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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.
WCI versus PoF: A Pro / Con on Donor Advised Funds
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 the last few months. Apparently, all of these bloggers use them and have written about them:
- Wealthy Doc
- JL Collins
- Frugalwoods
- Our Next Life
- DoughRoller
- Investing to Thrive
- Stop Ironing Shirts
- Fetching Financial Freedom
- Need2Save
- ESI Money
- Leigh’s Financial Journey
- Doctor Money Matters
- Retire to Roots (blog inactive)
- Plan Invest Escape
- PT Money
- Retirement Manifesto
- Rogue Dad MD
- A Good Life MD
- Chief Mom Officer
- B.C. Krygowski
- TJ Pridonoff (blog inactive)
- The White Coat Investor
- The Best Chapter
- Crispy Doc
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.
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# 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.
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.
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.
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-advantated 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 it’s 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.
For more information on Donor Advised Funds, please see all of my posts on the topic:
What do you think? Is donating to 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 in the next five days?
92 thoughts on “WCI versus PoF: A Pro / Con on Donor Advised Funds”
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Very interesting and informative blog. Keep posting!
Thanks for this. More (belated) thoughts –
Sometimes a DAF can help when you are forced to sell an appreciated stock by corporate events – esp common in the years around 2000-2012 when US companies such as Medtronic and Eaton did “tax inversions” – becoming a new Irish company (by merging with a smaller Irish company) to reduce tax bills. Meaning if you held $100K of old Medtronic US stock that you had bought at $5K, the corporate transaction worked like a forced sale for you, for your $100K of Medtronic US stock you would get $100K of new Medtronic ireland stock with a $100K basis and you would get $95K of taxable capital gains income. If you donated that stock to a donor advised fund before the tax inversion took place, you could avoid the tax hit. Tax rules changed around 2012 making that move less easy and beneficial for companies, but the move happened a lot before that. And the same may still happen with some corporate mergers and buyouts, though they are more often structured to avoid tax consequences for shareholders.
Use of a donor advised fund lets you donate appreciated stock in a way that 1) is more easy and 2) lets you spread around the donations while getting the tax benefit. If you have the $100K of Medtronic stock with a $5K basis from my previous example, sure you could donate that appreciated stock to your favorite charity and that would give you the tax benefit of avoiding the $95K taxable income, but it would be a bit of a hassle to transfer the appreciated securities without selling them, and it would be especially hard if you want to spread that $100K donation across ten or twenty charities. Both of those are super easy with DAFs.
The avoided tax hit lets you donate more to charity than you otherwise would.
The appreciation over time can be significant, and all goes to charity.
Excellent point, D.
I didn’t realize these companies forced sales on their shareholders. Any stock that has returned 20x is an excellent candidate for donation to a DAF.
Cheers!
-PoF
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I don’t have a donor advised fund, nor do I envision establishing one. My thinking is more along the lines of the WCI in this matter. This report Warehousing Wealth: Donor-Advised Charity Funds Sequestering Billions in the Face of Growing Inequality by a team from the Institute for Policy Studies (https://inequality.org/wp-content/uploads/2018/07/Warehousing-Wealth-IPS-Report-FINAL.pdf ) expands on some of the points the WCI made in this post.
I thought I saw in blog post once that you mentioned one DAF being easier for Anonymous donations and repeat donations to the same charity. Between Schwab and Fidelity DAF’s right now and didn’t know if one had a more easy to use interface that you are aware of? Only between those to right now because only at $15,000 to contribute.
It’s incredibly easy with Fidelity. I donated to 100 charities in this post and 130 in this one, every one of them anonymous.
I can’t speak to Schwab, but I imagine they make it easy.
Best,
-PoF
I am with POF on this. We love our DAF (now that we know to fill out the forms online, lol).
I got a sign-on bonus this year for a new job and my salary will change for years so my income would be its highest for years. Is this a good year to do the DFA? I have about $30k (~25% total gain over the past 5 years with dollar averaging contribution in a taxable S/P 500) that I’d like to give. Does it matter if it’s a mixed bag of long and short term gains?
It sounds like this will be a good year in which to give, and the type of gains are irrelevant.
Happy giving!
-PoF
I’m with POF’s view for a number of his stated reasons, but another one is that I currently lack the time to investigate the worthiness of some charities that I’m interested in helping. One of my pet peeves is charities that collect money and then just give to other charities after taking a large slice of collections for ‘admin fees and salaries’. I’d like to avoid that as much as possible because I’d rather give directly to those who are going to put the money to actual use. Some charities that we wish to support may not be known to us today and in the future we may have more time to raise awareness of these opportunities and decide which ones we wish to support financially after careful scrutiny.
Also, although we did fund a DAF this year and accelerated some of our future giving into this year for tax reasons, we will also plan to donate some over the next few years even though we will get no real tax benefit from doing so.
The main reason we liked the DAF strategy was to enable us to continue to give to those charities in the future even during years when we have little or no income. I don’t think that’s a Jerk move at all!
Setting up the DAF for the tax breaks was a smart move, but the other reasons don’t fly for me. If you have the money to donate, then donate it. If you don’t, you don’t. Same with time, if you don’t have time to research the charity now, you probably won’t magically end up with more time next year either…
The more comments I read here, the more I think that the DAF is for more about the giver than the receivers.
“Same with time, if you don’t have time to research the charity now, you probably won’t magically end up with more time next year either…”
Unless you retire between now and then.
Keep in mind that every dollar donated to a DAF will be given to charity.
Best,
-PoF
I’m with POF on this one. Although I’ve done it both ways, the new tax law and some huge capital gains on a particular investment pushed me to open a DAF last week. Either way, all the money eventually will hopefully go to those who need it!
I’m with WCI on this one, but there isn’t a wrong answer when donating to charity.
I think the DAF makes you feel like you did something, when you haven’t yet. I guess you get to revisit the idea of being really generous when you look at how much money you have “donated.” Similar to refinancing a loan, you feel good having done something, but you really haven’t changed much. With a DAF you feel good that you just donated a lump sum, but you haven’t really helped any charity yet. Some people may need that feel good feeling twice for the same money, but I prefer to just give the charity the money and be done with it. If I am worried about them blowing the lump sum, it’s likely not going to be a charity I want to support.
The one good think I can think of using for is the bunching so you can get the deduction now, or if you are retiring and want the bigger deduction now. But, I just donated it all directly and told the charity that I won’t be donating for the next 2 years, problem solved. They were more than happy to accept the donation with the knowledge that it would the the last one for a couple years.
Thank you for the comment, Ricky.
I don’t really understand the analogy with the loan refinancing. That’s typically lowering your monthly payments with a different interest rate. That’s not doing nothing; if done right, it will positively impact your bottom line.
Contributing to a DAF has the opposite effect; it negatively impacts your bottom line. You are literally giving your money away to a charitable organization that donates to hundreds of thousands of other charities. Which charities and when — you get to decide.
I’ve given enough to buy 100,000 lattes, but I can’t buy a single latte for myself with the money I’ve contributed. It’s not my money anymore. That’s not doing nothing.
Finally, people who fund donor advised funds also give from their DAFs to charity. I believe I read that either Vanguard or Fidelity Charitable doles out about 20% of its balance every year. By law, they’re required to give at least 5% and can force you to give from your fund if you insist on being miserly, but the participants are more than generous enough to keep them from having to worry about hanging on to too much money.
Best,
-PoF
By the loan comment I meant what most people seem to do. They refinance a mortgage or other loan from 4% to 3.5%, which is great and will can save interest. However, most people take the 30 year loan that they are 20 years into paying, refinance it into another 30 year loan and get really excited that they lowered their payments and did “something.” Then, they come around to retirement and wonder how they still have payments on the house… Same thing for a credit card, lowering the interest from 18% to 0% is great, but unless you pay on it, you haven’t moved the needle much. That’s what I meant by doing nothing. It may have changed a little, but until you follow through with it it doesn’t help any charity.
Like I said though, DAF is great if you need a deduction now and want to feel good about giving later also. I prefer to just give if to a charity I want and not think about it after that. The charities I give to also prefer to have the money now, than later. But, they will take it at any point.
One item that I have not seen discussed is the ability, in using the DAF, to rid oneself of shares that for one reason or another, you do not want to own. For me personally, we opened a DAF specifically because we had a lot of shares of a company that I personally did not want to own (think the opposite of socially responsible) due to a previous stock being acquired.
To give that amount in one year would be too much for us. However, DAF and voila…..gone in a stroke of a pen….and now I have a number of years worth of pre-planned giving that is not tied to the volatility of that security.
Great point, M. I didn’t write about it in this article, but that’s how I started my first DAF. If you look closely, you’ll see the image above is from T. Rowe Price Program for Charitable Giving. I realized that the funds I had purchased in a taxable account were actively managed and poorly tax-efficient. Rather than selling them and incurring the capital gains taxes, I donated them.
Only after that did I realize the numerous other benefits of giving via DAF.
Best,
-PoF
I am in the no-jerk camp
I think you have to split the concept into “funding” and “donating”. The funding aspect is how to most efficiently take advantage of the tax benefits of charitable giving. In our case we have a large taxable account and with the bull market have a lot of capital gains exposure. The DFA is no different then other vehicles we all use to minimize our tax exposure. I think I give more due to the perceived tax benefits.
The donation aspect is really a separate discussion. I doubt POF would have donated 250k in one year and then said I am done with my lifetime giving. I suspect he is donating what he is comfortable with on a yearly basis and that number would be the same whether or not the money was in a DFA or coming out of another account. Thus the DFA is really a vehicle for tax efficiency and not a determination of what is donated on a yearly basis.
I agree with this philosophy. And you’re right — someone on the cusp of retiring soon and dropping income is in a great position to “superfund” a DAF. I’ve contributed the $250,000 in four years, for an average of over $60,000 per year. I was not that generous before I opened a DAF and was carrying debt myself.
Best,
-PoF
Can someone comment on the charities you are able to donate to from a DAF? I heard they have to be ones affiliated with the DAF in some way, meaning you could not just give to any charity. Thanks to POF and WCI for a spirited debate!
You can donate to any charity registered as a 501(c)(3). Guidestar has a list of more than 1.7 million such US charities, and if they’re not there, as long as the charity is actually registered as an actual charitable organization with an tax ID number, you can enter the information with the DAF and make a grant.
The things you can’t do are the types of gifts that wouldn’t be deductible as an itemized deduction. For example, paying someone’s college tuition, giving to a GoFundMe that benefits an individual, etc… You can, however, give to an organization that gives scholarships to underpriviliged kids or donate money to the hospital that’s providing care for a sick individual.
Best,
-PoF
I agree with PoF on this one and have been donating 10%/year to a Schwab DFA for the past several years (actually thanks to WCI for teaching us about the DFA in the first place Lol). Just a note: it makes sense that a lot of people are rushing to load up their DFA before the end of 2017 due to the reasons PoF cited. But for those who are single, high earners in states like CA with high state taxes (ie over $10K/year), it seems like it will actually make sense to continue donating to the DFA as usual in year 2018. First, the gap will only be $2000 (based on the $12K standard deduction). Second, if you donate enough, the savings/refund on state taxes over and above $10K can be more than enough to make up for the $2000 gap.
If I want to give to a charity I just write a check. I’m not interested in becoming a bank. One charity I like is Food For The Poor. I suggest giving a house in Haiti or drilling a well. If you have an address there is a chance of getting out of poverty. It can also become a station where other family members leverage getting out of poverty. If you’re living on a garbage dump you will never get out Drilling a well moves potable water close to a village instead of hours away. If a kid gets dysentery and you have some salt and water you got a chance if the water is 2 hours away your kid is dead. It’s another kind of leverage. I also like A lot of kids can die while your nest egg is becoming amazing. I also like Unbound out of KC.
Given how you optimize in so many ways, I’m surprised you haven’t taken advantage of the opportunity to donate appreciated assets rather than cash.
Like I’ve said many times, tax optimizing just puts more money in the charity’s coffers for each dollar you part with. You don’t necessarily need a DAF to eliminate those capital gains, but it makes it much simpler, particularly when donating to multiple charities.
Best,
-PoF
PoF
I generally donate 25-30K per year. Up till now that has generated a nice writeoff. I have nothing against DAF and I’m not being critical, I’m just offering a different point of view. The future value of 25K per year for 25 years is about $1.5M. The cash value of my donations are about 40% of that, but from my perspective that dough plowed into someone’s life 25 years ago has yielded something more substantial than a monetary value.
Once a mission priest came through about 20 years ago. He told me of his life in India. He had 7 parishes scattered throughout south India (the area where doubting Thomas went and was martyred) He told me about the snakes of southern India and how when he visited this one parish he slept in a tent and at night could hear the snakes dropping out of the trees onto his tent. Scared the hell out of him since these snakes are deadly. I wrote a check and built him a church. It was all done legit Diocese to Diocese, and eventually I got a picture of the church. Cost me $15K which I wrote off. Imagine what it means to a community of poverty to have a church. Imagine how many have come and gone, been baptized, married, buried and educated in 20 years.
My FV money would be larger in a DAF but worth less due to inflation. At 2% it would be worth only about $300K more than the way I chose to do it. I still got a tax writeoff. What is the FV to those people? What is the FV to the communities who have water from a well I planted? What is the FV to the families I’ve put in houses designed to withstand Haitian hurricanes?
I have nothing against DAF. Perfectly legit and smart maneuver. I just thought I’d throw in an alternative perspective.
Best
The “buying a home/building a church NOW” argument is the most convincing I’ve seen from the anti-DAF side. That said, it’s a wash to me between buying 5 houses in Haiti now and ignoring people who might need a house over the next 5 years, or buying a house for 1 person each of the next 5 years. With the first option, the people have longer to live in their houses, but it ignores the people whose need for a house arises after year 1. For those people, the second option benefits them more. But the second option ignores 4 people who could have used a house in year 1.
The essential problem is that one person isn’t going to solve homelessness in Haiti. Regardless of when you buy the houses or how many are bought, there will always be current and future others who will need housing. So it’s a wash to me.
But sure, if you are debating between $15k into a DAF and $15k to help build a church that will be led by someone with whom you have a personal connection, then I fully support building the church instead of donating to the DAF. I doubt most people have such a connection. I don’t. A DAF allows us to save the money anyway, and it will be available in the future if we make a connection with someone like your priest or find some other worthy cause (essentially POF’s “effective giving” argument).
Cash
Thanks for your thoughtful reply. A house to an occupant where the resident was previously homeless is the difference between enforced poverty and a chance. It gives you an address and thus a place to get mail and establish things like a bank account or cell phone service, voting credentials, apply for a job etc. It gives you a secure place to store some stuff like food so your day can be spent working instead of hand to mouth searching for food. It supplies some security for your children from weather and robbery. It also can be leveraged so a relative can come live with you, get a job and contribute to the families general welfare aka chain migration. Where would all the millennials reside if not in Mom’s basement? A house tends to bring stability to the society in general.
My post was merely to point out with examples how there is a cost to the dollar cost averaging DAF gravy train and that is a missed opportunity cost. PoF and I are Anesthesiologists. A DAF is like building a blood bank. Charitable giving is like the act of giving the blood. Let those implications swirl around the old cerebral saucepan. Both have good intent and are legit in my book, but the missed opportunity may have critical consequence. It ain’t no fun trying to keep someone alive with a Hemoglobin of 3. I have no dog in the hunt how a person decides to spend their money, I just wanted to tie the argument to the end game beyond tax shelters.
I love everything that you’re doing, and I totally get the idea of donating Now versus Later. I still think there’s room to use a DAF to do good Now with appreciated funds rather than cash, and a DAF makes it really easy to do so.
At the risk of being ridiculously redundant, I think of tax-optimized giving as the equivalent of giving more money to charity per dollar you choose to part with. I see no reason not to make every donation to a 501(c)(3) eligible organization with appreciated assets. Giving now versus later is a separate issue.
Cheers!
-PoF
First heard about DAFs from a financial advisor a few years ago and immediately dismissed the idea feeling like I had to choose to donate now or later. I now realize the issue has so many more layers as discussed by WCI and PoF, thanks guys. Seems like a few people have mentioned it but seems to make sense if someone wanted to give $10k for example, to give to the DAF first and then turn around and distribute the funds to the charity. You benefit from easy tax reporting and the charity gets an immediate benefit. Maybe I missed this, but is there any sort of maturing or vesting period that the funds need to be in the account for before being distributed?
No, the funds are available the next day.
That was an excellent debate!
I am currently in the WCI camp since I am well into a high marginal tax rate (54%) right now and will be for a number of years. Better to give now and avoid fee drag over time.
However, I plan to defect at some point when in my final few years of high work income and build a DAF at my high tax bracket to use over time when in a much lower one. There will almost certainly be charities that I will want to help in the future that I don’t even exist today.
I think the key is to have giving regularly as an explicit part of your financial plan for the present and smart tax planning for the future. How you operationalize that to divert as much money to your favourite charities and away from your less favourite ones (like the government du jour) or fees depends on your tax bracket mobility in the next few years.
Ooohhh…that’s a new argument for a DAF- charities that don’t even exist today. I guess I have to give you that one.
This is actually the first time I’ve heard about the new senior standard deduction. Thanks for sharing.
Apparently we physicians are a generous group quibbling about the best way to give our money away.
To me, the “you’re not really giving to charity now” argument is bogus. In my case, I have a charitable giving plan:
-I will give $x to charity 1, $y to charity 2, and so on, this year.
-I plan to continue giving similar amounts to these charities each year in the future.
-I could fund these gifts with cash each year.
-Instead, I am funding them from appreciated securities contributions to my DAF. The charities are getting exactly the same amount of money each year either way. (In fact, the tax leverage of the DAF allows me to increase my total charitable giving each year, compared with cash contributions. And I have enough in my DAF to support my charitable giving for the next several years.)
One could ask “why not give the charity the whole amount this year”. If you can afford to do this every year, great – just give more to your DAF to gain the benefits. In my case, that would mean giving less (maybe nothing) in future years – probably not optimal for most charities. (It would be interesting to get charity representative views on getting $50,000 now, vs. getting $10,000/year for the next five years.)
—————————————
In addition to the big brokerage houses (which are basically philanthropic check writing services), most community foundations and some other organizations offer DAFs with more personalized support. They can help donors identify their philanthropic mission; identify specific charities that support their mission, and provide other personalized services. The admin fees from their DAF’s go directly to support the mission of the community foundation. Personally, I have DAFs both at Fidelity (for convenience of contributing appreciated shares) and at my community foundation.
——————————————
Note that, for those of us over 65, the new standard deductions are actually $13,600 (single) and $26,600 (married) because of the extra standard deduction for seniors. Might make a difference in your itemized deduction “bunching” strategy.
And, for many of us nearing 70 1/2, with substantial IRA balances, the QCD (Qualified Charitable Distribution) (which basically allows you to reduce or eliminate your RMD by having your IRA custodian write checks from the account directly to charity) just became a lot more attractive. It’s not as effective as a fully deductible DAF contribution of appreciated securities, but, if the new larger standard deduction/limits on itemized deductions impact you significantly, a QCD may be a better alternative. (Note that QCD’s cannot go directly to DAF’s.)
Interesting debate and while I very much appreciate the link to my own post on the subject, I object being tarred with this brush:
“…aflame with excitement about this niche account the last few months.”
My post was written in 2012, some six years ago and, as far I as I can tell was the first in the FI community on the subject.
We run our DAF in much the same way as PoF, except that our payout rate is at 10%+. So, we don’t expect it to last like a 4% rule portfolio. Indeed, when the 2007-9 crash happened “sequence of return risk” was writ large.
We have since refunded it a few times, the most recent being earlier this year (2017). It has served well for tax planning and for locking in our charitable commitments.
This was especially true when the amounts we were able to give were less.
Still, WCI makes some excellent points. Were we to make any changes it would be to increase our payout rate to get the funds put to work that much sooner.
But clearly, in my view, the key thing isn’t how we all choose to play this game, it is that we do choose to play it.
Here’s to a Healthy, Happy and Prosperous New Year!
Amen to that. Better to give through a DAF, even if the gift is delayed, then not to give at all.
And to be fair, I didn’t read your article. I copied PoF’s list from elsewhere . But DAFs have certainly been a hot topic lately, with the end of the year, the tax bill, and PoF’s focus on them.
I set up a Giving Fund at Fidelity Charitable 5 years ago and it’s one of the best financial moves that I’ve ever made. While I agree with evey point that PoF made, especially in light of the 2018 Federal tax law, the main reason that this is so important to me is the simplicity of record keeping. One transfer of appreciated stock at the beginning of December and the completion of all of my giving by the end of the same month, with a single IRS form 8283, and I’m done.
I donate to maybe 15 charities in three groups of organizations…reproductive rights, environmental preservation and religiously-affiliated. Every charity I add to my list has been immediately recognized by Fidelity and the gift approved and transferred within a week, sometimes faster than that. Couldn’t be easier.
Agreed. This morning, I finished the year’s annual giving with a grant to my medical school and a new grant to our local public library. I found the new charity in about 15 seconds, and I was probably logged into the site for less than two minutes. So simple.
Cheers!
-PoF
Hadn’t really heard of DAFs before reading this and related posts. A thought occurs to me:
Thanks to the cash balance plan our group has, I am putting away virtually my entire yearly earnings into the plan and have essentially no income, and I just live off of after-tax savings I have accumulated. The downside is that most of my net worth is in tax advantaged accounts and I will be in what looks to be the 24% tax bracket when I have to start taking RMDs in about a decade. I had been planning to convert $75K of IRA money into a Roth to fill the 15% tax bracket, which should cost me about $10K in taxes. I’m thinking that (especially with the charitable deduction being less available in 2018) since you can deduct up to 50% of your AGI in donations, I could convert $150K of IRA money into a Roth, put $75K into a DAF (front-loading about 7 years of charitable contributions), and still only owe the same $10K in taxes.
Does that logic make sense?
Yes thats is what I did.
I’m with WCI on this one. Giving that doesn’t reach the charity is of no value to anyone but the giver. That’s not giving.
The time value of the tax benefit (What the giver receives) was covered but with no mention of the time value of the Charity benefit (What the charity receives). A good example would be giving a well for clean drinking water. One can give the money to make a well now, or put the money in a DAF and let it “grow” and give two wells in 10 years. More likely though the DAF will give one well in ten years so the money can keep “growing” for more future benefit.
If one gives the well now, then the people with the well will get the time value of 10 years of better health and less death from disease. They are far better off with ten years of clean well water from one well than they are to get two wells in ten years. How many of them will die waiting to get the DAF money for their well? People shouldn’t suffer now so they can get more later.
The use of DAF for giving in the future is a lot like making arrangements for someone to call your spouse once a month for the rest of their lives to tell them that you love them. It does save you the trouble of having to remember to do it yourself for the rest of your life, but the benefits are not the same.
There are some advantages of using the DAF as a tool, and I think they were covered well. Just don’t use it to stockpile money to give away someday. Don’t let the DAF be a substitute for your future giving. Don’t let a DAF keep growing. Make your goal to give away all the money in the DAF every year. Then the charities win by getting to use the money now (Time value of charity) and you win by getting to use the DAF tax tools. The best of both worlds.
Happy New Year,
Dr. Cory S. Fawcett
Prescription for Financial Success.
I think you could make a similar argument against giving to any charity that has an endowment or carries any significant balance of reserves. If the money isn’t going to be used to do good right now, it’s not really giving.
Donations to a large university alma mater would be a great example. Instead of carrying a balance measured in tens of thousands or hundreds of thousands like most DAFs, their endowments are measured in tens or hundreds of millions and even billions.
Best,
-PoF
I wanted to give appreciated stock this year. I called my church—was too complicated of a process. Looked at DAF—I like Fidelity lower minimum gifts, but don’t like $100 minimum fee/year ( I don’t plan to keep DAF very large, but use it as a flow–through to giving for ease of giving my taxable assets at Vanguard. DAF easier to open, use and transfer, then paperwork as several charities. I opened DAF with Vanguard. I just need to have 15k in fund by March 1 to avoid $250 fee. .06% fee on all assets that I will accumulate. So if most of year, I keep $5000 in DAF, only costs me $30/year. So once fee period done in March, I can spend down DAF, and refill it to 15k either late in prior year or before March 1, depending on which year benefits me for a greater tax deduction.
I tithe. I realized I need to think of DAF funds as separate from tithe. Use DAF for tax planning, and give per calendar year out of DAF for our tithe. If I ever get windfall–inheritance, etc, I would tithe from there–put in DAF, and give large amount to charities anonymously. I don’t want charities calling me because I’ve given a big gift. It’s happened in the past. I want to be able to give larger gift anonymously without expectation of more coming. So I will give my “normal” giving out of my DAF to my church/charities, using my name, but larger than usual gifts anonymously. I will continue giving my less than $500 gifts to charities using my 1.5% using my Chase Unlimited Credit Card. Or bundle, and give every 2 years a $500 gift.
One important thing to realize, if you are older—I tried to open a DAF for my mom from her RMD with Vanguard where her IRA is—tax laws PROHIBIT donating RMD to DAF! Silly! They said they are hoping law will change, but hasn’t yet. So for her to donate RMD, we had to give Vanguard list of the 15 organizations she wanted to donate to out of her RMD–they cut checks for each one, sent to my mom, and she had to send to each organization. Inefficient, but the reality. Let’s hope tax law changes before we approach 70.5, as funding RMD out of DAF would be SO simple! So DON’T open DAF thinking you can use for your RMD!
Another reason for a DAF–if you are planning to give out of your will at death, it can go to your DAF. Then you don’t need to be constantly updating who to give to out of your will. Or, you appoint a trusted family member as advisor of your DAF at death, and keep them informed of who to donate to.
I am not planning to grow my DAF, but just keep as a conduit. I want my church and organizations I love to use the money NOW, as they need it NOW. I am used to, for tax reasons, paying ahead and donating in the prior year, for my giving through the first quarter of the next year. Now I don’t need to do that, as can give more regularly out of my DAF. But I don’t want to give to organizations more than 3 months ahead. So I will hold on to funds in DAF without donating for short time—less than 6 months.
I was not aware Vanguard Charitable would let you keep that lower balance. It is a 0.6% fee (not 0.06%), but you are correct that it would be $30 per year for a $5,000 average balance.
I’m surprised you can’t give your RMD to a DAF, but glad to hear Vanguard was able to accomodate your mother’s wishes.
Good point on the will. All money can go to the one charity (the DAF) and be distributed from there.
Best,
-PoF
Popular post and topic. I just dropped 40k into a daf and convinced my brother to out some into his own. I don’t think one way is better than the other. Just depends on what kind of tax deductions you want. At the end of the day it will go to charity so that’s great. Nice post and keep on giving!
That’s great to hear, Triple-D.
I can’t imagine you were about to donate $40K as a one-time gift to a single charity, but the DAF lets you be generous now and decide where to give the money later.
Cheers!
-PoF
True true. Not about to give one charity 40k this year. I am not that Rich! Maybe in the future. For now I make a lot of smaller donations.
I first read about DAF on Mrs. Frugalwoods’s blog. I was thinking about opening a DAF account soon until I read this post.
I have to be honest to say that I don’t really like my money being tied up somewhere where I can’t touch. But I realized the tax benefits of DAF. I will need to look further into this to make a decision. Mr. FAF and I like to keep things simple, but we certainly don’t want to miss out on the pros of DAF either.
Happy Holidays to you both! 🙂
Happy Holidays to you, too!
If you don’t like your money going somewhere you can’t touch, you wouldn’t like giving money directly to charity, either. I’m surprised this post would dissuade you from DAF giving; I guess WCI’s arguments were stronger than I thought.
Best,
-PoF
Oh no I meant I’m on the fence and will look into DAF more closely. So far hubby and I have donated directly since our donations are small in size. Your argument is def very convincing. Opening a DAF account will require an extra step of setting up for me, so I will need to do a bit more research on my end. 😉
I’m firmly in the PoF camp, but yes, with confirmation bias since I just opened a DAF this month.
WCI misses a key point — once I put the money into a DAF, it can ONLY go to charity. While this is stated above as a factual component of the rules of a DAF, it misses the behavioral aspect.
Money in cash or in my own taxable account is something I can spend on something else. I cannot be tempted to use that $ to remodel my kitchen or go on a fancy vacation if I put that money into the DAF.
The commitment to charity in and of itself is a behavioral thing that cannot be overlooked. Given WCI’s emphasis on paying yourself first, automatic savings, etc, I think he should recognize that as being of incredible value.
The tax code changes this month are also of particular benefit — since WCI is taking advantage of it himself to bunch giving/deductions, doing the same via a DAF seems only completely reasonable. Just because the charity is not getting the money immediately does not mean the DAF is inferior — plenty of giving is planned to be doled out over time.
Also, while I know most of the general and specific types of charities I want to donate to, the fact is we do change the amounts and organizations periodically, and we generally donate small sums. I don’t want to donate $10,000 to any specific organization right now. However if I know my goal is to donate that amount to 10 different charities over the next 2 years, then funding the DAF now is the perfect answer. It gives me flexibility that I lose if I just give it all now.
As mentioned in the list above, here’s more of my discussion of why we’re doing a DAF now:
http://www.roguedadmd.com/2017/12/why-were-not-donating-to-charity-in-2018/
I’m certainly not missing that point. I just find it to be a trivial point compared to the major point- that no charity gets any money when you contribute to a DAF. The charity is in the granting from the DAF, not the contributing to it. It’s really little different from making a commitment to yourself to give to charity later, unless you’re just lying to yourself, which seems silly.
No, it isn’t silly at all. It’s the same reason you put money directly into a savings account or a Roth or whatever instead of having to make the conscious decision to do it. You are setting that money aside for a goal, whether that be retirement or charity or something else.
Money saved for my kids college is a bigger commitment when in a 529 instead is a taxable account or cash, because there are financial penalties and behavioral implications for using it for other purposes.
Considering how much of your core advice for people is mindset and behavioral, I think calling a behavior that SHOWS a giving mindset, even when planned in the future, is short sighted.
Just because you don’t need to do it doesn’t mean it isn’t important for others.
You are always saying 90% of doctors would benefit from a financial advisor (or something like that) —not because it’s hard to do that work, but because without the advisor they will never make the right steps on their own. This isn’t identical but it’s analagous — it’s a way to help you follow through and make a plan for giving.
Ha ha. Tell you what, send me your money and I’ll charge you 0.6% of it a year and then remind you when you want it back that you’re supposed to give it to charity. 🙂
A little behavioral help is one thing. Paying to get it is another. Some people might need that help, but it seems like one of those week arguments like “Buy whole life insurance so it forces you to save.”
Hysterical— check will be in the mail shortly.
The behavioral argument is only one of many — PoF listed several as have others so I don’t feel a need to restate them all.
As someone who has managed my own investments for awhile I have no difficulty doing so, but I have not made charitable contributions a focus in the past. The DAF signals that I am. As PoF also shows, the math is almost equal regardless of how you donate vs invest on your own. Doing it via the DAF still lets me donate when I want and to who I want, without forcing me to bunch contributions (to max tax benefits) — I don’t want to donate $10k to a single charity, nor do I want to spend the time to donate $500 to 20 charities this month to spread it around.
Thanks for the shout out PoF!
For us, #4 and #6 are the most valuable to us. The seamless transition of stock positions owned at Fidelity into my Fidelity DAF is the top reason we use the fund,
Followed by the record keeping efficiency. In our first two years, we’ve given the same dollar amount to charity as we did before, but do it in a more tax efficient way. We granted a small in memorial gift just this week we would have given anyways, so that argument is a moot point against our giving philosophy. I also love the anonymous giving and this year there is the tax arbitrage opportunity!
I am particularly passionate about #3, not that I can leave a gift that size but have personally watched two charities destroy themselves when they received a gift larger than they were ever used to. Increase fixed costs, capital spending, political infighting. A charity with $200,000 in assets isn’t often equipped to manage themselves after receiving a seven figure gift. Local community foundations serve a great purpose here for outsourcing that process.
I encourage everyone to use a Donor Advised Fund!
Very good article. I am still in the DAF camp. Having said that, I would estimate that half of put giving are not to qualified charities – buying a bicyle for someone’s kid, giving a neighbor who have fallen in hard times a grocery gift card, donating our time for a health check-up at the community clinic, etc. All giving is good, regardless of how we choose to give. Kudos to both of you for all the giving you do and for building great websites that give great education on personal finance to the rest of us.
I didn’t donate because it is the latest fad.
I started my DAF in 2003. I was taking a huge voluntary pay cut by leaving my private practice to join academia. I figured I may never make that much money again and it would be a good time to set aside some money for others. I didn’t do it for a tax deduction? That doesn’t cause a financial gain? I was able to donate more because of the tax timing though.
Since that time, I have directed thousands of dollars from the fund to charities of my choosing. The fund now has more than twice the original amount without any additional funds added. If that makes me a “Jerk” that is a label I will gladly embrace!
Another 15-year jerk! Some might say you obviously haven’t given enough from it if the value has doubled. I think that’s the beauty of the DAF, though. With decent market returns, it can be a constantly renewing source of good.
With your pending part-time employment and likely lower marginal tax bracket next year, 2017 may be a great time to make a contribution to really boost that DAF balance.
Best,
-PoF
I couldn’t agree more.
I would add that after a 9-year bull market it is a great time to donate shares of stock directly to the DAF. In fact, I did just that today!
Awesome.
I prefer the original title for this post: “Two Rich Doctors With Confirmation Bias.” 😉
Love you guys, and Happy Holidaze!
Dr. C
Ha! I can confirm that my DAF will not be donating to the Curiosity Lab for Curious Children with that attitude.
Cheers!
-PoF
How about its sister school, “The Derek Zoolander School for Kids Who Can’t Read Good and Want to Do Other Stuff Good Too”?
That far-too-tiny school is exactly what I was envisioning when I posted my reply.
Non-jerk here, too. If you typically budget $10k/year for your church, why not give 5 years worth of contributions to your DAF in 2017 before the tax code changes, get the deduction, and have your DAF dole out $10k/year over the next 5 years? Church doesn’t lose anything, but you’re way ahead of the game, especially if you won’t be able to itemize beginning in 2018. And, sad to say, not every charitable organization can be trusted to spend a $50k windfall wisely. Kind of like giving your kids a year of allowance in January…
That last point is an interesting one. WCI mentioned it, too, but I hadn’t really considered the possibility of a charitable organization behaving irresponsibly when flush with cash. I can see that could easily happen, depending on the Board and their stewardship.
Best,
-PoF
I have been a jerk longer than most people I know, since 2003, at Fidelity. Up until recent years, I did not accumulate much in the account, primarily using the DAF to manage using appreciated shares to make larger ($500+) donations.
As our career winds down, we have been building the funds in the DAF, knowing that the math favors donating and taking the deduction while we are in the higher brackets and with the likelihood that our (soon) part time and eventual retired incomes will not support the level of giving that we have kept up in the past.
In some ways, contributing to a DAF is keeping us from being miserly jerks in the future. Take that, WCI!
You were giving like a jerk long before it was in vogue!
I think similarly to you. I don’t trust myself to feel generous enough when the paychecks stop coming. By loading up the DAF now, I’ll have no excuse not to give in the future. These are mind games, but behavioral and psychological factors are huge in personal finance.
Cheers!
-PoF
Ha ha. I knew the “jerk move” phrasing would get a rise out of people. But it is serving its purpose- people realize that the charity doesn’t get the money until it comes out of the DAF, and that was my main point.
Between that and the DAF management fee, there is a barrier to overcome before which a DAF makes sense. We’ve both listed a few things that could help one over the barrier and make a DAF worthwhile, but my take is that this is pretty niche and applies to few people, whereas PoF’s take seems to be that the majority should be doing their giving through DAFs.
Different strokes for different folks.
I think I may be just about alone on this side of the argument, but PoF pointed out I’m not completely alone as he had this comment posted on one of his DAF posts:
I view the DAF as a financial optimization tool, not a gift to a charity. I am the jerk* that benefits, and that is the intent of the DAF. Perhaps that is one source of the disagreement between you and many (many 😉 ) of the others. I think if you look at it through that prism, you might see it differently.
*facetious use of “jerk” 😉
I think this is a tough debate, but the end result does seem to be “give money in some way, some how to charity.”
The ideas presented for a DAF and not having to keep up with receipts, and (particularly) the ability to give anonymously is very appealing to me. That said, starting my first year as an attending I am not doging a bunch of taxes this year by opening a DAF, and I wonder if it will become more beneficial next year when I hit the higher tax bracket.
So, this will be something I’ll look into a year from now. Thanks for the pro/con and for encouraging the intellectual discussion.
I will admit that I use the DAF frequently for anonymous donations, to avoid the years of solicitation that might otherwise follow a one-off $100 contribution.
I hate the idea of fees on my charitable givings. This make sense if I had taxable accounts with capital gains, but filling >$70k of i401k/famHSA/bdRoth plus >$70k on student loan reduction since I’m a fresh attending didn’t leave much room. Plus I donate heavily and I assign most dollars monthly so I have no great stash ready to give earlier. Also I will still itemize yearly especially since I have just begun to tackle my mortgage. Basically you both are the niche/small market for DAFs which is quite the compliment: you are the rare generous wealthy ones!
I’m very much fee averse, too (see Investment Fees Will Cost You Millions), but as you point out, a DAF is best for someone who has built up a sizable taxable account holding equities with some capital gains to unload. That’s not required, but it’s optimal.
In that situation, you’ve got fees (tax drag) that can be very similar to the 0.6% DAF fee. Tax drag will be higher than 0.6% for most if you’re not invested in the most tax-efficent funds available (passive stock index funds and / or muni bonds).
Thank you for your kind words and your own generous giving, docnews.
Cheers!
-PoF
Well count me in the non-jerk camp. I started a fund after being inspired by POF. I like the concept that you can grow the money like an endowment fund and give a percentage as you age and feel good about it. I think by giving anonymously it is personally more meaningful. I have not given to several tear-jerker organizations because I did not want to be on the mailing lists. Now I can give to them.
Fascinating. I am completely late to this train but I am just learning about DAF now so this post came at a perfect time (and answered many of my questions/covered many of my musings). From my initial understanding, I see DAF as a good vehicle for charitable giving, allowing one to maximize impact in a strategic way… so I am in the “DAF = Not Jerk Move” camp at the moment 🙂
And good point from the WSP (previous comment)…
Hard to decide who won ?. Both of you made good points.
Moral of the story:
-Each person should do only what they are comfortable with.
-Both methods are better than nothing ?.
-Kudos to you guys for being so generous and giving so much.
Nice Pro/Con — was looking forward to this post since you two were teasing it on Twitter last week.
One reason not to use a DAF that wasn’t mentioned by WCI is that once the money is in the DAF, additional appreciation of the shares cannot be deducted on your taxes. So if you put money in a DAF with no intention of donating it to charity for years, then you’re reducing the eventual size of your deduction when you do donate the money to your charity. In addition, as WCI mentioned, the DAF creates a fee drag on the money, lowering how much your charity eventually gets.
-WSP
But you also have to account for the time value of the tax benefit. The charity arguably benefits more from the upfront donation to the DAF because it gets the future value of both the donation and the tax benefit (assuming you also donate the tax benefit).
Excellent points by Cash and PoF. I had not read the previous post on DAFs. I stand corrected.
From a behavioral finance perspective, my suspicion is that the use of DAFs will lead to an increase in charitable giving, which of course is not a bad thing.
-WSP
Sorry, WSP, but I’m with Cash on this one, too. This was essentially myth #2 that I debunked in my last DAF post. From that one:
“If you give $100 now, and get $45 back on your taxes now, you’ve got $100 in the DAF and $45 to invest in your taxable account.
Years later, when the market has doubled, you have $200 in the DAF and $90 in your taxable account. (Ignoring the 0.6% in tax drag / fees which you would have if you give now or wait to give later).
If you wait all those years to donate until that original $100 in the taxable account has doubled, you will put $200 in the DAF and get $90 back.
So there’s really no benefit to waiting if you plan to give eventually, anyway, unless you plan to be in a higher tax bracket later in life. In that case, you should wait until you’re in the highest bracket you expect to be in to start a donor advised fund. Conversely, if you expect to be in lower tax brackets in the future, there’s no time like the present to fully fund a DAF.”
Regarding fees in the DAF versus tax drag in taxable, the two are nearly identical right now.
DAF: 0.6% plus expense ratios (as low as 0.015% with Fidelity)
Taxable: expense ratios (as low as 0.03% with Schwab plus tax drag on ~2% dividend (15% +3.8% NIIT + state income tax (9.85% for me)) = 0.58%
When I stop earning a large income, the taxes on dividends will drop, and there will be a slight advantage to keeping the money outside of the DAF in my taxable account. If I could get 100% tax-free dividends, that difference may approach 0.6% per year. I will already be way ahead by donating in my highest earning years that I’m not concerned about 60 basis points, and it’s likely most people with enough money to fund a DAF will never have taxable income low enough to have tax-free dividends, anyway.
Cheers!
-PoF