9 Reasons Why you Should Have a Donor Advised Fund—and 1 Reason Not to

Today’s post is brought to you by DH (Dear Husband):

DAF stands for Donor Advised Fund, and it is a great way to give to charities efficiently. DAF’s are something you should look into if you donate more than $5k/year.

We’ve used Fidelity’s DAF for years and have been very pleased. Vanguard is also a good option (as always), but we went with Fido as it had lower contribution limits, as well as lower disbursement (gifts to the charities) limits.

Here are 9 reasons why you should have a DAF—and 1 reason not to have one:

1) Savvy taxpayers prefer to donate appreciated shares of XYZ stock, not cash.  Why would you want to give shares instead of money? The tax savings!

If you have taxable stocks and have held them one year or more, you’re able to give these appreciated (they’ve gone UP) assets away and yet not have to pay capital gains taxes on them.

Here’s how:

At some point in the future, you want to give away the money you made on a stock investment that was initially $5,000 but has gone up to $10,000. Typically you would have to pay capital gains when you sold your shares and wrote a check to the charity for $10,000.

But this would be the least tax-efficient way to give these shares. You would have to pay capital gains taxes on $5,000 for that year!

A more tax efficient strategy is to give that stock directly to your DAF.

2) Charities love to get cash, not shares of stock. Many small charities have big trouble if you try to give them shares of Apple or of a Total Stock Market Index. The charity would have to take your shares and sell them at a brokerage—hopefully, at a fair price. To do this, if they don’t have a brokerage account, they would have to open one.

As a result of these complications associated with receiving stocks, they’d much rather receive cash. That way they can focus on running their charity instead.

Directing securities (stocks/mutual funds/bonds) to a DAF can be easy as the DAF then does the job of selling the security to convert it into cash that they then send to the charity. Conversely, you could also write a check and ask the DAF to turn it into stock to be held for a while (to grow) and then convert it into more money at a later date (see below).

3) Tax time is much easier.  This is especially true if you give to multiple charities. You only have to enter one line item for donations. No more numerous entries. No more lost receipts or tracking down charities to send a receipt that got lost in the mail.

4) Batching is easier. “Batching” is an advanced tax mitigation concept that will be the subject of a future blog.  The basic idea here though is instead of donating $X to charity for the year 2017 and $X for year 2018, give $2X in year 2017 alone and take the standard deduction (now $24,000) in 2018. The same amount of money has been given, but in this example, the savvy batching taxpayer has saved at least the value of 1 year’s standard deduction (assuming your total deductions are at least $12,000).

5) You can donate in one year, and spread the gifts out over other years. The year you donate to the DAF is the year you get the tax deduction. But then the money can stay in the account to be distributed over later years.

Batching may be difficult for charities (especially smaller ones)—it’s probably better to get smaller, regular donations than a huge donation followed by…nothing for a few years.

As a side note, you could also donate stock to your DAF, let it remain as stock, so it grows in the stock market and then sell the stock at a later date (which presumably means even more money donated to your favorite charities).

6) You’ve won the lottery or obtained some other one-time big income.  You can donate several years’ contributions during your high tax burden year. Then you can dispense money to charities over many later years when the tax mitigation value would be less (because you’d be in a lower tax bracket).

There are limits to how much of your salary you can contribute, but this is something to look into should you ever win Powerball. 🙂

7) You can easily give anonymously. From whether a desire for humbleness to merely avoiding being added to donation mailing lists.

(Editor’s note: I’ve stopped checking the “anonymous” box off after too many instances of charities absorbing the donations into their overall funds.

When you donate to a specific unit inside a large charity, the name of the intended recipient appears buried in a verbose two-page letter accompanying the check. Many of these charities are understaffed and don’t take the time to read the form donation letter closely. When these charities haven’t known who to direct the funds to, they’ve contacted our DAF, who couldn’t release our names. Hence the money was absorbed into the overall charity.)

8) You have a ready response to “would you like to contribute…”   Sorry, I only contribute through my Donor Advisory Fund. If you could provide me with a packet, we’ll review it…

9) The DAF screens that the charity is legit. We don’t have to worry that all the charity’s paperwork is in order with the government. One less thing to worry about come tax time.

Bonus info: When we’ve donated cash, we haven’t converted it into stocks or bonds—as its value may go up or down. We’ve always viewed the donations as “this money is for charity.” What have you done? And do you have a DAF?

(Editor’s note: One reason NOT To have a DAF. Yeah, DH might extol the tax mitigation strategies of having a DAF, but let me tell you another side of this story. We set our DAF up ourselves and it was a three-month paperwork nightmare.

I am the one who sits down and fills out the two pages associated with each donation. Over the years of doing medical mission work, etc., we’ve accumulated a list of people we like to give to. The resulting paperwork ends up being over an inch thick. I know, first world problems—but I dread how time-consuming filling out the paperwork has become.

Pro tip: Keep copies of the front donation page with the money amount left blank. That way the next time around, all you have to do is copy this front page, fill in the donation amount, staple the standard checked off second page to it, and sign it.

Next week I’ll be busy with a local writer’s convention, so we’ll post again in two weeks. Have a fantastic weekend!)