[Editor's Note: It's that time of year when we're all thinking a little more charitably so The Physician on FIRE sent me this post for our weekly WCI Network post. This was originally run on PoF a while back (a while being before I opened a DAF myself) but was never run on this site. It's kind of a funny post to run now because I actually do run all my charitable giving through a DAF. The only difference between the way I use one and the way PoF uses one is that I don't store money in it to give later, the infamous “jerk move.”]
Welcome to our first Pro/Con post, a collaboration between The White Coat Investor and me. This is going to be fun.
The White Coat Investor a.k.a Dr. Jim Dahle and I have a lot in common. We are both physicians in a shift-work specialty. We’re the same age. We can consider ourselves to be financially independent in our early forties. We work less than full time and have kids in grade school. We’re both pretty tall thanks to our Scandinavian heritage. Even our names are similar.
Another trait WCI and I share is our proclivity towards
charitable giving. Where we differ is how that’s best accomplished. As of today, I have exactly four years of experience with
donor-advised funds (DAF) and I think it’s hands down the best way to give back monetarily, but I have yet to convince him to open a DAF of his own.
We’ll open with his argument against the concept, and I’ll follow up with my counterarguments and a few additional pro arguments to seal my case. My goal is to be objective and let you, the reader, decide why you agree with me.
The timing of this post is not accidental. There is still time to open and fund a DAF in 2019 to take a deduction at your current marginal tax rate, particularly if you use funds from the same brokerage to fund the account. For example, Vanguard to Vanguard Charitable, Fidelity to Fidelity Charitable, or Schwab to Schwab Charitable.

December 26, 2013. My first DAF
WCI versus PoF: A Pro / Con on Donor-Advised Funds
Con: A DAF is Fine, but Beware the Jerk Move by The White Coat Investor
Physician on Fire and I had a spat on the WCI Forum the other day. He’s a major proponent of a Donor-Advised Fund (DAF). In fact, I think the whole blogosphere has been aflame with excitement about this niche account in the last few months. Apparently, all of these bloggers use them and have written about them:
In case you’re not aware of how a DAF works, let me briefly explain. You open an account at Vanguard (or wherever) and make a contribution. If you itemize, that contribution can be a tax deduction on this year’s taxes. Then the money stays in the DAF, invested in whatever you like for as long as you like. You pay the custodian a fee each year (the fee at Vanguard is 0.6%.) And then you “advise” the fund manager to donate money to your favored charities whenever you feel like doing so.
Donating to a DAF is a Jerk Move
I think I may be the lone dissenting voice on these. I don’t think they are awesome. In fact, I’ve even called donating to a DAF a “jerk move.” Here’s why:
When you donate to a DAF, you get a tax deduction. But no charity gets any money. In fact, that money might not go to an actual charity doing actual good for decades! 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%.
Physician On FIRE will surely argue that the DAF fee is no big deal, since the tax drag on that money in a taxable account will be similar. But that’s really quite a straw man.
First, you can tax loss harvest in that taxable account, but you can’t do that in a DAF. In fact, the charity gets REALLY hosed if the value of your asset drops dramatically between contribution and donation. You got a huge deduction, and the charity gets some piddly donation. That’s a real jerk move there.
But the main reason it’s a straw man argument is he is comparing putting money you’re going to donate to charity later into a DAF versus putting that money into a taxable account. I would argue that the comparison should be putting the money into a DAF versus giving money to charity RIGHT NOW. There’s no advisory fee or expense ratio or tax drag on money you give away. It’s totally free. In fact, it works just as well to flush out low-basis shares from your taxable account if you have charitable intentions.
Now don’t get me wrong. Donating to charity is a good thing, no matter how you do it. But if I had to rank the “how” by which one is more impressive to me, I’d rank them like this, from least impressive to most impressive.
- Leaving money to charity when you die. Yes, it’s nice, but you’re really giving your heirs’ money to charity, since you certainly didn’t need it.
- Putting money in a DAF. The sooner you donate it, the more impressive it is to me. Leave it there for decades or even until death? That’s pretty much the same as # 1.
- Giving the money to charity right now. The charity gets the cash right now and can start doing good right now with it. That’s most impressive to me.
In reality, there are really only six reasons to use a DAF and they’re all pretty darn niche. The vast majority of charitable givers don’t need to use one.
Six (Mostly Lame) Reasons to Donate to a Donor-Advised Fund
# 1: Indecision
If you just can’t decide what charity you want to support, but want to get the tax deduction for the contribution this year and give to charity eventually, then it’s probably reasonable to use a DAF. But most of us know what charities we like. Put the work in to research your charities and do it right, and right now.
# 2: Selfish Giving
If you’re giving to “feel good” rather than to help others, then happiness studies suggest that giving small amounts at frequent intervals are best. In fact, using a DAF can help you feel good twice-once when you put it in the DAF and once when you take it out of the DAF!
But it seems a little superficial to me. If you have a large sum of money that you don’t need and you want to give to charity, just give it to charity. Spreading it out over decades doesn’t help the charity. It only helps you.
That’s selfish. I mean, not as selfish as giving nothing at all, but it’s not the same as a straight donation. But if a DAF gets you to give to charity for any reason, and you wouldn’t do so otherwise, then sure, use the DAF.
# 3: Screw Up the Charity
If your donation is so huge that it is going to really mess up the charity’s future planning, I suppose using a DAF to spread donations out could make sense. But I can only think of a single charity I’ve donated to over the years that even a $100K lump sum would mess up their planning.
# 4: Get the Little Things Deductions While Bunching
During the year you get nickel and dimed for little $20 and $50 donations here and there. You could use a DAF to do these while still being able to bunch your charitable donations and take the standard deduction every other year.
This option becomes more attractive with the new higher standard deduction and the decreased ability to deduct state and property taxes. But realize this isn’t even possible with most DAFs. The Vanguard minimum donation is $500. You can’t use this thing for the $20 donations.
# 5: You Think a Future Donation Does More Good But Want the Deduction Now
Another argument for a DAF is a bit weak, but I’ve heard Warren Buffett make it before so I’ll include it. Basically, the idea is that the charity can use the deduction more later than they can use it now. Or that you’re such an awesome investor that the charity is better off getting the larger amount after you’ve invested their money for them for a few decades. Like I said, kind of weak if you’re not Buffett, but if you believe it then fine, use a DAF.
# 6: The Charity Can’t Handle a Donation in Kind
Some charities are too small to have a brokerage account and can’t handle you transferring them appreciated shares of stock or mutual funds. These tend to be VERY small charities, but if they’re your favored charity, this could be a reasonable use of a DAF.
For the rest of us, charitable people that aren’t in one of these niche categories above, just give the money to charity directly and skip the DAF. Or at least don’t give yourself a pat on the back for making a DAF contribution until you’ve actually donated the money to a charity. However, realize that you can flush appreciated shares out of your account just fine donating directly to most charities. You don’t need a DAF for that.
[Update 12/2019: As noted in the post linked to in the introduction, there are two other good reasons and those are the reasons I actually use a DAF now- you don't fill your mailbox with “Charity Porn” because you can hide your identity from the charity using the DAF while still getting a deduction and because it is easier to donate in kind via a DAF than directly. It's faster and less paperwork hassle.]
The Rebuttal from Physician on FIRE
Since we’re talking about charity today, I can’t help but say this feels like a charity softball game. Not a fastpitch game, but definitely a slowpitch game, and I’ve just been tossed a meatball in the center of the strike zone.
Donating to a DAF is Not a Jerk Move
When you donate money (preferably in the form of appreciated equities with a low-cost basis, but cash is also accepted) to a DAF, it’s a one-way transaction. There is no taking it back. It is destined for charity, and so are over 99% of the investment returns over the life of the fund, assuming you choose a low-fee DAF.
Our donor-advised funds now hold over $250,000, and I plan to treat the sum much like I do my own nest egg. If I were to stop contributing right now, I could give the equivalent of $10,000 a year in today’s dollars (using a 4% safe withdrawal rate) with a good chance (FIREcalc says >80%) of never running out of money to give in my lifetime.
Barring a poor sequence of returns, there’s an excellent chance the balance would continue to grow, allowing to give more generously as time goes on. Yes, our chosen charities would rather have $250,000 now, but if we were to grant $10,000 to $50,000 each to a handful of charities, I’ll bet they’d expect great things from us in the future, and I can’t afford to be that charitable year after year. Does that make me a jerk? I don’t think so.
What is more likely is that we’ll continue to grow the fund — I donate half of my profit from this site to charity via our DAFs, and we’ll probably choose to give more than 4% per year. But we’re already in a position to donate a five-figure sum annually in perpetuity.
Well Known Benefits of Donor-Advised Funds
I’ve written extensively about DAFs, and I won’t repeat everything that’s been said, but I think it’s important to highlight some of the benefits that are more widely known.
Donating to a Donor-Advised Fund results in an immediate tax deduction.

There are times when large donations can be helpful to take advantage of tax arbitrage.
Just prior to retirement is another time to consider a large lump sum donation. You might drop from the 39.6% (soon to be 37%) tax bracket to the 15% (soon to be 12%) tax bracket.
Capital gains disappear when you donate appreciated securities.

If you have a mutual fund from ten years ago that has tripled in value, you might pay hefty capital gains on the sale to access that money. When you donate the fund, neither you nor the recipient pay the capital gains tax.
While it’s true that some charities can accept funds directly, many can’t and the hassle factor cannot be ignored. A donor-advised fund makes it very easy to transfer mutual funds and other assets into the account and donate to charities large and small whether or not they can accept stocks and mutual funds.
You can fund a DAF now, and donate later.

The White Coat Investor sees this as a negative, but I see it as a positive. In his excellent post In Praise of Giving, he talks about how giving takes work. Effective giving does take some effort in researching what types of organizations you want to support, and which specific recipients will best achieve those goals.
When I retire, I won’t have the income to support generous giving. Thankfully, I’ve got the DAF to support decades of giving.
While most of our current giving has been local, effective altruism suggests our dollars would do more good providing clean water to those who don’t have it or medications and vaccinations to third world countries. Our giving may shift more to organizations working on worldwide health issues. Perhaps we are indecisive, and the truth is I haven’t taken the time to research how to best allocate our donated dollars.
There are several highly-rated books shown above on the subject of optimal giving, and I’m a big fan of optimizing. In retirement, I’ll have more time to give and more time to read. Thanks to the DAF, I’ll also have plenty of money to give.
Lesser-Known Benefits of Donor-Advised Funds
Charitable giving is far simpler with a donor-advised fund.
Before I had a donor-advised fund, in order to get the benefit of the tax deduction (which allows me to put more money in the charity’s coffers per dollar I part with), I would write a check, enter that donation into a spreadsheet, and wait for a receipt that I would save in a folder to support the itemized deduction.
Over the course of the year, that could be dozens of checks mailed off to different places, a pile of receipts, and if I miss a spreadsheet entry, that’s a deduction I’m not taking. Now, with one large contribution to the DAF each of the last four years, I may never have to keep track of another donation for the rest of my life. When I log in to my DAF, I can donate to twenty different charities with a few quick clicks and keyboard entries. My year-end giving literally takes less than ten minutes, and there’s no need to track any of it for tax purposes since the deduction has already been taken.
A DAF eliminates the need to bunch deductions.
Alternatively, you could say a contribution to a DAF is an effective bunching of deductions.
The White Coat Investor gave two years’ worth of his normal charitable contributions in 2017 and didn’t give enough in 2018 to itemize deductions, taking the standard deduction instead.
That means any smaller donations he made throughout the year in 2018 will not benefit from a tax deduction. In other words, when Dr. Dahle gives up $100 for a school fundraiser, the school receives exactly $100. If he were giving in a tax-advantaged way like a DAF, he could have given closer to $180 at a cost to him of $100.
While it’s true that Vanguard Charitable has a $500 minimum grant, both Fidelity Charitable and Schwab Charitable allow you to grant as little as $50 at a time.
Funding a DAF now makes a ton of sense if you plan to take the standard deduction in the future.
Both Dr. Dahle and I live mortgage-free, and we’ll only be able to deduct up to $10,000 in state and local income tax or property tax.
That leaves a $14,400 gap to reach the $24,400 standard deduction for married couples filing jointly in 2019. If we were to itemize deductions every year, assuming we have no miscellaneous deductions like gambling losses or medical expenses or loss to theft in excess of 10% of our adjusted gross income, the first $14,400 of our donated dollars would not qualify for a tax deduction.
Someone in our situations donating $15,000 a year would only be rewarded with a tax deduction on the final $600 donated, reducing tax burden by less than $300 each year.
A better move would be to contribute $75,000 to a DAF in 2019, taking a deduction of over $60,000, and donating the money over the next five years from the DAF. With decent returns, they might be able to give $15,000 a year for six or seven years.
By doing so, instead of saving maybe $1,200 in taxes over five years, the lump sum contribution would result in about a $24,000 reduction in federal and state income tax owed on the 2019 tax return (assuming a 40% marginal tax rate between federal and state).
Anonymous giving is a cinch with a donor-advised fund.
With each grant from a DAF, you decide how much information is shared with the recipient. You have the option to share full details including name and address, limited info such as the name you assigned to your fund only, or no information at all.
Anonymous giving is an excellent way to stay off the mailing lists of the charities you support, and could actually save the charity the money they would spend on sending you marketing materials.
The psychological benefit of pre-paid donations.

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.
By donating to a donor-advised fund, I’ve funded many years' worth of donations. I don’t have to convince myself each year that we can afford to give. I’ve already made that determination and parted with the money.
Now, when I donate, it’s like I’m playing with house money. Donations from my DAF don’t affect my net worth or personal financial future. As Dr. Dahle pointed out, I get to pat myself on the back twice. But only one of those back-pats costs me any money.
Closing Arguments
While it’s true that many of the benefits of giving to a donor-advised fund can also be realized by direct charitable giving, there are some unique benefits to using a DAF.
- “Donation smoothing” or the ability to give every year with no concern about exceeding the standard deduction.
- Simplified giving. In 2017, we made 28 grants to 25 recipients. The DAF keeps track of those recipients and I can give to them again by checking the box next to its name and adding a dollar amount. It’s much easier, faster, and none of it needs to be reported on Schedule A of your 1040. In 2018, we donated to well over 100 charities, with 100 of those grants arising from a single blog post.
- Anonymous giving. While this can be accomplished outside of a donor-advised fund, within the DAF, it literally requires one mouse click.
- Psychological benefits. People with DAFs give more generously than others.
- Tax arbitrage. A DAF allows you to donate at your current marginal tax bracket, which could drop in the future. Mine dropped when I started working part-time. It will drop again with the Tax Cuts and Jobs Act (from 33% to 24%) and will drop again when I retire and no longer have an income. But every donated dollar will have benefitted from a healthy tax deduction in a high marginal tax bracket.
That last point deserves a little more attention. It can be seen as greedy, but that’s not at all how I view it.
When you get the most bang for your buck by taking a larger deduction, the ultimate benefit goes to the charities you choose. If you decide you’d like to give $1,000 of your money and you’re in the 12% tax bracket, you can donate $1,136 at a cost of $1,000 to you after the $136 you get back on your taxes.
If you decide you’d like to give $1,000 of your money and you’re in the 39.6% tax bracket, you can donate $1,655 at a cost of $1,000 to you after the $655 you get back on your taxes.
These examples assume you have itemized deductions that exceed the standard deduction, which is nearly doubling in 2018. If you don’t have enough deductions to itemize, some or all of your donated dollars will only result in an equal value to charity.
Why would you not attempt to maximize the “government match” with every dollar you choose to give?
As I said above, there is still time to start a Donor-Advised Fund in 2019.

What do you think? Is keeping money in a DAF a “jerk move”? Does a donor-advised fund make sense for you? Have you opened one recently, or have plans to do so?
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.