A donor-advised fund (DAF) is an investment account specifically designed for charitable giving. It allows you to donate cash, appreciated securities, or other assets to a sponsoring charity (i.e., the DAF sponsor). You receive an immediate tax deduction, and then recommend grants from the fund to your favorite charities over time.
DAF Benefits
One of the significant benefits of using a DAF is the immediate tax deduction you receive when you contribute to the fund. You can receive a tax deduction for the full fair market value of any assets you donate to the DAF. For example, if you donate $10,000 worth of stock that has appreciated from $5,000, you can receive a tax deduction for the full $10,000.
Another benefit of using a DAF is the flexibility it provides in terms of timing. Once you contribute assets to the DAF, you can take your time in recommending grants to the charities of your choice. This can be especially helpful if you are considering making a large donation to a charity but are not quite sure which one to choose. With a DAF, you can make the contribution to the fund and take the time you need to decide which charity to support.
Additionally, donating appreciated securities to a DAF can help you avoid capital gains taxes. When you donate appreciated securities to a DAF, you receive a tax deduction for the full fair market value of the securities and also avoid paying capital gains taxes on the appreciated value of the securities. This can be especially helpful if you have highly appreciated securities that you would like to sell but do not want to pay the capital gains taxes.
Furthermore, a DAF can be an excellent way to simplify your charitable giving. Rather than making donations to multiple charities throughout the year, you can make a single contribution to your DAF and then recommend grants to your favorite charities as you see fit. This can save you time and paperwork, making charitable giving more manageable.
Downside to Donor Advised Funds
However, there are also some downsides to using a DAF. One potential drawback is the cost associated with managing the account. Many DAFs charge fees, such as administrative fees, investment fees, and grant-making fees. These fees can vary depending on the DAF, so it is essential to research and compare costs before opening an account.
Another downside to using a DAF is that once you contribute assets to the fund, you lose control over them. While you can recommend grants to your favorite charities, the sponsoring charity ultimately has the final say over which grants are awarded.
DAF Sponsors
Donor-advised funds are a popular charitable giving tool offered by many financial services companies, including Charles Schwab, Vanguard, and Fidelity.
Here are some details on the donor-advised funds offered by each of these companies:
Charles Schwab Charitable:
Charles Schwab Charitable is one of the largest donor-advised funds in the United States. It offers a flexible and easy-to-use platform for individuals and families to manage their charitable giving. With a minimum initial contribution of $5,000, donors can recommend grants to any IRS-qualified public charity. Donors can choose from a variety of investment options, including a range of index and actively managed funds, as well as customized portfolios. Charles Schwab Charitable also offers a donor-advised fund that invests in socially responsible funds.
Vanguard Charitable:
Vanguard Charitable is another leading donor-advised fund sponsor that offers a low-cost, tax-efficient, and easy-to-use platform for charitable giving. With a minimum initial contribution of $25,000, donors can recommend grants to any IRS-qualified public charity. Vanguard Charitable offers a range of investment options, including index funds and actively managed funds, as well as a socially responsible investment option. Vanguard Charitable also offers a feature called “Investment Impact,” which allows donors to see the potential impact of their investments on their charitable giving goals.
Fidelity Charitable:
Fidelity Charitable is the largest donor-advised fund sponsor in the United States, with over $35 billion in assets under management. It offers a wide range of charitable giving solutions, including donor-advised funds, private foundations, and charitable trusts. With a minimum initial contribution of $5,000, donors can recommend grants to any IRS-qualified public charity. Fidelity Charitable offers a range of investment options, including index funds and actively managed funds, as well as a socially responsible investment option. Fidelity Charitable also offers a feature called “The Giving Account,” which allows donors to make grants to charities directly from their mobile devices.
Overall, donor-advised funds offered by Charles Schwab, Vanguard, and Fidelity are popular and flexible charitable giving tools that offer a range of investment options and features to help donors achieve their charitable giving goals.
DAF Fees
Donor-advised funds typically charge administrative fees for managing the fund and making grants to charities. The fees vary depending on the fund and the financial institution that manages it.
Here are some examples of fees charged by the three financial institutions we mentioned earlier:
Charles Schwab: Schwab Charitable charges an administrative fee that ranges from 0.30% to 0.60% of assets, depending on the account balance.
Vanguard: Vanguard Charitable charges an administrative fee that ranges from 0.05% to 0.60% of assets, depending on the account balance. There is also an annual account fee of $250 for accounts with a balance below $15,000.
Fidelity: Fidelity Charitable charges an administrative fee that ranges from 0.60% to 1.00% of assets, depending on the account balance.
In addition to the administrative fees, there may be other costs associated with donor-advised funds, such as investment management fees, transaction fees, and account closing fees. It’s important to review the fee schedule for any donor-advised fund you’re considering to ensure you understand the costs involved.
Going Big – Your Own Charitable Foundation
Setting up a private foundation may be a better option than a DAF if you have a larger amount of money that you would like to donate and want more control over how your money is invested and distributed.
Private foundations can be set up by individuals or families. Creating a charitable entity with its own board of directors, investment portfolio, and grantmaking program. You retain greater control over where the money goes, how it is invested, and how grants are made.
However, private foundations are typically more expensive to set up and operate than DAFs. There are also stricter legal and reporting requirements, including the need to file an annual tax return and maintain a certain level of charitable giving.
Some other reasons to consider a private foundation instead of a DAF might include:
- You want to involve multiple generations of your family in your philanthropy and create a lasting legacy.
- You have specific causes or organizations that you want to support, and want to make larger, multi-year grants.
- You want to engage in more active philanthropy, such as by funding your own programs or research initiatives.
- You have a significant amount of appreciated assets you want to donate, such as real estate or privately held stock. And desire to retain more control over how these assets are managed and sold.
Ultimately, the decision between setting up a private foundation or using a DAF will depend on your individual circumstances, philanthropic goals, and financial situation. It’s important to do your research and consult with a financial advisor or attorney to determine the best option for you.
DAF – Better Way to Give for Most People
In summary, a DAF can be an excellent tool for simplifying giving, providing flexibility in timing, and reducing tax liabilities. However, it is important to carefully consider the costs associated with managing the account. And understand that once assets are contributed, control is relinquished to the sponsoring charity.
Learn more about types of financial advisors: INVESTMENT ADVICE: IS THERE REALLY A DIFFERENCE?
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