Donor Advised Funds and Private Foundations

[sol]

As my FIRE date draws near, I'm educating myself about the various forms of charitable giving available to me.  After I have earned enough money for myself and my family, I'm hoping to spend the rest of my working life on philanthropic efforts.

The easy and common way to do that is to volunteer my time down at the local food bank or the United Way, and cut the occasional check directly to a worthy 501(c)(3) (aka non-profit) organization.  But there are other options that may be more impactful, and personally satisfying.  Yes, I freely acknowledge that my charitable giving is done for reasons that are partly selfish, because it makes me feel good to do good.

One easy option, that Nords and jcollinsnh have both recommended, is to use a Donor-Advised-Fund.  This is essentially like a 401k plan that is designated for charity instead of for retirement.  You can set one up with Vanguard or Fidelity, and you retain control over the asset allocation.  Contributions are tax deductible in the year they are made (up to 50% of your AGI for cash, 30% of AGI for appreciated stock) so they are a tax-efficient way to donate to charity in your final year(s) of high income.  Your donations can then grow tax free in the fund, and you can designate distributions to 501(c)(3) organizations of your choice for the rest of your life.  This has the benefit of getting the full tax deduction when it still has value to you, while you are working.  People who don't have tax liability in retirement or don't itemize would otherwise receive no tax benefits from charitable giving, so the DAF fixes that.  If you're like me, and intend to continue your charitable donations past your working career, this plan allows you to donate more by losing less to taxes.  You effectively reclaim federal tax money (some of which is spent on social welfare programs and some not) and can then redirect it to social welfare programs of your choice.

A more difficult option is to set up a private foundation.  Foundations are non-profit organizations, unlike a DAF that is a personal account within a non-profit organization, but they otherwise have many of the same features as a DAF like up-front tax deductibility of donations (up to 30% of your AGI for cash, 20% of AGI for appreciated stock).  They also come with some additional restrictions (you must distribute at least 5% per year to charitable causes, unlike a DAF that can distribute zero) and also some additional benefits (you retain more control over where the money goes, including the ability to legally pay your family to manage the foundation or perform charitable activities, or give scholarships to individuals).  Plus you get to name it something cool like "Sol's Giant Pile of Smugness" and then talk about your "endowment" at dinner parties.

You can do both!  If you establish a private foundation, you can then meet your 5% annual disbursement requirement by donating your donation to a DAF.  In this case, the foundation is just an intermediate holding tank.  (You only get the tax deduction once, of course.)  I'm less clear on whether your DAF can donate to your private foundation.

In either case, donating appreciated assets (stocks or real estate) totally avoids capital gains taxes.  If you're planning to donate $10,000 to charity, you can do a heck of a lot more good by donating $10,000 of old VTSMX shares from 2009 than you can by liquidating those shares and then donating the residual value out of your checking account.

I am still learning about this world, and considering my options.  Does anybody here have experience with establishing or using DAFs or private foundations?

[Romag]

I went the Donor-Advised Fund route with Vanguard this year - I FIRE'd in September so this will be my last "High-Income" year. I decided to maximize deductions, so front-loading my charitable giving and writing it off in the current tax year made sense.
Vanguard requires a minimum $25,000 start-up contribution. I used appreciated equities in the DAF, so no capital gains taxes on the gain either.

I made two grants to charities I support during December. It took about 10 days for the organizations to receive the funds. I also set up reoccurring grants for the next few years.

The whole process was simple and streamlined and uncomplicated. I am very happy on all fronts.

[Lagom]

Posting to follow. I looked into this with Fidelity briefly, and their DAF minimum was only $5k, for those who prefer to start small. Don't know much about private foundations, but their potential interactions with DAFs sound very interesting.

[sol]

Don't know much about private foundations, but their potential interactions with DAFs sound very interesting.

After further reading, it looks like private foundations are basically divided into two groups.  Group one is "non-operating foundations" that make donations to other charitable groups.  Group two is "operating foundations" that are themselves active charities, like they run an annual food drive or send relief supplies to disaster victims.

DAFs can apparently only make contributions to an operating foundation.  So if I start a private foundation, it needs to spend it's money on actively performing charity itself (in addition to also making charitable grants).  So far, this seems like an easy hurdle to clear.  Running a local after-school program apparently counts.

other recent MMM threads:
http://forum.mrmoneymustache.com/taxes/donor-advised-funds/
http://forum.mrmoneymustache.com/investor-alley/donor-advised-funds-for-charitable-giving/
http://forum.mrmoneymustache.com/taxes/donor-advised-fund-(daf)-for-synagogue-dues-for-tax-management/

[msilenus]

I love me my DAF.  Have it through Fidelity Charitable.  All our workplace accounts are with Fidelity, and the minimums are waaaay friendlier, so it just made sense.

Are you sure you can go from a DAF to a private foundation you control?  Fidelity Charitable's guidelines include these as reasons why they might deep-six a grant request: "the Account Holder and related persons control the organization" and "where Fidelity Charitable provides a substantial portion of the organization’s public support".  I believe this would apply to an operating foundation I controlled, but I could still grant to an operating foundation which I did not control.  (But where's the fun in that, one wonders?)

I've recently been idly considering creating a (real) charity, so this means I couldn't use an FC DAF to fund it.  At least, not reliably.  But if Vanguard is more permissive, and if I can grant from FC -> Vanguard, then that could be a pathway to funding a charity I run.  (But it's not a big deal, either way.)

[HAPPYINAZ]

I considered creating a DAF or private foundation this year.  Was leaning toward DAF, but then I realized the main reason to create one was to be able to donate appreciated stock and I could do that for most charities directly and avoid the middle man fees.  I didn't like the idea of paying fees to manage the DAF when I could donate the stock directly for free.  And the money is available to the charity sooner (ie, no temptation to just hold on to it in the DAF, which is one of the big criticisms I have seen of DAFs.....giving is increased, but it sits in fund and therefore unavailable to charities until you actually send it). 

[Romag]

I considered creating a DAF or private foundation this year.  Was leaning toward DAF, but then I realized the main reason to create one was to be able to donate appreciated stock and I could do that for most charities directly and avoid the middle man fees.  I didn't like the idea of paying fees to manage the DAF when I could donate the stock directly for free.  And the money is available to the charity sooner (ie, no temptation to just hold on to it in the DAF, which is one of the big criticisms I have seen of DAFs.....giving is increased, but it sits in fund and therefore unavailable to charities until you actually send it). 

Agree - the ability to front load the charitable deduction (in a high-income year before retirement) was the only reason I created a DAF. Otherwise, direct giving seems preferable.

[CheapScholar]

Cool topic.  I'm director of foundation relations at a major research university and deal with family foundations and DAFs all the time.  IMO, setting up a charitable foundation is not worth it unless you are putting 2M+ into the endowment. 

[sol]

IMO, setting up a charitable foundation is not worth it unless you are putting 2M+ into the endowment.

What do you mean by "worth it"?

Do you mean it's not more cost effective than a DAF?  There are advantages to running your own non-profit corporation, which is what a private foundation becomes in the eyes of the IRS, and in some cases those advantages outweigh an extra 0.6% operating expenses.

[Paul der Krake]

Don't the administrative fees make this a rather suboptimal allocation? Vanguard Charitable charges about 0.5% on the first million. OP didn't hint at the sums involved, but for a $1m endowment that's a whole $5k per year that could be going to a real charitable cause instead of suburban bean counters in Pennsylvania.

The only real advantages I can see are:
1) Creating a lasting legacy that will survive you
2) Taking massive deductions in your prime earning years

Now you could improve this a little by pooling donors into one fund and get better fees, but then you need to all agree on governance.

[Catbert]

I've had a Fidelity DAF for the last 5-6 years.  I didn't know about them until several years after I retired so I haven't used it to shift charitable deductions into high income years.  I use it for two primary reasons:

*Donate seriously appreciated stock mutual funds and avoid capital gains.  As a buy-and-hold investor I'm donating stock/mutual funds that I've owned for 20 years where the current value is ~75% capital gain. 

*Donations to the charities are anonymous (MW Family Trust)so I don't get on mailing lists.  Keeping my mailbox and email free of charity requests is important to me.  You could also choose to have the charity get your address if you want.

I use it mostly as a pass through where all/most of the money donated to the DAF is passed along in the same year so the .6% is only charged once rather than multiple years.  Both donating and recommending disbursements are quick and simple (click, click).  I could donate the mutual funds directly to some of the charities but it would involve more work and get me on lots of mailing lists.  One of the charities I give to is very small (annual budget ~100K) and I doubt that they would be able to easily handle a stock donation.

[CheapScholar]

IMO, setting up a charitable foundation is not worth it unless you are putting 2M+ into the endowment.

What do you mean by "worth it"?

Do you mean it's not more cost effective than a DAF?  There are advantages to running your own non-profit corporation, which is what a private foundation becomes in the eyes of the IRS, and in some cases those advantages outweigh an extra 0.6% operating expenses.

If you start a foundation you'll need to give away 5% every year.  If your hope is to have the foundation live in perpetuity (managed by descendants usually) then the payout on a 2M endowment would be $100K.  Plus, there will always be some administrative costs and hassles associated with a foundation.  I attend professional conferences and read about this issue quite a bit and most experts say that 2M is the floor.  Some experts say 5M.  Of course, these "experts" might not be thinking about your situation and goals.  Maybe you want to spend down the foundation before you die?  As to the cost effectiveness, my donors are wildly in love with DAFs because their DAF money gets pooled with our university endowment, which is one of the best performing univesity endowments in the country.

[sol]

Don't the administrative fees make this a rather suboptimal allocation? Vanguard Charitable charges about 0.5% on the first million.

If the up front tax deduction is worth 28% to me, then an extra 0.5% administrative fee seems pretty worth it. 

[Nords]

One easy option, that Nords and jcollinsnh have both recommended, is to use a Donor-Advised-Fund. 

Another "benefit" that I absolutely love is anonymity.  When you set up the grant to go from Fidelity to the charity, you have the option of identifying yourself or being "an anonymous donor".  This keeps you off the solicitation lists and helps minimize the junk mail & phone calls.

Here's the verbiage that I use on Fidelity's site with the royalties I earn from The Military Guide book sales: 
"In honor of the contributors to the book 'The Military Guide to Financial Independence and Retirement'. 
Please use this contribution where it's needed most.
See The-Military-Guide.com or e-mail NordsNords@Gmail.com."
The charities can still track me down if they care to invest the time and effort, but they don't.  Better yet, the buyers of their lists don't have my contact information.

You can do both!  If you establish a private foundation, you can then meet your 5% annual disbursement requirement by donating your donation to a DAF.  In this case, the foundation is just an intermediate holding tank.  (You only get the tax deduction once, of course.)  I'm less clear on whether your DAF can donate to your private foundation.

I am still learning about this world, and considering my options.  Does anybody here have experience with establishing or using DAFs or private foundations?

We've looked into setting up our own 501(c)3, but it's more work than we care to tackle. 

The DAFs will generally avoid doing extra work too.  If you set up a 501(c)3 you can still ask your DAF to send grants to your 501(c)3-- but they'll probably balk at the administrative overhead of reviewing and approving each individual grant.  (And complying with IRS requirements for tracking & auditing.)  DAFs also decline to accept royalties from authors.  This is a pain because I have to cash the royalty check, pay income taxes, and then move the funds to the DAF.  Maybe someday the IRS rules will change, but until then the (itemized) tax deduction is probably a wash. 

A royalty alternative would be for me to ask my publisher to donate all of my royalties to a specific charity, but they balk at the extra work too.  (Someday I'll research whether Amazon will do this for Kindle Direct Publishing.)  And if a charity goes through a bad patch of adverse publicity (Wounded Warrior Project) or even illegal behavior, then it might be hard to persuade the publisher to change the donation.

It boils down to what you want to support and how you want to spend your time.  In my case, my spouse and I are more inclined to support a college scholarship fund.  That can easily be done by giving an endowment to a local high school or community organization or to a college endowment office.  A $1000 annual scholarship can be established with as little as $20K and still meet the 5%/year requirement.  Another alternative would be setting up a 501(c)3 through probate and putting a family member on the payroll to administer the fund... but if I found out that I was the beneficiary administrator of some generous deceased donor, I would not be very happy about it.

Don't the administrative fees make this a rather suboptimal allocation? Vanguard Charitable charges about 0.5% on the first million. OP didn't hint at the sums involved, but for a $1m endowment that's a whole $5k per year that could be going to a real charitable cause instead of suburban bean counters in Pennsylvania.

The only real advantages I can see are:
1) Creating a lasting legacy that will survive you
2) Taking massive deductions in your prime earning years

Now you could improve this a little by pooling donors into one fund and get better fees, but then you need to all agree on governance.

Yes, there are expense ratios and even money-market fees.  In my case (with the royalties) I make the donation and then immediately request the grant.  The balance of the DAF is effectively zero, the distribution rate is 100%/year, and I'm never charged a fee.

As Sol has pointed out, taking a tax deduction in one year probably saves more than the money you spend at the DAF to administer the fund.  You'd probably spend more money (accounting, tax returns) and time on administering your own fund, so the DAF is still "cheaper" there too.

[seattlecyclone]

I've looked into setting up a donor advised fund account, but the fee structure has turned me off. The percentage fee on assets in the account would, for me, act as an incentive to distribute the money as quickly as possible so the charities get it instead of the DAF provider. However this is contrary to one of the main benefits of a DAF, namely the ability to decouple the year of tax deduction from the year of donation. If I'm going to send the money to a charity at the same time as I take the tax deduction, I might as well just send a check to the charity without the middleman!

The other main benefit is the ability to donate appreciated stock, which most charities simply don't want to deal with. It's stupid that our tax code treats donating stock differently than selling stock and donating the proceeds, but that's where we are. I personally don't value this benefit very much because I'm not sitting on very many appreciated taxable assets, but it can be a real consideration if you're in a different position.

I realize running a DAF costs money and that has to be accounted for in the fee structure, but I've always thought it would be more appropriate to charge something like a flat fee per distribution to cover administrative costs of sending money to charities. Seems fairer than charging a rather high percentage of assets under management regardless of how much activity goes on in the account, whether they distribute one large donation or a hundred smaller ones.

[chasesfish]

Sol - Have you looked to see if there's a local "Community Foundation" in your area?

They operate under the same premise as Vanguard/Fidelity, but have a local "feel" or mission.   You contribute to a donor advised fund with your local community foundation, then make grand recommendations based on the fund guidelines.  It may or may not be as flexible as Vanguard/Fidelity, but a well run community foundation will have programs to connect donors and volunteers with not-for-profits.

A local community foundation also gives you an option to turn over the grant making to the discretion of the organization if you ever decide to.

[azure975]

I set up a donor advised fund with Fidelity earlier this year. We are in the highest tax bracket so the ability to take the tax deduction up front was my main motivation. I hope to load up on it during our high earning years and then distribute it after we FIRE and are in a much lower tax bracket. So far I don't have too much of an opinion about the Fidelity DAF specifically--I have everything in a money market fund for now and haven't made any grants yet, so not really much to report. I'm planning to make my first grant in 2017 for a program called Pets for Life that I volunteer with that brings veterinary and spay/neuter services to underserved areas. I'm glad that Sol started this thread and am interested to hear about other mustachians' philanthropic efforts.

This may be for a separate thread, but I'd like to hear about what kind of causes other people are interested in supporting. My main passion is animal welfare, and specifically spay/neuter since it seems to be the best bang for the buck in terms of results. Much more efficient to prevent unwanted litters from being born than to handle it on the other side. I'm also interested in helping people keep their pets through financial assistance and support. I prefer to donate to charities that I am personally involved with as well so I know how my money is being used. When I FIRE I am planning to spend most of my time volunteering and working on philanthropic efforts so it will be like an encore career, but one I'm actually interested in rather than one that I was forced to do to earn money.