DAFs To The Rescue

DAFs To The Rescue
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#1

Well, we’re coming towards the end of the year and many folks are looking to make strategic “adjustments”. As an example, after already implementing the standard techniques, five grand would bump you down into a lower tax bracket or massage your MAGI in regards to the ACA.

You can purchase a Donor-Advised Fund (DAF) from Vanguard, Fidelity, Schwab, etc. which provides you with an immediate charitable deduction, but allows you to decide at a later date how much and where it is distributed.

You can do one $5K contribution, or five $1K contributions, or ten $500 contributions, or any combination thereof to various charities.

One nice move is to donate enough stock which has appreciated substantially to adjust your AGI or MAGI, the DAF will liquidate the stock, place the funds in your account, and NOBODY PAYS ANY TAXES. You can then purchase the same shares of stock on the open market, and your position is restored, you’ve not paid any tax, yet you’ve accomplished your goal.

Many DAFs will accept almost anything, like a house, property, art, vehicles, or a boat. They provide an appraisal and can liquidate and deposit the funds in your account.


#2

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#3

What is the DAF with the lowest cost that is reputable? Vanguard, Schwab, Fidelity, TIAA all seem to be running the greater of 0.60% or $100 for administrative costs (plus costs inherit in the investments).


#4

The Fidelity Charitable Fund is just outstanding. We’ve been donating appreciated stocks for years, and then supporting our favorite charities later. I’m not the only person who thinks their product is superior – it’s grown to be the largest DAF in the world.


#5

How does this relate to MAGI for ACA?

MAGI for ACA is before charitable deductions. Isn’t this just an itemized charitable deduction? Or am I missing something?


#6

Jerosen, I think this in regards to “resetting” the base for stocks, although this has limited application. The main question I would have is how fast these providers can set up a DAF in the unlikely event tax reform passes. Because of my financial situation and where I live, elimination of SALT would push me towards the standard deduction for the foreseeable future. I would deduct appreciated stock up to the 30% deductibility limit and use the DAF to fund charitable giving until it was exhausted.


#7

As a tax attorney would say, it depends.

Anyway, I was present when somebody did a back-of-the-envelope explanation for someone, but I wasn’t really paying attention, as I don’t qualify for subsidies.


#8

If it’s one of the majors, they can do it immediately. I’d say the biggest lag time would be how long it takes whoever is actually holding the physical shares to get them to the fund.


#9

I’m sure that it is. My hesitation about DAF is that it may not be practical in small amounts, and by small, I mean a balance of, say, $25,000. In that case, the administrative fee would be essentially 0.4% per year. In some scenarios, it might be better to go ahead and make a multi-year donation to your charity of choice … same effect of accelerating the donation into this year, but without the administrative cost overhead.

Not in reply to you since you know this, but to others that are less familiar … the magic of donating appreciated assets works the same outside of a DAF too as far as the tax benefits are concerned. But the DAF would relieve the charity of the receive/sell transaction and paperwork.


#10

If you have a large enough relationship with Fidelity, they waive the yearly administration fee – at least they do for me. It doesn’t make sense for us to give appreciated securities directly to charities, as we give small amounts to a large number of charities. It’s far easier to make one donation of the securities to Fidelity’s DAF, and then direct the DAF to make monthly donations to numerous charities.


#11

You have a good thing going there, then. I called them (the Fidelity DAF specialists line) and was told that neither client level in other accounts (e.g. Private Client Group), or amount in the DAF account would reduce the fee as published on https://www.fidelitycharitable.org/giving-account/giving-account-details.shtml. So whatever you have going, props to you.


#12

Out of the big three is there any reason why you prefer Fidelity? I am a Schwab man myself and dropping it into an appropriate combination of SWAGX, SWTSX, and SWISX would be the lowest fee option.


#13

Posting my personal experiencing having just opened a Fidelity DAF two days ago, and the process of transferring appreciated assets to it. Actually opening the DAF is trivial … takes seconds. The only thing that requires thought is what you want to call your fund, but even that is not cast in stone.

Determining the process for moving assets from another brokerage was a little more difficult. I got different answers depending on who I talked to, and what the assets were. For transferring ETFs from Vanguard to Fidelity, both said I had to fill out Vanguard’s form and have them push it to Fidelity. But for T. Rowe Price mutual fund accounts not held in a brokerage, TRP said that they couldn’t do anything … that would be totally up to Fidelity to handle. This was after having been given the Letter of Instruction by Fidelity to send to TRP. I called Fidelity back and they said, oh yeah, they could pull it. from TRP, so I did fill out their form. I had said in both conversations with Fidelity that I was racing to complete this by year-end, of course. Now that Fidelity has received the TRP move request, it says on my account that:

Depending on the type of asset and how quickly the asset is transferred by the financial institution currently holding your investments, a typical transfer initiated by Fidelity Charitable® will take approximately three to six weeks to complete.

Well. Despite pointing out that I was trying to get this done by year-end, no one said anything about 3-6 weeks. Now I am panicking. In another thread, calwatch pointed me to https://www.fidelitycharitable.org/what-you-can-donate/charitable-year-end-tax-deadlines.shtml, which describes much shorter time frames except for mutual funds held elsewhere. Had someone mentioned this in my discussion about how to get this done quickly, I would have selected ETF assets instead (I was choosing assets with the maximum gain). If I’m lucky, the mutual fund transfer will either complete soon, or hit a snag so it cannot be completed soon, in which case I will cancel and go the ETF route.

One other thing that has me a bit concerned too is that my letter of instruction included specific lot identification for the shares to be transferred (which happen to be uncovered lots). It looks like, though, the version of the LOI Fidelity is sending to TRP drops that info. OK, well as long as they pull from non-covered lots, then it really doesn’t matter. But if they transfer covered lots with minimal gains, I’m screwed.

Lesson learned: Setting up a DAF this late in the year can still be done, but study the expected timeline for transfers carefully. This may influence where you set up the DAF and/or what type of assets to transfer, even if not the optimal for getting rid of the lots with maximum gain.


#14

Is there any reason you wouldn’t donate everything to various charities this year as opposed to spreading it out? I’d imagine part of the reason is the desire to focus on things in different years based on philanthropic needs of the time, but are there other reasons to spread across years?

ETA: I realize there are other benefits to DAFs, but specifically asking about timing.


#15

Reasonable question. In our situation, the charity that we support the most is an organization whose long-term future is not certain. I didn’t feel comfortable about making a 5-8 year gift to them all right now. At the other end of the spectrum the DAF allows us to send a couple hundred dollars here and a couple hundred there with a process as easy as bill pay, and not have to go through the process of donating appreciated assets to each one.

Our DAF is funded (or will be) to last us until we are 70, at which time qualified charitable distributions from deferred compensation come into play.


#16

I’m looking at the DAF to average out future contributions and invest for growth. Also it buys me time to decide what I want to do. My goal is to fund the DAF for about 8 years of contributions; once I fall below $10,000 I’ll just distribute the remainder and close the account.


#17

I’m wondering if the confusion stems from sheer nomenclature. When a fund refers to it taking weeks to complete, are they referring to the settlement date, just as when you exercise an order at a brokerage house, the settlement date is three to five days later, but the official date is the day the order was exercised? Which means you could use the date you put the purchase order in and the rest is back-room backchannel stuff.


#18

According to the people that I talked to at Fidelity, mutual funds at another institution take a long time. But the reasoning sounded bogus to me … things like “they have to be sent off to be re-registered and that takes a couple weeks”. While I’m hopeful that this is all B.S., there are several places deep in their documentation that say things like

To be eligible for a yearly tax deduction, you may need to initiate your donation as early as November.

They also say the date that matters as far as tax deduction is concerned in the day the securities are posted at Fidelity to my DAF, not when they were removed from the sending institution.


#19

None of that makes a lick of sense, UNLESS they’re referencing the settlement date. You’re purchasing shares in a fund, just as you would purchase shares in a mutual fund. The day you execute the order should be the official date, unless it’s after business hours, then it would be the next day.

Obviously if you’re donating a 1959 Cadillac, for instance, there would be appraisals and notarization of title transfers and such, but common securities should be straightforward.


#20

I thought the whole point is you aren’t selling and purchasing new. You’re transferring and then the DAF (the charitable account) is selling? Or not selling, I don’t think you have to have it change to cash in all of them, Fidelity for example.

With your car donation example, if it takes you a month to ship it to a charity by freight, and for some reason the value is $1k lower that month later – Would not the donation/deduction amount be set when it’s received by the charity, not when it was “sent”? Securities will also change value between the time you initiate the transfer and the time the charity receives them.