DAF - At What $ Level Do Other Options Make Sense?

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learningstill
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DAF - At What $ Level Do Other Options Make Sense?

Post by learningstill »

My wife and I have been using a Fidelity DAF for the last 5+ years and we find it to be a great solution for many reasons. In terms of contributions, we take advantage of bunching them into a single year and also find it very easy to contribute stock with capital gains. We also find it to be simple for granting money once we have set up our charities initially and we take advantage of recurring donations.

We are mid 50s and starting to think harder about retirement planning as we near the end of our working years (likely 5-10 years to go). One of the things that we are considering is building up the DAF as we approach retirement while we are at what will likely be our highest income and highest marginal tax rate. One question that has come up as we think about this possibility is whether there is a $ level where the DAF no longer makes sense due to the expenses and other options should be considered. If so, what would those options be? When I think about this, I think an extreme amount of money to have in the fund would be $1M (likely much lower in our case) so that would be a good limit test. In that case, the annual fees would be $4,500 as of today. If there is a point where there are better options, where would the transition point be? My expectation is that the next step would be to create a foundation of some sort but that would involve much more money.

All thoughts would be appreciated.
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Stinky
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Re: DAF - At What $ Level Do Other Options Make Sense?

Post by Stinky »

I agree that the Fidelity DAF is a marvelous instrument. We have one that was funded with appreciated stock several years ago, and it has performed well. It gave us a big tax deduction in the year we funded it.

One consideration which would cause you to limit funding of a DAF is the ability to do Qualified Charitable Distributions (QCDs) from an IRA account once you reach 70.5. Here's the wiki article on QCDs: https://www.bogleheads.org/wiki/Qualifi ... tributions

Arguably, QCDs can be even more powerful than a DAF for a person who has significant amounts in IRAs (and therefore will have significant Required Minimum Distributions starting at age 72), because (a) it reduces taxable income even for someone who does not itemize, and (b) it reduces income subject to the IRMAA test.

It appears that our DAF is funded richly enough that there will still be funds in it when we reach RMD age. In hindsight, I wish that we had funded the DAF a little less richly, so that we could make full use of QCDs at age 72 and later.
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Chip
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Re: DAF - At What $ Level Do Other Options Make Sense?

Post by Chip »

Stinky wrote: Wed Apr 07, 2021 5:47 am It appears that our DAF is funded richly enough that there will still be funds in it when we reach RMD age. In hindsight, I wish that we had funded the DAF a little less richly, so that we could make full use of QCDs at age 72 and later.
I go back and forth on this. The DAF is so convenient for small donations that I think we'll keep using it for that after RMDs and QCDs begin. Certainly not the best move from a $$ standpoint, but I sure do like the anonymity it provides.
mgensler
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Re: DAF - At What $ Level Do Other Options Make Sense?

Post by mgensler »

Schwab charitable and Fidelity charitable will both negotiate lower fees at levels above $3 or $4mm.

We have both a daf and operating foundation. We choose to keep the investments in the daf for several reasons. This includes keeping balances private, simplifying accounting, and being able to give anonymously.

The operating foundation overhead is about $10k/year. Some on here will argue it can cost less but this is our real world costs.
fourwheelcycle
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Re: DAF - At What $ Level Do Other Options Make Sense?

Post by fourwheelcycle »

Stinky wrote: Wed Apr 07, 2021 5:47 am One consideration which would cause you to limit funding of a DAF is the ability to do Qualified Charitable Distributions (QCDs) from an IRA account once you reach 70.5.

Arguably, QCDs can be even more powerful than a DAF for a person who has significant amounts in IRAs (and therefore will have significant Required Minimum Distributions starting at age 72), because (a) it reduces taxable income even for someone who does not itemize, and (b) it reduces income subject to the IRMAA test.
It turns out my wife and I are doing this, although we did not plan any particular strategy in advance. During our sixties our children were starting their careers, getting married, and buying their first houses. We continued our charitable contributions at our previous level, but we did not increase them significantly. Instead, we began giving annual gift money to our children to help them begin their adult lives.

For us, RMDs arrived at the same age as QCDs. Our other income covers most of our annual expenses, so we are able to give a large part of our RMDs to charity as QCDs. As a side benefit, our income subject to IRMAA is lower than it would be without the QCDs.
HootingSloth
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Re: DAF - At What $ Level Do Other Options Make Sense?

Post by HootingSloth »

Just to build on mgensler's comment, establishing your own private foundation is the most common alternative to a DAF for individuals making large charitable contributions. But it is probably not practical until you get to dollar amounts higher than you are talking about. There can be other concerns as well in dealing with all of the legal constraints put on private foundations, which can make it significantly more complicated than just giving through a DAF. You also have to file a (public) tax return every year (Form 990-PF).
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White Coat Investor
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Re: DAF - At What $ Level Do Other Options Make Sense?

Post by White Coat Investor »

The main other option is a private foundation. Benefits are a bit more optionsl on donations and you can pay yourself or kids to be on the board.

DAFs are awfully convenient though.

What $ level? I'd say it could start making sense to do a private foundation if you're putting mid 7 figures into it. A typical DAF charges 0.5-1% a year and at mid 7 figures that's $25-50K which should be enough to cover start up costs and more.
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DJZ
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Re: DAF - At What $ Level Do Other Options Make Sense?

Post by DJZ »

mgensler wrote: Wed Apr 07, 2021 6:08 am Schwab charitable and Fidelity charitable will both negotiate lower fees at levels above $3 or $4mm.

We have both a daf and operating foundation. We choose to keep the investments in the daf for several reasons. This includes keeping balances private, simplifying accounting, and being able to give anonymously.

The operating foundation overhead is about $10k/year. Some on here will argue it can cost less but this is our real world costs.
I would be very interested to hear more from mgensler and others who have set up a foundation, regarding “real world” pros and cons, especially compared to their DAF.

I looked into this pretty closely and chose DAF only, for the reasons others here expressed (ease, anonymity) but also you can deduct a greater portion of your AGI. Two other important differences that favor foundations: a foundation *greatly* widens the range of legitimate recipients, from US-based 501c3 to, well, almost anything consistent with the mission. And foundations can invest their assets with fewer restrictions; your AAPL can remain as AAPL there, whereas it will be sold and put into index funds at your DAF.

DAFs are becoming much better now in both of these crucial regards though. Vanguard Charitable allows (through CapShift) to “invest” in recoverable grants for instance. ImpactAssets (a DAF sponsor) actually allows you to invest in for-profit entities. And RealizeImpact (a 501c3 that acts as a pass-through entity) allows you to do similar things via any DAF.

https://capshift.com/
https://www.impactassets.org/
http://realizeimpact.org/

These changes are happening right now. I suspect that the advantages of a foundation will be less important for most people in the future because flexibility is improving.

Interestingly, Zuckerberg chose neither; he donated to an LLC which he controls.
mgensler
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Re: DAF - At What $ Level Do Other Options Make Sense?

Post by mgensler »

We have a private operating foundation in addition to our DAF. An operating foundation can run its own programs. So we can partner with say the city and install pedestrian safety infrastructure. We sign the contract, purchase supplies, hire and pay contractors, etc. Otherwise, we'd have to let the city do all of that or find another non-profit. (most cities aren't set up to receive charitable gifts easily and we'd lose control of the process).

We have consultants that work with us, take meetings with non-profits, do marketing, etc. We find it's better to remove ourselves from the ask part of the process. We pay the consultants via check.

If we partner with a non-profit we simply have the DAF send them a check.

It really depends on what you want to do. Having both gives us the most options. We keep things as simple as possible in the foundation. We have no employees, no real estate, no investments. We have a checking account and credit card. If the foundation needs cash, we simply make a donation from the DAF. Sometimes keeping things simple means paying a little more in AUM fees to the DAF.
DJZ
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Re: DAF - At What $ Level Do Other Options Make Sense?

Post by DJZ »

mgensler wrote: Wed Apr 07, 2021 11:14 am We have a private operating foundation in addition to our DAF. An operating foundation can run its own programs. So we can partner with say the city and install pedestrian safety infrastructure. We sign the contract, purchase supplies, hire and pay contractors, etc. Otherwise, we'd have to let the city do all of that or find another non-profit. (most cities aren't set up to receive charitable gifts easily and we'd lose control of the process).

We have consultants that work with us, take meetings with non-profits, do marketing, etc. We find it's better to remove ourselves from the ask part of the process. We pay the consultants via check.

If we partner with a non-profit we simply have the DAF send them a check.

It really depends on what you want to do. Having both gives us the most options. We keep things as simple as possible in the foundation. We have no employees, no real estate, no investments. We have a checking account and credit card. If the foundation needs cash, we simply make a donation from the DAF. Sometimes keeping things simple means paying a little more in AUM fees to the DAF.
mgensler,

Two interesting things in your post:

1. That you donate to your private operating foundation from your DAF. I had thought that this might not be possible because you are moving funds from a more restrictive setting to a less restrictive one.

2. That you partner with the city to pay for city infrastructure. I’ve given a lot of thought to how to grant from my DAF (mostly based on effective altruism concepts, and Banerjee and Duflo and a few others). Something like this would probably never come up, but might be reasonable.

I’m interested to learn more about both the operating foundation and your ideas about granting. Would you have time to answer a few questions off this forum, by email or phone?

Thx, DJZ
aristotelian
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Re: DAF - At What $ Level Do Other Options Make Sense?

Post by aristotelian »

Might want to check out this thread. If you are looking to set up a permanent charitable fund, one poster suggested $3M as a number where private foundation could make sense. viewtopic.php?t=330877

Another option would be making direct gifts rather than going through the DAF. Just depends on what you are trying to accomplish.
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