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.
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One thing to keep in mind is that Vanguard has a low balance fee of $100/year (assessed in March) if your balance is less than $15k in March of each year. For their part, Fidelity charges 0.6% management with a minimum of $100/year. Fidelity wins in this scenario, because that $100 includes the 0.6%, instead of being in addition to it – I’m not sure when Fidelity assesses their minimum, you’d have to call and ask.
I’m not sure about Schwab or others. I’m not sure what happens in the event of a zero balance. Worst case scenario, I guess you could donate, disburse, and close your account. Just pointing out that you might run into some unanticipated fees if you if you keep your balance really low.
Harry Sit says
Thank you Nickel. That’s unfortunate. 0.6% with a minimum of $100 in fees translates to a minimum balance of $16,667 at all times. Or you’d have to treat that $100 as the necessary evil for paperwork convenience. One more reason I’m not using a donor advised fund at this time.
Harry Sit says
P.S. I just looked. Schwab also has a minimum fee of $100/year, which includes the 0.6%.
“The minimum individual account administrative fee will be the greater of $100 or 0.60%.”
I’m pretty fee-sensitive myself, but I view charitable gift funds as valuable tools that are worth 60 bps. Sure just giving appreciated securities down the road works fine, but here are the advantages of the Gift Fund from my perspective:
– You can give appreciated securities to the gift fund now, and the tax deduction is taken now even if the moneys aren’t distributed to charities until future years. So there is an acceleration benefit.
– Yes, the market could rise and the value of the deduction could be greater in the future, but it could fall too and the deduction would be less. You lock in the deduction now at a known level.
– The gift fund does not pay tax on interest, dividends or cap gain distributions like a taxable account.
– You can donate more when you have a good year at a high marginal tax rate. If you have a bad year you might not donate any. However your pattern of distribution to charities can take whatever form you like.
– You may have plans to become active in a charity after you retire and give both time and money. Maybe you don’t know what that charity will be right now. If you think your tax rate is higher now than in retirement the charitable gift fund helps you take advantage of the deduction when it does the most for you.
The way I justify the added cost is that:
1. I want to donate appreciated investments rather than cash for the eventual tax benefit, but
2. I’m lazy, and don’t want to deal with donating shares to individual charities and tracking all the separate paperwork, and
3. I procrastinate, and need to be able to pull off this sort of thing at the last minute, which is possible with a donor-advised fund, but less so with individual charities, and finally…
4. I like being able to bunch deductions into years when they’re worth more, but actually dispense the money over time as I sort out which charities I want to support
So for me it’s worth a few extra bucks a year, but it’s certainly not necessary if you want to save a bit of money.
Harry Sit says
@nickel, @Sammy_M – You both gave very good points. Great discussion, thank you. I guess I come from a perspective of (a) expect to be the same or higher tax bracket in the next ten years; (b) don’t need bunching to itemize; and (c) don’t have a substantial variation in income (no windfall). Suppose I want to donate $5,000 each year in the next 10 years, I can use the pass-through method as I described in the post, paying $100 a year for streamlining paperwork. Over 10 years I will pay $1,000. If I donate $50,000 in one shot, I will pay $300 in the first year, $270 in the second year, … (ignoring investment returns for now). The fees add up to a much higher amount.
For a different person whose tax bracket is expected to drop, or who want bunching or who received a windfall, a donor advised fund will be very useful. I will keep this in mind when I’m about to retire.
Interesting point about doing this one year after the next instead of carrying a balance in the account. In this light, the $100/yr vs 0.6% on an ongoing basis begins to look like a better deal, as opposed to being punitive.
Aaron L says
Interesting to see this mentioned here. I was just looking at donor-advised funds a few weeks ago. I was put off by the $100 fee, and since I’m not in a rush to dispose of any of my ETFs, I concluded that there was no benefit over making cash contributions directly to charities. Time value of money makes paying a bit of capital gains in 40 years preferable to paying $100/year starting now.
If/when my employer stock becomes liquid, I may take another look at donor-advised funds. They seem very well suited to that situation.
Martin Farley says
You should keep in mind that there are continuing compliance costs that a donor-advised fund (like any charitable foundation) must meet. These include IRS filings and determining that a charity you direct your funds to is actually a charity (proper IRS category; I’m not sure it’s limited to 501c3). So administrative costs are to be expected.
Another advantage of a donor-advised fund is that instead of giving one large donation, which could make the charity think you should be good for similar donations in future years, you can give the same total over a number of years.
My mother set up her fund when a company she had owned for many years was bought out by private equity, thus forcing her to realize sizeable capital gains. Some of this was reduced by creating the donor-advised fund with shares donated before the buy-out finalized and allowed the decision about the charities to be made in a more thoughtful way.
Another nice thing about donor advised funds is that they can be used to max out an employer match without knowing exactly where you want the money to go. That is money that wouldn’t otherwise be donated to charity, so the 0.6% fee seems a reasonable trade-off. Also, the paperwork savings are even greater when you can make one contribution of appreciated stock and file the employer’s form only once.
LCF Advisor says
What a bunch of whiney crap. “I looked into it and it looks great – I just don’t see why someone show take 85 bps from my money” Sob sob – tears follow.
If you want to make MEANINGFUL gifts to charity, you have a choice. Either write a check for $10,000 of hard earned, AFTER TAX dollars which you then hopefully get to deduct without a haircut from your tax returns. Or you can Gift $10,000 of your highly appreciated stock which you bought for $1,000 or $2,000 and dodge capital gains tax of 15% (Plus State Income Tax (Mine is 3.2%)).
I’ll pay 85 bps OVER an 18.2% hit any day. Waaaaaaaa!!!!
If $5,000 is a “relatively high minimum” than you should not be researching Donor Advised Funds.
But you can give the $10k of appreciated stock directly without paying the 85bp of fees to a donor-advised fund. What are you whining about?
The fact that relatively large minimums mean that some “small” philanthropists might not want to consider donor-advised funds is exactly the kind of thing that readers might want to derive from this article.
Vanguard’s low balance fee has increased to $250 for balances under 25K. This has been their way for at least 2 years now.
AND – they are now assessing the fee earlier – in February instead of March. I’m probably going to dump all of my Vanguard Charitable assets at the end of the year, close my account, and move to a Fidelity Donor Advised Fund.
Wish there was an easy way to do the same for Vanguard itself – would love to move everything to Fidelity but there would be major tax consequences if I did so.
Harry Sit says
You can transfer shares of Vanguard funds in-kind. Fidelity doesn’t charge for selling existing shares of Vanguard funds or reinvesting dividends. They charge for buying new shares of Vanguard funds, but you can buy new shares of Vanguard ETFs or Fidelity funds without paying a commission..
Good to know, thanks Harry. After doing a bit of research though, I’m kind of talking myself out of an in-kind transfer:
* Will cost basis for every fund travel along? It’s supposed to, but it didn’t happen for this guy: https://old.reddit.com/r/fidelityinvestments/comments/pfn32z/cost_basis_of_inkind_assets_transfer/
* I would also have to confirm if every single existing Vanguard fund in my portfolio is actually offered at Fidelity.
* I would also have to see if there are any extra expenses, closing fees, etc.
* Not totally Fidelity’s UI is any better than Vanguard’s. https://old.reddit.com/r/Bogleheads/comments/q2vbem/five_user_experience_reasons_i_hate_fidelity_all/
Finally, I’d have to go through many of these steps (and probably more) –
I’m still considering it though, as it would be faster to transfer assets to a Fidelity Donor Advised Fund. And Fidelity has better customer service. And it’s one more step toward simplifying my accounts.
Harry Sit says
Whether the cost basis comes over depends on how the sender does its job (Vanguard in this case). Vanguard sent the cost basis for my transfer. Loving or hating the UI is personal preference. I have no problem with either. The steps in the Bogleheads post are for transferring into a solo 401k. Many of them don’t apply to a regular taxable account. Of course something can go wrong whenever you make a move. As the saying goes, if it ain’t broke, don’t fix it. It just depends on how badly you want to move versus the risk of something going wrong.
Thanks again Harry. Good advice. In my case, I have a couple of IRAs and a taxable account to move, so it’s a bit more complicated. I’ll keep the in-kind transfer option in mind for the future, but right now it’s not urgent enough for me to risk something going wrong.