Katie and I have always been givers. We think giving is one of the five critical parts of our financial lives; it is just as important to give well as to earn, save, invest, and spend well. We believe that giving not only benefits those we give to, but also makes us better people. It helps remind us that we are only on this sphere temporarily and that our hearse will not have a trailer hitch. We are just stewards of the resources we are entrusted with during our very limited time on the planet. Giving helps us to keep money in its proper place in our life—as a tool, not a goal and the means rather than the end. We're less selfish, happier, and perhaps even wealthier as a result of this practice. We've been blessed with a very high income and so feel an obligation to continue to pay it forward and are proud that for the last two years we've given away more money than we've spent (not counting taxes and savings).
Our giving takes on many facets. We give directly to family and friends in need. An example of this is the donation we're making each year to the college funds of our nieces and nephews. We give through the WCI Scholarship. We give to our church. We also give to public charities. One nice thing about giving to an official 501(c)3 is that our gifts become tax-deductible, at least in any year when we itemize our deductions. We did not do that in 2018, so we ended up lumping our charitable contributions into 2017 and 2019 and taking the new higher standard deduction for 2018, but anticipate itemizing every year moving forward so long as the tax code doesn't change significantly.
When we have appreciated shares, we like to use those for our charitable giving. By doing this, our capital gains are continually flushed from our taxable (non-qualified) investing accounts. There's no waiting period after donating shares. You can buy back those shares the very next day if you like. However, by combining this practice of donating appreciated shares with tax-loss harvesting, we are able to invest in a taxable account in an incredibly tax-efficient way. If I could just get the Vanguard Total Stock Market Index Fund and the Vanguard Total International Stock Market Index Fund to quit sending me dividends (in our case taxed at 23.8%), it would be even more efficient.
The “Jerk Move” of Using a DAF
In the past, I've criticized Donor-Advised Funds (DAF) users (primarily my WCI Network partner Physician on FIRE) for pulling a “jerk move” by contributing to a DAF with a plan to make future donations from it. My criticism isn't so much donating to charity (as you can see, I'm a big fan of that) but simply that the donor gets a tax deduction as soon as they put the money in the DAF, even though the charity might not actually receive any money for decades! Up until this year, we never saw any reason for us to use a DAF. Not only did we prefer to actually give money to charities rather than invest it in mutual funds while giving ourselves a pat on the back, but we aren't big fans of paying AUM fees to DAF providers, the most prominent of which charge 0.60%, up to 20X the expense ratios on our mutual funds.
Become a Jerk Decided to Use a DAF Anyway
However, I changed my mind this year. No, I haven't decided to pull a jerk move (mostly), but I've become more appreciative of some of the other benefits of a DAF. We used to use credit cards or checks to give to charities. But we wanted the tax receipt. We figure if we're going to give to charity, we might as well get the tax benefits of doing so. In reality, by letting us give with pre-tax dollars, it allows us to give more. But in order to get a tax receipt, you have to give them a name and address. It turns out even if you request to remain anonymous with your gift, they still start pounding your mailbox with what we call “charity porn”. You know, those glossy magazines about all the good they're doing. Well, we already know they're doing good, that's why we gave them the money in the first place. We want that money to go toward their primary mission, not toward glossy magazines and stamps. A DAF allows us to donate completely anonymously so more of our gift can go toward a good cause rather than killing trees and filling up our recycling container. Note that you can choose whether to make each individual gift anonymous or not. You can tell the charity nothing, give them the name of your DAF, or give them your name and address. The choice is yours.
A DAF also makes giving super convenient. We chose to use Vanguard Charitable because their fees are no higher than anyone else's and it was super simple to link it to our taxable investing account. Note the site is separate, so there is a different login, kind of like the Vanguard Small Business site for those of us with Vanguard Individual 401(k)s. On the Vanguard Charitable site itself, you can search for charities and learn more about them. You can then save them to your list of favorite charities, so you only have to look them up once. Now, when we go back and donate to them again, it is just a few clicks with the mouse. If you want some of your donation to go to a specific account at a local congregation of your church (like a missionary fund) you can just choose “other” on the drop-down menu and type in exactly how much of the donation goes where and input your name/number and congregation name/number in the free text box.
But wait, there's more. It's not only convenient on the donation side, but also on the contribution side. Our plan most years is to donate appreciated shares. At the beginning of 2019 when it was time to make some donations, we didn't really have any appreciated shares thanks to the December 2018 bear market. I had a few shares of the VXUS ETF that had a small gain, but it just felt like selling low to use that for our charitable giving this year. There weren't enough shares for all the giving we wanted to do anyway. So we used cash for our donations this year. I opened the DAF on a Sunday afternoon and directed money to be transferred from our Vanguard Municipal Money Market Fund to our Vanguard Charitable account and by Tuesday morning it was in place ready to be distributed to charities. I'm confident it will be just as easy to use appreciated shares for future donations as those MMF shares. Unless you've tried to use shares to donate to charity or pay tithing in the past, you have no idea how much easier this is to do. Plus, there's no waiting around for days/weeks not knowing exactly what price the shares are going to be sold/transferred at. It should all take place at end of day pricing like any other mutual fund transaction. Super, super convenient.
The DAF keeps track of all of your donations, so there's no more trying to track down a bunch of receipts to input into Turbotax. It's all combined into one single donation for tax purposes, a donation to your own DAF. Very convenient.
I was going to put together a few nice screenshots of the process for this post, but every page always seemed to have some personal information on it like our account numbers or the name of our DAF, so you only get a few. The first one is the donation page for one of the charities:
Vanguard Charitable DAF
Followed by the summary page for that same charity.
As you can see, it's just like most other online financial transactions, no big deal.
The Downsides of a Donor-Advised Fund
So what are the downsides? Well, there are several.
- The minimum initial contribution at Vanguard is $25K with $5K for subsequent contributions. No big deal for us. We give a multiple of that away every year. Even if you don't, as long as you have $25K that you plan to give away eventually, you can get it open and then decrease how much is in there by not replacing donations. If that's too high-roller for you, consider Fidelity's DAF which has a $5,000 initial donation.
- The minimum donation is $500. If you give $10 at a time to charity, this really isn't for you. If a $50 minimum would work, again, consider Fidelity's version. You also can't use the DAF to donate stuff you no longer need, so we'll still need to keep track of those receipts separately using something like Turbotax It's Deductible.
- While you can have a co-advisor on the fund (Katie and I are co-advisors), you cannot name your kids as successor advisors until they turn 18. No big deal, we just picked someone else we trust for the next few years.
- There is an AUM fee, 0.6% per year, or $600 for $100K. You start getting a break at $500K on that fee (it drops to 0.35%). No big deal. I'm not planning on leaving much money in there year to year and 0.6% of not very much money is almost trivial and well worth the convenience.
- There is a minimum balance fee charged if you keep less than $25K in there. I'm not very happy about this, since my plan was to NOT keep anything in there. That's the jerk move, remember? Fidelity doesn't require a minimum balance, why does Vanguard? It wasn't entirely clear from the website what the low balance fee was, so I had to call. Well, Vanguard Charitable tells me it is $250 and assessed every February (confirmed on two separate phone calls). Since $25,000 * 0.6% = $150, i.e less than $250, I've opted to leave $25K in there through February. Honestly, I feel a bit like a jerk doing it, but hey, I guess that's life. But if you contribute $25K in there at the end of January and donate it the first week of March, you'll never pay the low-balance fee and you'll only pay something like $12 to Vanguard in AUM fees. To be fair, Fidelity charges a minimum fee of $100 per year, so for my purposes, Vanguard will be cheaper fee-wise.
Our Giving Process
Prior to meeting with the kids, Katie and I have already decided the total amount we were going to give to charities after our usual church donations, niece/nephew 529 contributions, and friend/family giving. The smackdown was deciding which charities to support and how much to give to each of them.
First, we go around the room and everyone had a chance to name the charities they wanted to give to this year. This is always interesting. We usually end up with a list of 10-15 charities.
Next, we whittle the list down a bit. This is where it gets fun. One year I planned to select 5 from our initial list of 13 so our gifts wouldn't be spread too thin, but eventually gave up and we expanded that to 8. It was just too hard to cut it down any more. The three older kids, Katie, and I each got 5 votes. Unless you could talk someone else into supporting your chosen charity and using one of their precious five votes on it, we weren't giving them any money. It was fun to watch the kids try to talk each other into supporting their pet causes.
Now, we had to decide how much to give to each one. Each family member got three votes in this round and each vote was worth a chunk of money. So a charity that got four votes got four times the money that a charity with one vote got.
Finally, I had to log in to Vanguard Charitable and actually put the transaction orders in. Again, super easy, super convenient and I end up with a nice online, printable record of what we did that I can use at tax time and for reference next year at our charitable smackdown.
Naming the DAF
Part of opening a DAF is to give it a name. This was harder than I expected. Since we wanted to use it for anonymous gifts, at least part of the time, we didn't want our names on it. We didn't want to use our street name or White Coat Investor. We thought about naming it after one of our favorite peaks, but there are so many funds out there already named after mountains we thought there was risk of confusion. In the end, we named it after a verse of scripture that inspires us to give. Each year, that will serve as a reminder to us of the reason why our DAF exists and redirect our minds to the best uses of its funds. I hope you enjoy naming your DAF as much as we did.
Overall, using a DAF makes giving a lot slicker. The additional costs can be minimized without a lot of hassle, and truthfully, 0.60% isn't very different from the tax drag on that money if you left it invested in taxable. I really appreciate the anonymity and simplification, but I think for a lot of people a DAF actually causes them to give more than they otherwise would. I encourage you to sit down and reflect for a bit on your wealth and what it means to you and make a commitment to give some of it away to a cause you support. If you find this is also an important part of your financial life, consider opening a Donor-Advised Fund to facilitate the process.
What do you think? Do you already have a Donor-Advised Fund? Do you plan to open one in the future? Why or why not? Comment below!