer to the causes I care about.

Am I thinking through this correctly? Am I missing anything? Any other thoughts to survive or at least feel good about an anomalously high tax year?

Thanks!

mgensler
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Re: Donor Advised Fund: Am I thinking about this correctly?

Post by mgensler » Mon Sep 18, 2017 7:02 pm

You will likly still have to pay some tax on the $100k that you donate. You probably want to have a CPA run an analysis for you. We ran into this last year where a large portion of our donation could not be deducted due to the AMT. If you have appreciated stock, you would want to donate that the before cash as well.

aristotelian
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Re: Donor Advised Fund: Am I thinking about this correctly?

Post by aristotelian » Mon Sep 18, 2017 7:13 pm

Also, keep in mind that you can make your donation with appreciated shares in your current portfolio. Assuming you are going to give $100K at some point in the future, the way to think about it is:

A) Donate $100k in future cash, reducing tax by marginal rate
B) Donate $100k of Total Stock Index purchased in 2009-10 that cost $50k, saving marginal rate tax on $100k plus capital gains tax on gains (e.g. 15% of $50k = $7,500).

Do keep in mind that some of the marginal rate savings assumes you are itemizing. If you would normally take the standard deduction, you will only be saving income tax on the donation amount that puts you over.

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Artsdoctor
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Re: Donor Advised Fund: Am I thinking about this correctly?

Post by Artsdoctor » Mon Sep 18, 2017 7:20 pm

I would definitely consider a DAF under your circumstances, and if you have appreciated shares of investments in your taxable account(s), donate those with the lowest possible cost basis.

I would also agree with the poster above about running some numbers. I use TurboTax but there are good software programs out there to help you figure out exactly what your savings might be (and what your total tax might be). These will be estimates, but I know of no other way to make an informed decision aside from sitting down with your accountant and doing so. You can either wait until the 2017 software comes out in late November or do a trial run with the 2016 software.

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dm200
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Re: Donor Advised Fund: Am I thinking about this correctly?

Post by dm200 » Mon Sep 18, 2017 8:46 pm

I am pretty sure that, in your circumstances, donation to a DAF or directly to charities in the same amount have the same result to your bottom like taxes. So, from purely a tax point of view - no benefit of the DAF.

What you get, among other things, from the DAF donation is a longer (or much longer) period of time to decide and distribute the funds to particular charities.

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FIREchief
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Re: Donor Advised Fund: Am I thinking about this correctly?

Post by FIREchief » Tue Sep 19, 2017 12:08 am

mgensler wrote:
Mon Sep 18, 2017 7:02 pm
We ran into this last year where a large portion of our donation could not be deducted due to the AMT.
Are you certain of this? Charitable contributions are still deductible under the AMT. Several other itemized deductions are not. If I'm reading this correctly, I believe that if you are in the "AMT zone," you even get to reverse the itemized deduction phase out of your charitable deductions (line 6, form 6251, entered as a negative number). Definitely see my signature. Hopefully one of the pros will either correct, confirm or clarify. 8-)
I am not a lawyer, accountant or financial advisor. Any advice or suggestions that I may provide shall be considered for entertainment purposes only.

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Re: Donor Advised Fund: Am I thinking about this correctly?

Post by inbox788 » Tue Sep 19, 2017 4:11 am

Yes, donate the shares if you can to further reduce your tax liability.

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Re: Donor Advised Fund: Am I thinking about this correctly?

Post by jaj2276 » Tue Sep 19, 2017 5:14 am

I opened a DAF last year with ~$100k of stock that had a cost basis of about $55k. I then took $100k of my income and bought stock in my taxable so I effectively upped my cost basis of my stock holdings (as opposed to just donating $100k). My taxes worked exactly like I thought they would although my income was all W-2 so I can't say that there's something else that would be important considering RSUs/Stock Options.

I then proceeded to use VPW with a 20-year distribution plan to guide the amount I could gift each year from the DAF. It's been great.

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Re: Donor Advised Fund: Am I thinking about this correctly?

Post by not4me » Tue Sep 19, 2017 7:58 am

Whether you do it yourself or get a cpa to run some numbers, I'd recommend you pursue that. I don't know how close your example is to reality, but beware that there are some limitations that you might encounter. I'm pretty sure there are limits on how much you can deduct if you go over certain percentages of your AGI. At some point, the itemized deductions are also capped. So, you might be in a case where the charitable in combination with other deductions is capped. There are some provisions to carry over to another year, but I've never done that & am not familiar with. If you should encounter those limits, you may also consider shifting some to next year. Of course, this is in reference to federal taxes & I don't think you've mentioned state considerations.

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Re: Donor Advised Fund: Am I thinking about this correctly?

Post by aristotelian » Tue Sep 19, 2017 8:05 am

^Good point in last post. Limit is 50% of AGI. Might want to contribute over multiple years to optimize the deduction. CPA could confirm but I think would not pay the capital gains tax no matter what.

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Artsdoctor
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Re: Donor Advised Fund: Am I thinking about this correctly?

Post by Artsdoctor » Tue Sep 19, 2017 8:55 am

^ Yes, there's a limit but no, he won't feel it.

If you transfer cash into your DAF, you're limited to deducting 50% of your AGI. If you transfer appreciated assets, you're limited to 30% of the AGI.

It looks as if his AGI will be in the $800,000 range so he'll be able to deduct the entire amount this year.

If, for some reason, the deduction is over these limits, he can carryover whatever is left to the following year.

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Re: Donor Advised Fund: Am I thinking about this correctly?

Post by PhysicianOnFIRE » Tue Sep 19, 2017 9:42 am

Yes, you are thinking correctly, and there's no better time to do this. I applaud your charitable aspirations.

As others have stated, you will see a huge tax break, and as long as you're not donating 30% or more, your deduction should be equal to the donation. The Pease provision applies, but that's really just a surtax on high earners disguised as a limit on deductions, so I wouldn't worry about it. I would donate appreciated assets rather than cash.

I donated $100,000 to my DAF last year, figuring it would one of my last high earning years. I detailed the thought process and math in an article called The Best Way to Donate A Hundred Grand. Seems appropriate to share given your situation.

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Re: Donor Advised Fund: Am I thinking about this correctly?

Post by not4me » Tue Sep 19, 2017 10:21 am

PhysicianOnFIRE wrote:
Tue Sep 19, 2017 9:42 am
The Pease provision applies, but that's really just a surtax on high earners disguised as a limit on deductions, so I wouldn't worry about it.
Whether it is a surtax or a limit on deductions, are you saying that there is no chance he could avoid it (or at least some) by deferring some until another tax year? This is somewhat guessing without knowing his real numbers & it may not affect his bottom line tax for 2017. If his 2018 tax situation is such that the surtax/limit doesn't kick in, it would seem that his 2018 tax bill MIGHT be reduced. What am I missing in the shift?

But I agree the DAF is a great thing & I applaud him giving as well as having the "problem"!

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Re: Donor Advised Fund: Am I thinking about this correctly?

Post by avalpert » Tue Sep 19, 2017 10:23 am

What is the difference between your marginal rate this year and your marginal rate most years?

Just because the absolute tax amount is higher this year, it may not save you more to pull-forward future donations if the marginal rates aren't all that different. Keep in mind that by investing the money instead of taking the deduction now you get to deduct the value of appreciation in the future (without paying capital gains taxes on it) as well as the invested amount.

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Re: Donor Advised Fund: Am I thinking about this correctly?

Post by PhysicianOnFIRE » Tue Sep 19, 2017 10:48 am

not4me wrote:
Tue Sep 19, 2017 10:21 am
PhysicianOnFIRE wrote:
Tue Sep 19, 2017 9:42 am
The Pease provision applies, but that's really just a surtax on high earners disguised as a limit on deductions, so I wouldn't worry about it.
Whether it is a surtax or a limit on deductions, are you saying that there is no chance he could avoid it (or at least some) by deferring some until another tax year? This is somewhat guessing without knowing his real numbers & it may not affect his bottom line tax for 2017. If his 2018 tax situation is such that the surtax/limit doesn't kick in, it would seem that his 2018 tax bill MIGHT be reduced. What am I missing in the shift?

But I agree the DAF is a great thing & I applaud him giving as well as having the "problem"!
Pease kicks in at $309,900 for married filed jointly in 2017, and in the example, OP used $800k and said he's in the highest bracket, so I'm assuming he'll be subject to it either way. I pointed it out because I've seen high-income people use the Pease provision as an excuse not to donate, and I don't like to see it misunderstood or misused. I'm no expert, but the linked page explains how it really just adds a bit to your overall tax rate.

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Re: Donor Advised Fund: Am I thinking about this correctly?

Post by jebmke » Tue Sep 19, 2017 10:52 am

avalpert wrote:
Tue Sep 19, 2017 10:23 am
What is the difference between your marginal rate this year and your marginal rate most years?

Just because the absolute tax amount is higher this year, it may not save you more to pull-forward future donations if the marginal rates aren't all that different. Keep in mind that by investing the money instead of taking the deduction now you get to deduct the value of appreciation in the future (without paying capital gains taxes on it) as well as the invested amount.
This is a valid question. We did large DAF donations in peak years when we knew our rate would be (and has been) much lower going forward. The tax rate arbitrage in our case more than offsets the cost drag of a DAF. Absent that, I would probably have gone with pay-as-you-go on donations.
When you discover that you are riding a dead horse, the best strategy is to dismount.

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Re: Donor Advised Fund: Am I thinking about this correctly?

Post by not4me » Tue Sep 19, 2017 11:21 am

PhysicianOnFIRE wrote:
Tue Sep 19, 2017 10:48 am

Pease kicks in at $309,900 for married filed jointly in 2017, and in the example, OP used $800k and said he's in the highest bracket, so I'm assuming he'll be subject to it either way. I pointed it out because I've seen high-income people use the Pease provision as an excuse not to donate, and I don't like to see it misunderstood or misused. I'm no expert, but the linked page explains how it really just adds a bit to your overall tax rate.

:beer
-PoF
I think we're likely in agreement. OP also said
In 2017 I will have an unusually high income year due to having to sell RSUs and stock options
and so I was suggesting that it really depended upon how unusual. For example, what if his 'normal' would be $250k? I don't recall if the $309900 will be inflation adjusted, but even if not he has "head room" & his 2018 tax could be lowered if he gave part to the daf after jan 1. I skimmed the article & if it addressed that I didn't see it.

I would agree that the surtax/limit should NOT be used as an excuse to not give. I was trying to help OP understand his options & impacts. My mindset is that overall tax planning can facilitate giving even more to charity by diverting some tax $s & not ignoring even relatively small steps

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Re: Donor Advised Fund: Am I thinking about this correctly?

Post by Artsdoctor » Tue Sep 19, 2017 12:30 pm

One of the benefits of really running the numbers is to actually see where you stand with your marginal rate.

At first glance, you'd think that your $800,000 income would push you past the AMT and into the 39.6% bracket. However, you could be "normally" in that AMT phase out zone where your marginal tax rate is in the 35% range. If that is so, then there might not be as much difference in your marginal rates (or better phrasing, your tax savings) as you might think.

This is why a tax software program is so helpful.

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Re: Donor Advised Fund: Am I thinking about this correctly?

Post by PhysicianOnFIRE » Tue Sep 19, 2017 1:16 pm

jebmke wrote:
Tue Sep 19, 2017 10:52 am
avalpert wrote:
Tue Sep 19, 2017 10:23 am
What is the difference between your marginal rate this year and your marginal rate most years?

Just because the absolute tax amount is higher this year, it may not save you more to pull-forward future donations if the marginal rates aren't all that different. Keep in mind that by investing the money instead of taking the deduction now you get to deduct the value of appreciation in the future (without paying capital gains taxes on it) as well as the invested amount.
This is a valid question. We did large DAF donations in peak years when we knew our rate would be (and has been) much lower going forward. The tax rate arbitrage in our case more than offsets thecost drag of a DAF . Absent that, I would probably have gone with pay-as-you-go on donations.
The cost drag of a DAF (0.6% plus expense ratios under 0.1% in Vanguard or Fidelity DAF) is nearly identical to the tax drag in a taxable account for me in my current tax bracket. Tax drag is about 30% of 2% dividends = ~ 0.6% plus the expense ratios of the funds. So I'm going to see that drag one way or another; it's a matter of whether that 0.7% goes to Vanguard Charitable or the state and federal governments.

When I retire, the tax drag in my taxable account should be reduced by half or more, but as you point out, the prior deduction more than makes up for what will eventually be a larger drag in the DAF.

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Re: Donor Advised Fund: Am I thinking about this correctly?

Post by Artsdoctor » Tue Sep 19, 2017 3:59 pm

Initially, I was bothered by the "cost drag" of a DAF. However, this no longer bothers me in the least. Once I've transferred over the appreciated assets, I'm no longer paying taxes on the dividends and I no longer am concerned about any capital gains; the money isn't even technically mine anymore. Yes, the expenses in the DAF can add up a little, but there are two ways of looking at it: it would be the charity and not you that is paying for those expenses (would it really matter if you made a $1,000 donation versus a $975 donation in your mind?); and, I have found that I am far more likely to make charitable contributions in general since having a DAF! So my annual giving has increased substantially because I sweep more appreciated assets into my DAF than I would have spent by just writing out a check in the first.
Last edited by Artsdoctor on Wed Sep 20, 2017 4:01 pm, edited 1 time in total.

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Re: Donor Advised Fund: Am I thinking about this correctly?

Post by dm200 » Wed Sep 20, 2017 12:32 pm

Artsdoctor wrote:
Tue Sep 19, 2017 3:59 pm
Initially, I was bothered by the "cost drag" of a DAF. However, this no longer bothers me in the least. Once I've transferred over the appreciated assets, I'm no longer paying taxes on the dividends and I no longer am concerned about any capital gains; the money isn't even technically mine anymore. Yes, the expenses in the DAF can add up a little, but there are two ways of looking at it: it would be the charity and not you that is paying for those expenses (would it really matter if you made a $1,000 donation versus a $975 donation in your mind?); and, I have found that I am far more likely to make charitable contributions in general since having a DAF! So my annual giving has increased substantially because I sweep more appreciated assets into my DAF that I would have spent by just writing out a check in the first.
These are very good (and valid IMO) ways of evaluating the benefits of using a DAF.

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Re: Donor Advised Fund: Am I thinking about this correctly?

Post by dm200 » Wed Sep 20, 2017 12:36 pm

Somewhat off topic -

The limits (annually) of tax deductions for high income folks are one reason some (or many) high income celebrities/athletes establis and support their own "foundations" to support their charitable causes. if such a person could, say, earn $1 Million because of their celebrity states and want that $1 Million to go to charity - there might hit the limit on such donations. However, if their "foundation" is the recipient of the "earned" $1 Million, then more goes to the support of the charitable cause(s).

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Re: Donor Advised Fund: Am I thinking about this correctly?

Post by InvestorThom » Thu Sep 21, 2017 2:27 pm

Thanks for all the helpful replies.

I have Turbo Tax 2016 software and will run the two scenarios - excellent idea!

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Re: Donor Advised Fund: Am I thinking about this correctly?

Post by jebmke » Thu Sep 21, 2017 2:48 pm

dm200 wrote:
Wed Sep 20, 2017 12:32 pm
Artsdoctor wrote:
Tue Sep 19, 2017 3:59 pm
Initially, I was bothered by the "cost drag" of a DAF. However, this no longer bothers me in the least. Once I've transferred over the appreciated assets, I'm no longer paying taxes on the dividends and I no longer am concerned about any capital gains; the money isn't even technically mine anymore. Yes, the expenses in the DAF can add up a little, but there are two ways of looking at it: it would be the charity and not you that is paying for those expenses (would it really matter if you made a $1,000 donation versus a $975 donation in your mind?); and, I have found that I am far more likely to make charitable contributions in general since having a DAF! So my annual giving has increased substantially because I sweep more appreciated assets into my DAF that I would have spent by just writing out a check in the first.

These are very good (and valid IMO) ways of evaluating the benefits of using a DAF.
Yes, you can look at it either way. But from our perspective, if we are giving $10,000 to an organization I am not going to write them a check for $9,750 and tell them to pretend like they got $10K. And if there isn't $10K in the DAF because of expenses I will make it up by putting in more money.
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Re: Donor Advised Fund: Am I thinking about this correctly?

Post by Artsdoctor » Thu Sep 21, 2017 5:51 pm

^ Of course. If you're committed to making a certain donation, you're going to do it.

There was a turning point for me when I realized that my DAF was an investment account in its own right. There were a couple of years when very large contributions were beneficial and the money was actually invested in something other than cash or short-term fixed income. Obviously, the extremely long bull market here has been beneficial for the DAF balance. However, I make contributions to charities based on what my DAF can afford, not me necessarily. Over the years, I've made contributions from appreciated assets with the lowest cost basis; when the market is kind, I donate more.

The difference between 0.6% and 0.1% in fees used to bother me but the fact is that I have become far more "philanthropic" having a DAF. There are "pseudo" commitments which I make each year in the same amount (since annual commitments aren't legally permitted with DAFs in the strictest sense), but sometimes there's a lot of flexibility in giving. If the DAF investments don't do quite as well, then there's less to give; if the investments do extremely well, there's more to give. This is not appreciably different than if you don't have a DAF.

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Re: Donor Advised Fund: Am I thinking about this correctly?

Post by dm200 » Thu Sep 21, 2017 7:59 pm

In a way, funds in a DAF are the ultimate "asset protection". Since the funds are not yours, they cannot be taken away by creditors, the IRS, ex-spouse, etc.

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Re: Donor Advised Fund: Am I thinking about this correctly?

Post by jebmke » Thu Sep 21, 2017 8:16 pm

Artsdoctor wrote:
Thu Sep 21, 2017 5:51 pm
The difference between 0.6% and 0.1% in fees used to bother me but the fact is that I have become far more "philanthropic" having a DAF. There are "pseudo" commitments which I make each year in the same amount (since annual commitments aren't legally permitted with DAFs in the strictest sense), but sometimes there's a lot of flexibility in giving. If the DAF investments don't do quite as well, then there's less to give; if the investments do extremely well, there's more to give. This is not appreciably different than if you don't have a DAF.
I would still use a DAF without the tax rate arbitrage. We do most of our donations anonymously so the DAF is helpful. But if I thought my tax rate was going to be flat I would fund it annually for the needs of that year. In my case I had a very large tax rate arb so we prefunded about 10 years.
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Re: Donor Advised Fund: Am I thinking about this correctly?

Post by Sidney » Fri Sep 22, 2017 12:15 pm

We also do most of our donations using a donor advised fund for anonymous donations. It keeps us off the mailing lists of national charities and below the radar of the whisper campaigns locally. Most of our donations are local. Staying anonymous has a lot of advantages.
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Re: Donor Advised Fund: Am I thinking about this correctly?

Post by dm200 » Fri Sep 22, 2017 1:17 pm

Sidney wrote:
Fri Sep 22, 2017 12:15 pm
We also do most of our donations using a donor advised fund for anonymous donations. It keeps us off the mailing lists of national charities and below the radar of the whisper campaigns locally. Most of our donations are local. Staying anonymous has a lot of advantages.
Oh yes. If you make a lot of donations to various causes (however worthy they are), you will get on mailing, phone and/or email lists. Making these as "anonymous" can be a real benefit.

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Re: Donor Advised Fund: Am I thinking about this correctly?

Post by dm200 » Fri Sep 22, 2017 1:25 pm

If you, for tax or other reasons, want to significantly fund an organization's needs/programs for a multi-year period, but make a one year large tax deductible donation - a DAF can be great.

In several cases I know first-hand, organizations I support (for many possible reasons) are (or would be) very bad at using my one time donation to be spread out to fund causes for many years. So, for example, if I wanted to fund the organization to spend $1,000 per year for 10 years on program(s), I believe that if I donated $10,000 this year - the organization would not be capable of properly spreading out its expenditures at $1,000 for 10 years. With a DAF, though, I could make the $10,000 donation now and then spread it out over ten years at $1,000 per year (perhaps a little more if the investments did well).

There are many reasons that excellent organizations are not capable of or good at this spreading out expenditures - too many varied ones to get into here.

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Re: Donor Advised Fund: Am I thinking about this correctly?

Post by Artsdoctor » Fri Sep 22, 2017 3:17 pm

^ We have committed to sponsoring a multi-year fellowship at our medical school. Generally, such a commitment would not be permitted through a DAF. That is the biggest drawback in using a DAF, in my opinion (the idea being that it's really not your money anymore, you are only "advising" that a donation is generated, and you don't have the authority to guarantee that the DAF will make those donations regularly). However, we worked with Giving VP at the medical school, and a letter was drafted which released us of any legally binding obligation to donate annually--and the DAF (Vanguard) was happy with that. This has been in effect for a long time and I've had no reason to regret the set-up. It's possible that our involvement over decades gave the medical school some room to "trust" us, and perhaps this would not be a given under other circumstances.

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Re: Donor Advised Fund: Am I thinking about this correctly?

Post by dm200 » Fri Sep 22, 2017 4:52 pm

Artsdoctor wrote:
Fri Sep 22, 2017 3:17 pm
^ We have committed to sponsoring a multi-year fellowship at our medical school. Generally, such a commitment would not be permitted through a DAF. That is the biggest drawback in using a DAF, in my opinion (the idea being that it's really not your money anymore, you are only "advising" that a donation is generated, and you don't have the authority to guarantee that the DAF will make those donations regularly). However, we worked with Giving VP at the medical school, and a letter was drafted which released us of any legally binding obligation to donate annually--and the DAF (Vanguard) was happy with that. This has been in effect for a long time and I've had no reason to regret the set-up. It's possible that our involvement over decades gave the medical school some room to "trust" us, and perhaps this would not be a given under other circumstances.
Yes - that is a common issue with a DAF. You cannot fund a legally binding pledge. My experience with the Fidelity DAF is that, in the last several years, there seems to be increased flexibility in grants to fulfill an "intent" for things like Capital campaigns where the "pledge" is not legally binding.

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