By Phil West, WCI ContributorIf you have enough money to donate to charities and want an efficient mechanism that also affords you a tax break, you may want to consider a Donor Advised Fund (DAF).
Alternatively, you can also just select when and where to donate to the causes of your choice and not complicate things through a DAF. (Although, as we’ll explore, making direct charitable donations can also be more complicated than you might think.) At The White Coat Investor, there’s a great deal of opinion on the topic, ranging from “hands down the best way to give back monetarily” to “a jerk move” in which “money might not go to an actual charity doing actual good for decades.”
Here are some pros and cons to think about when pondering a DAF for your charity-giving needs.
What Is a Donor Advised Fund?
A Donor Advised Fund is a popular alternative to charitable foundations. It’s essentially, as the IRS sees it, “a separately identified fund or account that is maintained and operated by a section 501(c)(3) organization, which is called a sponsoring organization.” Each fund contains contributions made by individual donors, and the donor, or their representative, has advisory privileges with respect to the distribution of funds and how assets are invested in the account.
Financial companies like Fidelity and Vanguard offer DAF options, as does the National Philanthropic Trust and Daffy. Once a DAF is established, you can donate money to it and get tax benefits for those donations, and you can advise the managing organization on where funds from your DAF go. The catch is that once you’ve invested money in a DAF, you can’t get it back.
More information here:
Donor Advised Fund (DAF) vs. Private Charitable Foundation
How Many Donor Advised Funds Are There?
According to the National Philanthropic Trust’s 2023 annual report, 1,151 charitable organizations sponsored DAFs in 2022, and “grants from DAFs increased 9% to $52.16 billion, a new high for grant dollars.” The report also notes, “DAF assets reached $228.89 billion in 2022, the second-highest value on record after 2021,” even with “the most notable market decline since 2008” affecting how investments across the board performed.
Pros and Cons of Opening a Donor Advised Fund
The Advantages of a DAF
One of the most obvious advantages of having a Donor Advised Fund is you get an immediate and current tax deduction for any donations you make to a DAF. If you’re looking to dip into a lower tax bracket at the close of a calendar year, a DAF is a mechanism by which you can do so.
Because a DAF can take in different types of investment vehicles as donations, like stocks and mutual funds, you can donate directly rather than cash them out and pay a hefty capital gains tax (provided, of course, they pass IRS muster). And since distributions from your DAF can go to multiple charities, you can assign those accordingly, only having to worry about tracking DAF donations rather than the multiple donations you might have to track and itemize yourself.
You can also donate to the fund now and then determine at a later date where you want the money to go. Also, you don’t have to be the only one to decide: If you’re trying to involve your children in giving, a DAF is a way to start the conversation with them and encourage charitable contributions to continue after you pass on.
Also, finally, if you want to do anonymous donations so you don't get inundated by charities who want to ask you for more money in the future, it’s remarkably easy via a DAF.
The Disadvantages of a DAF
Investopedia points out that DAFs aren't quite as donor-directed as they purport to be. According to the article:
“They are not legally required to spend the money they receive and can hold it for as long as they want. Furthermore, the fine print in the agreements explicitly states that donors cede all legal control of their contributions to the DAF sponsor. Although the sponsors promise that donors will retain control, the fund has the final say in what happens to the money.”
Also, you could say it’s a “jerk move” to donate to a DAF because of the fees involved. As we pointed out previously on WCI, “The only people that benefit any time soon from you putting money into a DAF are you and the DAF custodian. In fact, sometimes the DAF custodian benefits a lot! Vanguard’s fee is relatively low, but there are plenty out there charging 1% a year or even 1.5%.”
Also, there’s no guarantee that the money invested in a DAF won’t depreciate. You could donate now with the idea that there’s more money to go around later once the fund gains in value, but if it does the opposite, there’s no recompense, and it’s ultimately the places you’re donating to that miss out on what you’d intended to give them. If you already have a sense of where you want to donate, you can just give that money directly now and put it to work right away.
More information here:
How to Report Donations to a Donor Advised Fund (DAF)
The Bottom Line on DAFs
As an earlier White Coat Investor guest post on DAFss pointed out, “Unless there is a one-time event (such as the sale of a business or other taxable event), there should not be a rush to jump into a DAF.” That article, in tandem with this one, is a great place to start if you’re looking to learn more about Donor Advised Funds.
They’re not necessarily for everyone who wants to make charitable donations. Some might say they’re not a good idea for anyone who wants to give. But for some, they can be an option delivering compelling benefits to accompany the good that comes with giving.
If you need help with tax preparation or you’re looking for tips on the best tax strategies, hire a WCI-vetted professional to help you figure it out.
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I’m in the camp of DAFs are a good thing. While I am not a fan of enriching Vanguard or Fidelity with the fees charged to manage the accounts, there are alternatives. I chaired a local community foundation where we set up DAFs for people the same way Fidelity and Vanguard do. We do charge a fee as well, but as a non profit our fee goes back to the run the foundation which does more than just manage the foundation, we do participate in community wide events and service. Money generated from the fees also goes towards grants to other non-profits.
DAFs are incredibly important for smaller communities where the donor base may not be growing. Our small community has maintained a lot of services because our foundation is able to give almost $2 million annually. As people move into retirement a DAF allows them to continue to give despite potentially moving to more of a fixed income. The continuation of charitable giving into retirement and after death is an annuity for the charitable organizations that we care about and give to while we are alive.
So you’re saying your charity would rather get $20K a year from you for 25 years than $400K right now? Seems unlikely to me. If nothing else, they could set up the annuity themselves.
I’m saying I take a percentage of my giving every year and place it in the donor advised fund. So that my gift will continue long after I am gone. As someone who is very involved with these organizations, the truth is many of our larger donors are dying off. We do not see the same level of charitable giving among the next generation. We have an annual campaign for one organization that raises $2,400,000. Due to having established donor advised funds and legacy giving, we now started the campaign this year with over $400,000. I actually think our organization is better served with $20k a year for the next 25 years than $400k right now and then not knowing whether I will give anything in the future. We are actually speaking with all donors now about increasing their gift by 10% and putting that amount in an endowment fund for the organization. For most non-profits that struggle to raise money annually, a one time windfall is gone before the year is out. Unfortunately, I have seen our organizations receive one time large gifts and somehow the boards always find a way to utilize the gift for something now.
If that’s the case…an excellent reason to use the DAF. The organization ought to learn how to budget, save, and invest too though. 🙂
I am a board member for a small, faith based non-profit, and over the last 12 years have been both Treasurer and Chairperson. We cannot accept securities. We budget and save, but we also want to do the most good. That takes money. So getting steady contributions helps us maintain what we are doing.
Another benefit of DAF is to store up charitable donations for big fundraising drives. Our church needed remodeling this year and we donated directly with appreciated funds. What happens if the market goes down when our church needs the parish hall renovated? No appreciated funds available. What if I am retired and don’t need the tax deduction because my income is much lower? I will still give, but the tax man doesn’t subsidize my giving as much. My DAF allows me to maximize my overall giving by getting the greatest tax benefit at the appropriate time.
2018 was our first year to open a DAF and we absolutely love this giving vehicle. We’d had a good year and wanted to give in a way that would also reduce taxes and reduce our taxable income to put us into the range to receive the Qualified Business Deduction. We put in $100,000 on Dec 31, 3018 with the market at its low for the year. This is equal to less than 2 years of our normal charitable giving so we planned to then give out of it for 2019 and 2020. Fast forward, that amount has grown significantly so we’ve been able to give much more than normal. In addition, we’d made full quarterly tax payments knowing it had been a good year so with the extra 20% QBI deduction our tax REFUND ended up coving more than 3 quarterly tax payments! We’ll owe only $2,000 in Jan 2020. We are also debt free so our only other deduction is real estate taxes. We will only pay the RE taxes on rentals and office before Dec 31, 2019 and will take the standard deduction for this year. Our home real estate taxes will be paid in 2020 along with a new donation to the DAF equal to another two years of giving. So, basically, we are bunching using the DAF. We love the anonymous giving and automated giving to our church (without one of us paying 4% for online payment with a credit card payment ). We have definitely been more charitable than ever because it’s already out of our budget and we know we saved a ton in taxes. Final note – our DAF is with Vanguard charitable invested in the s & p 500 which historically has had a positive year 8 out of 10 years. I’d say those are good odds you’ll get to give away more, not less.
The 4% savings is great, but bunching isn’t necessarily a reason to use a DAF. I’ve bunched just fine without one.
Not sure why you think giving more later is necessarily better than giving less now. Time value of money and all that. Unless you think the charity can’t invest its way out of a paper bag and you need to hold their hand on the investing front.
I am beginning to see one of the differences here – whether or not you know exactly what charities are getting the money. I do give to a fairly small church so I would have some concerns about dropping in a two year tithe and not giving again for two years. Just not the way I prefer to give a church that depends on a monthly budget system. But, the remainder of our giving isn’t just to a fixed set of charities. And, even for the ones we do generally support each year, the amount we decide to give may vary based on needs that come up within the charity. So, we have a general giving budget but the DAF allows us the flexibility to give as we’re lead during the year.
Yes, many charities can’t invest their way out of a paper bag. Big ones can do it fine. Small ones usually don’t have a lot of investments (if any). St. Francis Center in downtown LA has no investments, doing great work for the homeless.
We went to the fundraising dinner for a Pregnancy Help Center and they prefer regular contributions. That is best facilitated with a DAF and appreciated securities.
Many thanks to WCI and PoF for this excellent and thought-provoking discussion!
I am firmly in the pro-DAF camp. I plan to leave the work force very soon, but I want to continue my philanthropic activities for as long as possible. Setting up and front-loading a DAF is an excellent option in this setting, because it allows my donated assets to grow while giving me time to consider when and where best to deploy them. A well-stocked DAF will ensure that I am able to continue to support the organizations that further my vision of of how best to make this world a better place, for many years to come.
In my opinion, people who donate carelessly to charity are nearly as irresponsible as the fool who blows all his hard-earned money at a casino over a weekend. I try to be as careful with my charitable donations as I am in all other aspects of my financial life. I work hard for my money, and I want to know that any funds I donate will be used in a way that is responsible and consistent with my objectives. Non-governmental organizations (NGOs) are like any other organization, and sometimes their performance is not as good as we would hope. Organizations such as CharityWatch and Charity Navigator evaluate and rank NGOs annually on the basis of their effectiveness, accountability, governance, and fundraising efficiency, etc. Before I send money to any NGO, I update my research to ensure their work continues to be in line with my goals. If they have fallen below a certain ranking, I try to find out why, and if there are signs of mismanagement of funds I typically will donate to another NGO with a similar objective.
Finally, my accountant and I both appreciate the fact that with only one annual charitable donation to track, the DAF also simplifies my accounting and tax documentation.
I agree, that’s a good use for a DAF. If you just can’t decide who to give the money to yet, you get your tax deduction now while in high tax brackets and can decide later.
The simplification is a huge benefit, I agree.
Your comments on NGO accountability resonate with me. I’ve discontinued support to a college scholarship NGO after learning that they award 90% to young women and only 10% to young men.
I donate enough to itemize every year, and I believe that Dr. Dahle does as well. I agree with the “jerk move” concept, but I also hate getting all the solicitation from charities. I think that they even share my address with other charities! That may be reason enough to start a DAF.
Dr. Dahleen isn’t a natural giver, as he wrote, “I don’t love parting with money. My relative frugality is a trait that helped me become wealthy, but it can also lead to some miserly Scrooge-like behavior.” So for people who would prefer to keep their money, the “jerk move” could be forgivable, since it may end up nudging people to donate more. But you don’t get “credit” until the recipients receive the money! Don’t brag how much is in your DAF and expect a pat on the back.
Amen.
Actually, I’ll give half credit for putting it in the DAF. It isn’t like you can take it out and spend it. It will go to a charity eventually. But that date could be decades away.
Colleges can have endowments, a large “pile of money” that is invested with the proceeds being put to good use annually.
Foundations can exist, donating the proceeds from the foundation’s investments on a regular and ongoing basis for decades.
But when an individual sets up a DAF, a chunk of donated money that’s invested, and plans to grant to worthy charitable causes from it annually for decades, he or she is selfish.
OK.
I just sent off another $100k to the DAF this morning, and have granted ~$30k to charity thus far in 2019. I’ll keep doing what works for us.
Cheers!
-PoF
I will also be transferring a 6 figure amount of stock into my DAF this week. I will then distribute it. I see the DAF as a vehicle, not a storage facility. Obviously you’re well within your legal rights to just leave your assets in there as long as you want. Different strokes for different folks.
I enjoyed this piece the first time around and again today.
I am one of those in the “jerk” category, and have been a jerk for at least a dozen years! I will say that having a balance in the DAF does prompt me to give more than I would otherwise, just because I see the money whenever I sign into my Fidelity account.
Example, last year my wife and I were at a fundraiser event for an organization that she is a board member, one that helps with education of inner city youth in our community. We usually donate a perfunctory $1000 per year. At this event, we were especially impressed by the breadth of programs for the kids and the kids themselves. They were really doing some great stuff!
The executive director of the organization was asking around for someone to give a $10k donation for the paddle raise to get things started and despite all of the wealthy people in the room (we were probably bottom 10%), he was having trouble getting that first donation. We quickly discussed it and decided to go for it. I knew that this would not affect our cash flow one bit since the money was already allocated to the DAF.
The paddle raise began at $10k and no on immediately volunteered. Then, we jumped in and as soon as we raised our hands for $10k, three others quickly followed. If the money were not in the DAF, this would not have played out as it did and perhaps this very worthy charity would have missed out on potentially $10s of thousands in contributions that year.
Happy to have just opened a DAF this past week, in part due to these discussions. I had one question about the amount of tax deduction benefit. If you hold a security, it doubles and then you donate those shares, you get to deduct the fair market value not just the cost basis (if you’ve held for more than a year). In a DAF, you only get the deduction for the cost basis but not the appreciated value. In either case, you don’t pay capital gains tax. Is that correct?
Your understanding is incorrect. You will receive a deduction equal to the full fair market value on the day of transfer. In the larger context of deductions, you will compare your deduction to the new higher standard deductions ( $24,400 for mfj) and decide to itemize or use the standard deduction.
JZ is correct. You deduct the net asset value at the time the stock, mutual fund, ETF, etc… is donated.
How I decide with lot(s) are optimal to donate : https://www.physicianonfire.com/donoradvisedfund/
Cheers!
-PoF
Our church mounted an aggressive campaign to pay our building off. My wife and I wanted to give 10K in addition to our usual giving. I wanted to give appreciated stock, but the church was unable to take it in kind so we went with a Vanguard DAF. I put in enough to get a break on 2019 taxes. Giving is almost effortless and no records to worry about because we’ve already taken the deduction. I will retire in three years and will “load it up,” and give any tax savings I realize to my charities. The IRS is not one of them.
Great reason for a DAF.
Though I think writing out a check each pay period to give to my church is a good discipline, I like the idea of a DAF for two reasons. 1) As a vehicle – my wife and I want to give anonymously to other churches, DAF allows this. 2) When I retire in 10 yrs, I still plan on giving. However, since I am not going to have much in way of regular income in retirement, there will be a greater tax benefits to me now as a high income earner, my future gift has a chance to grow, and I will still be able to designate the funds later. Am I overlooking anything?
My biggest fear is that Congress will change the rules on DAFs in the future not allowing to give to certain charities.
Your thinking is correct.
I don’t think the government can do anything specifically with DAF giving. The DAFs themselves are charitable organizations. They could change the rules on charitable giving deductions, which I see as a good reason to take the deduction now by loading up the DAF.
There is reason to fear the DAF itself not allowing you to give to certain charities. A recent example:
https://www.cbsnews.com/news/charles-schwab-charitable-fund-halts-donations-to-nra/
Best,
-PoF
Wow. That’s interesting. But you can always roll your DAF elsewhere. I mean, the NRA could start one.
Your point about the DAF not allowing donors to give to certain charities is valid, and it may be more common than we think. For example, Environmental Defense Action Fund (EDAF) is a legitimate 501(c)(3) charitable organization with an A+ rating on CharityWatch. Twice I have tried to donate to this NGO, and twice been denied—despite being its being listed on Vanguard Charitable’s website.
We must understand that once we have made the contribution to the DAF, we no longer control the funds. We merely advise, and make grant recommendations. So this may be a good reason for people NOT to use a DAF, especially if they wish to support an NGO that may be politically sensitive (NRA, ACLU, EDAF, etc.).
My current trajectory involves dropping to half time in five years and then to zero W2 income in ten years. By pre-funding my donations for the next fifteen years during the next five, when I’m in the op tax bracket (and with highly appreciated assets,) I’m able to donate more than I would otherwise. Seems an all-around win to me.
But why not do all the donations now? What’s the reason to make the charity wait 15 years?
I think that we all have a number of reasons for charitable giving.
Most important for me, of course, is that I believe in the causes and want to see them adequately funded. They have need now, but they will continue to have need in the future, as evidenced by the solicitations for additional special matching gifts, Giving Tuesday gifts, and year-end gifts by my regular charities. Yes, they have foundations, and if I were to donate all up front, they would invest it or use it as they see best, but the investments in the DAF are also generating a return that will go to the charities, and the financial difference between the two is not likely huge.
Tax breaks are not a reason that I or likely anyone gives – if it were merely a question of financial gain, not giving at all is less costly. Tax breaks do help guide my investments, including to whom and (as above) when I donate.
But there is also an emotional component to this giving. It helps me to stay connected to the larger world and to the causes to which I am donating. By continuing to see distributions from my DAF after it has been funded and after I am donating less or not at all during a year, I maintain this ongoing connection and sense of accomplishment at giving. I am not convinced that this would be the case merely remembering that I’d given in the past.
In the end, donors are doing a good thing and making a degree of financial sacrifice. They are not “jerks.” While it is good to raise issues that help us to optimize our giving, we need to be careful that we are not shaming donors for not doing it “correctly.”
You don’t see any difference at all for the charity in whether they get the money now or later? I’ll bet your favorite charities feel differently. The “jerk move” is a bit of a legacy term we’ve used over the years that I mainly use to point out the fact that the only person helped at the time you make a DAF contribution is you, but you’re right that it is far better to give later than to not give at all.
[Comment deleted for profanity and other offensive language.]
Okay, apologize for the mildly salty language. But I hope that you take my point.
It’s your money man. Do what you want with it. Don’t give it away at all. Give it away later. Give it away now. It’s your call.
It’s my opinion that no charitable gift has occurred until money is distributed from the DAF, despite the fact that the IRS will give you credit at the time of contribution to the DAF. If there were such a thing as “credit” (and there isn’t other than what the IRS gives) for a charitable contribution, I’d give it out in the following rank order from worst to best:
1) Not giving away anything
2) Pledging to give money away at death/putting it in will
3) Contributing money to a DAF at some vague future date
4) Contributing money to a DAF and immediately distributing it or giving directly to a charity
I’m with POF here. Only recently discovered donor advised funds are in Australia too. It seems to makes sense to take advantage of being able to deduct while on top tax rate 47% down to retirement 0%. That means $4700 extra giving for each $10k donated!
Struggling with the concept a bit: If I have ETF shares worth $10K in 2019 for a DAF (let’s say I bought the ETF shares in 2009 at $5K), but I expect annual rate of returns of 7%, in 2029, the ETF shares would be worth almost $20K in 2029. If I decide to retire in 2030, then wouldn’t 2029 be the ideal year for me to deduct those ETF shares that are now worth a much larger tax deduction then than now?
My annual giving is <$5K currently and I plan to work at least 5+ years, so if I open a DAF now, it seems that I will be parking my money in the DAF and taking my tax deductions too early, no?
Thanks for helping with this point of confusion!
I agree it’s silly to put money in a DAF before you’re ready to give it to charity most of the time. That was my point in the article, mostly because of the jerk move issue. But you point out a second reason why it may be a bad move.