Speaking of donating appreciated shares to charities, I read a great article by Nickel at FiveCentNickel.com about using a donor advised fund as an alternative to donating shares directly to each individual charity.
Donor Advised Fund In a Nutshell
A donor advised fund lets you do time-shifting. You donate and take the tax deduction now. Then you take your sweet time to distribute the money to charities. It can be next year, or it can be years down the road. Before the money is distributed to charities, you invest the money among some mutual fund pools offered by the donor advised fund, similarly to how you invest in a 401k or 529 plan with a menu of options.
Minimum Contributions and Fees
A donor advised fund is a good idea. I looked into it before but I haven’t set one up. My hesitation with donor advised funds continues to be the relatively high minimum and high fees. Mutual fund companies are popular sponsors of donor advised funds. For whatever reasons, they all require a high up-front minimum and charge high ongoing fees.
Here’s a list of the minimum initial and additional contributions and the ongoing fees for several donor advised funds sponsored by major mutual fund companies:
|Company||Initial / Additional Minimum||Admin
|Fund Expenses (*)|
|Vanguard||$25,000 / $5,000||0.60%||0.18% – 0.32%|
|Fidelity||$5,000 / $1,000||0.60%||0.07% – 0.32%|
|Schwab||$5,000 / $500||0.60%||0.09% – 0.35%|
|T. Rowe Price||$10,000 / $500||0.50%||0.35%|
* I picked investment options with the lowest expenses, typically index funds.
Maybe John Bogle drilled "cost matters" into my head. I just can’t see how I should pay 0.60% in admin fees year after year. We’ve all seen charts showing how an extra 1% in fees will cut down the final value of an investment, right?
I understand there are administrative costs involved in a donor advised fund. People’s salaries must be paid. Some small charities I love may not be set up to receive appreciated shares (they should). I can’t help thinking I can do the paperwork myself and give more money to charities, as opposed to spending money on the fund operator’s personnel.
I think that’s exactly why all these funds require a high initial minimum. The high initial minimum makes sure that money will stay in the fund for some years, generating admin fees. If it’s just a $1,000 contribution quickly distributed in a few months, it can’t cover people’s salaries.
How I Would Use a Donor Advised Fund
Because I don’t need to bunch several years of donations in order to take a tax deduction, if I were to use a donor advised fund, I would
- use a company with a lower minimum, such as Fidelity or Schwab
- contribute the bare minimum to get it started
- quickly distribute the money and not leave money in the account (charities will get to use the money sooner for their good work)
- contribute additional appreciated shares each year and distribute the money out right away
Leaving the money in the account doesn’t make a lot of sense to me. I’m not trying to accumulate a large sum to endow a soup kitchen with my name on it. Money can grow faster, without the admin fees, when it’s in my own account.
If you have a sudden windfall, however, it’s a good idea to donate a large sum to a donor advised fund and leave the money in there for a longer period of time. A windfall may push you into a higher tax bracket. A larger-than-usual charity donation is worth more in tax deductions when the tax rate is higher. If you wait and spread it out, the deductions will be worth less in future years. The time-shifting function of a donor advised fund works the best in this scenario.
A windfall hasn’t happened to me yet.