In addition, a reader named Howard recently emailed me the following:
Donor-Advised Charitable Gift Funds: I’ve recently established (through Fidelity) a donor-advised charitable gift fund. A donor advised fund enables you to contribute an asset, typically an appreciated stock or mutual fund to a charitable fund that is created in your name (The Berger Family Charitable Fund). You would pay no capital gains tax on the appreciated value and would get a tax deduction for the full amount of the charitable contribution. Once the fund is established, you “recommend” that the fund make grants to the charities that you typically support.
This came to mind on your recent podcast in which you mentioned that you held a small cap fund in a taxable account with considerable gains and are holding it to avoid having to pay taxes. This is a perfect example wherein you can contribute the fund to your Donor-advised fund, not pay any capital gains taxes, and get a tax deduction for the market value of the contribution. Needless to say, I believe I’ve properly explained the tax advantages, but I’m not a tax expert, so I urge you to confirm!
I funded my account by transferring shares of Apple stock that has appreciated very well (300%+) over the years.
Is this a vehicle that you’ve explored and do you have any thoughts?
Let’s first start with just what a donor-advised fund is.
Table of Contents:
Donor-Advised Fund Basics
Run by companies like Vanguard and Fidelity, donor-advised funds allow organizations and individuals to set up the equivalent of a charitable foundation. You contribute cash or securities to the fund. The fund invests the capital based on your risk tolerance, and then will distribute the proceeds to charities of your choosing. Think of it as a middleman between you and the charity that invests the money until you’re ready to give it away.
Advantages of Donor-Advised Funds
Like most people, my wife and I have always made charitable contributions directly to the charity. We either write a check or use a rewards credit card (no reason not to earn 2% cash back). But this approach presents two problems.
First, at the end of the year we are always rushing to figure out where to make our final contributions. With the tax clock about to strike midnight on December 31st, sometimes we feel as if we are making these decisions too quickly. Call it procrastination, but it would be nice not to have to deal with tax deadline every year.
Second, we’d like to donate appreciated stock and mutual fund shares instead of cash. With appreciated securities, you get the full tax deduction based on the current value of the stock, but don’t have to pay any capital gains. The problem is that many of the charities we give to are small organizations that are net set up to accept stock.
A donor-advised fund can solve both of these hurdles. First, you get the tax benefit based on when you contribute to the fund, not when you direct the fund to distribute the money to a specific charity. This means that once you contribute to the fund, the money is no longer yours to control, and you can’t get it back. But you get the tax deduction immediately, even if you wait months or years to make a distribution to a charity.
In addition, you can donate appreciated securities to a these funds. When you decide to make a distribution, the fund will sell the securities and distribute cash to the charity of your choice. You get the benefit of donating stock with significant capital gains, and the charity of your choice receives the cash from the sale.
The donation of appreciated securities is arguably the most significant advantage to donor-advised funds. If you plan to make contributions to a number of charities, trying to give stock directly to each charity would be an administrative nightmare. With these funds, you donate the securities once just to the fund, and they take care of the rest.
- Appreciated Stock: You can contribute appreciate securities and take a full deduction without paying tax on the capital gains.
- Donate Now, Give Later: You can make your contribution at any time and receive the tax deduction immediately. But you don’t have to make grants to specific charities until you are ready.
- Anonymity: For those who want to make anonymous donations, a donor-advised fund is an easy way to do it.
Disadvantages of Donor-Advised Funds
There are some potential disadvantages to these funds. First, as noted above, once you contribute the money, it’s out of your control forever. You can’t get it back. So you need to be certain of your contribution before you make it.
Second, there are fees associated with the administration of these funds. Vanguard, for example, charges an annual administrative fee of 0.6% for the first $500,000 in the fund, and 0.45% thereafter. These fees are in addition to the expense ratios you’ll pay for the mutual funds you invest the money while it sits in the fund.
Third, there is typically a minimum contribution to open an account. At Vanguard, you need $25,000 to open a donor-advised fund. At Fidelity the minimum initial contribution is $10,000.
Where to Open a Donor-Advised Fund
The three main options are Vanguard, Fidelity and Schwab. Here’s a comparison of each:
|Min. to Open||$25,000||$5,000||$5,000|
|Fees||0.05% to 0.60% +|
|0.15% to 0.60% + |
|More Information||Vanguard Charitable||Fidelity Charitable||Schwab Charitable|
They say there are only two things certain in life, death and taxes. I would add to that list changes in tax laws. As the United States struggles to address a growing national debt and a complex tax code, everything is on the table, including deductions for charitable contributions. While I don’t think such a change is imminent, it’s reasonably possible that many of not all tax deductions could be replaced by a much simplified tax code.
With a donor-advised fund, however, you can make the contributions now and enjoy an immediate tax deduction. And then you can take your time making grants to specific charities from the fund, regardless of what our fearless leaders decide to do with the tax code.