Donor advised fund

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In the U.S. a donor-advised fund means a public charity operated by a financial services firm, which serves as a convenient "umbrella" for individual or institutional contributors. One or more donors make irrevocable and unconditional contributions to an account within the fund. They receive an immediate tax deduction and normally become account advisors. They name the account (e.g., The John Doe Memorial Fund for Educational Excellence) and usually choose one or more investment pools where the funds reside. Advisors may make subsequent donations at any time. From their funds, the donor can recommend grants to public charities they select. There are some IRS conditions regarding approval of these grants (no personal gain, no gifts to relatives, cannot fulfill a legal pledge, etc.) Once the recipient is verified by the fund operator, grants are essentially automatic as long as the fund's rules are satisfied.

Setting up a donor-advised fund can be done easily with the major players (Vanguard, Schwab, Fidelity, ... ). Donating from a DAF is somewhat like online bill paying, but may take several weeks if it is the first grant the fund is making to a new or small charity.

Advantages

  • Tax savings: Donor-advised funds generally accept gifts of marketable securities (e.g., publicly traded stocks & mutual funds), and they sometimes accept certain special assets (e.g., private equity, hedge funds, real property). Donation of appreciated assets yields a double tax advantage. Contributions are fully deductible, though IRS limits may force the donor of large gifts to spread the deduction over a period of years, per Pub 526. [1]. The donor avoids paying capital gains tax on appreciated securities. Note that grants from a fund account are not deductible later when given to the charity.
  • Deliberate giving: The timing of a big charitable donation is often motivated by the donor's tax situation in a particular year. However, prudent selection of the specific charities to benefit may take a substantially longer period. A donor-advised fund provides a good solution to this problem.
  • Investment growth: A donor's account value has the potential to increase over the years with the financial markets, resulting in larger charitable grants.
  • Estate planning options: Upon the original advisors' deaths, a number of choices are available, such as the ability to continue a gifting tradition by naming successor advisors; or making the donor-advised fund a beneficiary of an IRA or Charitable Remainder Trust. The funds themselves are not part of the estate and cannot be given to the donors' heirs.
  • Paperwork simplification: A contributor who frequently makes gifts to several charities, especially of securities, will experience a reduced paperwork burden by using a donor-advised fund.
  • Optional anonymity: An account advisor is free to request selected grants be made anonymously.

Currently donor-advised funds are specifically excluded from receiving Qualified Charitable Donations which according to IRS rules may only be made by an individual donating directly to a qualified charity.

Alternatives

  • Direct giving: This method puts a donation to work immediately for the desired cause, while avoiding donor-advised fund fees. There are some drawbacks, especially if the selected charity is small and the donor is making a large contribution for tax reasons. If the gift is very large, the organization may not be able to spend it wisely, whereas smaller donations spread over a period of years may be more effective. The donor may wish to give appreciated securities, but some charities have difficulty handling noncash contributions. Anonymous giving is also difficult when an individual is sending funds to a charity.
  • Split-interest giving: A contributor to a donor-advised fund receives no financial benefits as a result of the gift, aside from tax breaks. Split-interest giving addresses this drawback. An example is Fidelity's Pooled Income Fund, though this arrangement is more often associated with well-established traditional charities.
  • Private foundations: Donor-advised funds provide limited investment options, and they restrict potential grant recipients to recognized public charities. Sponsors of private foundations exercise a much higher degree of control over their charitable assets, with respect to both investment and granting. Unfortunately, foundations are very complex and costly to administer, and they are subject to tight IRS regulation. Only extremely wealthy individuals and families need consider this option.
  • Qualified charitable distributions: Distributions from individual IRAs can be donated to directly to a qualified charity. These qualified charitable distributions can be used as part of a Required Minimum Distribution.

Setting up, funding and donating from a donor advised fund

Donor-advised funds are operated by independent organizations linked or related to major players (Vanguard, Schwab, Fidelity). Starting an account is relatively simple (comparable to setting up any other account). Each organization has different fees, minimum donations, choices in AA in their investment pools, etc.

Funding a donor-advised fund involves transferring the securities (irrevocably!) to the charitable account. If a trust is involved, this may require multiple phone calls, special forms and notarized signatures. Donors should be aware that contributions for a taxable year benefit should be initiated well before the end of the year.

It has been said that donating from a DAF "is basically as simple as online bill pay"[2].

Notable examples

Comparison of Selected Donor-Advised Funds (Individual Accounts)
Provider Min Initial Donation Min Additional Donation Min Grant Annual Admin Fee Pool Expense Ratios Total Annual Expenses
Fidelity $5,000 $1,000 $50 0.60% [3] [4] 0.07% - 1.17% 0.67% - 1.77%
Schwab $5,000 $500 $50 0.60% [3] [4] 0.09% - 1.23% 0.69% - 1.85%
T. Rowe Price $10,000 $500 $100 [5] 0.50% [4] 0.34% - 0.75% [6] 0.84% - 1.25%
Vanguard $25,000 $5,000 $500 0.60% [7] 0.06% - 0.18% [8] 0.66% - 0.78%

Charity recommendations

The reader should refer to Charity selection links for guidance in selecting an appropriate charity.

References

  1. Pub 526
  2. Bogleheads® forum topic: Donor Advised Fund
  3. 3.0 3.1 Minimum $100 fee
  4. 4.0 4.1 4.2 Discounts apply for account balances over $500,000
  5. Free annual grants are limited (10 for account balances under $250,000; $10 each thereafter)
  6. Minimum $2,500 balance per pool
  7. An extra $100 annually is charged for balances under $15,000; Discounts apply for balances over $1,000,000
  8. Different investment pools are available for account balances over $1,000,000

External links