This article does not recommend any specific financial advice but is just one person's personal invest strategy. Consult your own financial planner/tax specialist for specific advice.
Growing up in Orange County, I’d often hear about a rich acquaintance who had a family charity. It all sounded so alluring. I wondered if someday I would have enough money to start a foundation. Could I actually be the one deciding who to give money to? I’ve always liked giving to charities so it sounded like a dream to me.
A few years ago, I first heard about Donor Advised Funds (DAF). DAF’s makes having your own charitable foundation easy; without the headache of paperwork, writing checks and record keeping. You can either give anonymously or in honor of someone else or in the name of your Foundation. And the DAF can be passed to your heirs, so they can give money away too.
How We Funded Our DAF
In 2016, I got an extra payout at work due to a job change and the fact that I rarely took vacation time. I spent so much time saving for retirement that vacations were not a priority. That vacation time accrued over the years and I received an unusually large check.
Good News ….Right?
Well, yes and no. In that year, it pushed my taxes so much higher than I had anticipated and were were going to owe some money come April 15th. In past years, we had donated money to a local homeless charity and to our church but we weren’t wanting to donate such a large chunk all at one time.
So I set up a Donor Advised Fund to put money aside for a couple years going forward when our income would normalize again. Along with donating some of the extra vacation payout cash, I donated some appreciated stock we didn’t want anymore. I could have sold the stock first and then donated the proceeds. By donating the stock directly, I saved us the fees and hassle of selling it. And we didn’t have to pay taxes on the appreciated value of the stock either.
But I Don’t have the $25,000 to Get Started
Don’t let that keep you from having a charitable foundation. Vanguard Charitable requires $25000 in cash and/or securities. But Fidelity offers a DAF with lower opening amount ($5000 last time I checked) and lower minimum grant amounts.
Vanguard Charity DAF
We chose Vanguard Charity because the majority of our investments are with Vanguard. I’m a simple investor, choosing Index Funds for most of our Portfolio. Vanguard charges very low fees, well below the industry standard and moving appreciated assets directly to our charity fund is seamless. The only downsides of Vanguard Charity is that each payout must be a minimum of $500 and additional deposits to the fund must be $5000.
What happens to the Money in Your DAF Foundation?
Your DAF is like a checking account, except you can’t get the money back for yourself. Once it’s in, it belongs to the charity fund forever. Or until you request a grant to be sent to a non-profit. A grant is just telling your DAF’s administrators where you want a check sent. It’s up to you to request grants to specific charities you support. I go online and request a check and amount to be sent to the charity I’d like to give too. The money I haven’t granted yet, is still in the account. I can have it stashed there in cash or in a mutual fund. It it grows, I don’t pay an additional tax on the growth and I have more to give.
What About Taxes?
The amount you contribute to your DAF is taken as a charitable donation tax deduction in the year you put it in your Foundation. We plan to continue adding appreciated mutual funds in order to avoid paying taxes on the gains. We then take the money we would have given directly to charity and buy more mutual funds. This raises my cost basis. If you aren’t a money person, this is not that important to understand. It means I’ll just have less taxes to pay. And I don’t have to make immediate decisions as to where to donate. That gives me time to investigate where we want to give.
Why I love having a Charitable Foundation
I get to give more. I don’t get on a bunch of mailing lists. Tax time is easy because I don’t have a bunch of small receipts to keep track off. I don’t have to decide right away where I want my money to go. I save on capital gains taxes.
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