Why You Should Use a Donor Advised Fund

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Why You Should Use a Donor Advised Fund

Many Americans generously give to charity. Giving appreciated stock through a donor advised fund has several benefits over other methods of giving.

Take for example a family who earns $120,000 a year and gives $12,000 (10%) to charity. They give monthly to their church and have eight other charities they give to annually. On average they are giving about $500 twice a month.

Up until this point, they have been writing checks and paying cash.

Giving appreciated stock instead of cash allows the family to avoid paying capital gains tax on their appreciated stock while still giving the same amount to charity and receiving the same $12,000 deduction on their tax return.

With their income, the family normally has to pay a 15% federal capital gains tax plus a 5.75% Virginia state tax whenever they sell appreciated stock.

Using appreciated stock for their charitable intentions could save them up to $3,300 if the stock is highly appreciated. They save half that amount in capital gains tax if half the value of the gifted stock is appreciation. They save more if they are subject to the Affordable Care Act surtax on capital gains.

Normally the  process of transferring appreciated stock is tedious and time consuming. You have to contact the charity and ask if they have a stock liquidation account. You need to get the account number and the Depository Trust Company (DTC) number. You need to send instructions to your custodian and then value the stock transferred by using an average of the market high and the low on the day of transfer.

Using Schwab’s donor advised fund is much easier.

You still need to pick the stocks that you are giving, but they smoothly transfer from your investment account into your Schwab charitable account. Schwab properly values the holdings for you and sends you a tax receipt for your gift.

From the Donor Advised Fund, the money can then be directed onward to the charity via a grant process which is again easier with Schwab Charitable Donor Advised Fund than it is on your own.

They have a searchable database of all the registered charities in the United States. Searching by charity name and state or charity tax id makes it relatively easy to identify the recipient for a new grant.

Then, after you have given once to a charity, they are in a saved short list on their website for you, and repeat gifts are only a few clicks away. You can even automate giving a fixed amount via a repeating pattern of your choice.

If the money will likely remain in your charitable fund for a while before giving to a charity, you have the option of setting an asset allocation for your charitable account. With an asset allocation set, any money transferred into the account will automatically be used to purchase funds according to the allocation. This allows your money to grow even after giving it away.

Transferring multiple stock gifts each to a different charity is difficult and time consuming. But transferring a single gift of stock to your donor advised fund allows you to give smaller gifts more easily. Once the stock is liquidated in your donor advised fund the minimum grant to a charity is $50.

Furthermore, the process is easier for the charity. Once you have instructed a transfer, the money is sent to the charity as a simple check. All they need to do is cash it.

Having a Schwab Charitable account allows you to separate the careful timing of tax planning from when you want to present the charity with your donation. You get the deduction when you transfer funds to Schwab Charitable, but the organizations you support get the money after you designate a grant be given.

You can use this time separation in multiple ways. You may want to gift more one year in order to reduce your income or offset a windfall, but you may want the organizations you support to receive those gifts gradually over a period of a number of months or even years.

Alternatively, you may want to transfer all of your gifts when the stock market is up and later be distributing those gifts while the market is down.

Finally you may choose to take the standard tax deduction most years and then every few years itemize your tax deductions and do all of your charitable giving that year.

Designating charitable gifts in your donor advised account can be done online at any time of day or night. The process saves time. Hopefully it makes generosity more convenient and therefore more of a joy and less of a burden.

Schwab Charitable keeps a permanent record of every grant you designated and how much was given to each organization. Keeping a record of your cumulative giving allows you to see the impact of your generosity over time and focus your giving on the organizations which you believe are doing the most good.

But there are a few circumstances when you may want or need to do charitable giving directly to the charity. Here are several reasons a gift might need to be given without using a donor advised fund.

At Schwab Charitable, the initial contribution must be $5,000 and additional contributions must be at least $500 in value. You can transfer enough stock to cover grants for several years but there is an annualized administrative fee of 0.60% of assets or a minimum of $100. This makes the account ideal for families whose charitable giving exceeds $2,000 a year.

If your capital gains are taxed at a 0% federal tax rate, the benefit of giving appreciated stock is smaller. You may still pay state tax rates on appreciated stock, but the benefit from avoiding federal taxes is zero. The smaller tax savings may not as easily justify paying the $100 fee unless your annual giving exceeds $3,500.

Finally, Virginia’s Neighborhood Assistance Program (NAP) tax credits allow the donor to receive 65% of the value of your gift back in Virginia tax credits. But these gifts require that your donation come directly from you and cannot flow through a donor advised fund. The same is true for the Virginia Education Improvement Scholarship Tax Credits.

That being said, most of our charitably-inclined clients would benefit from using a donor advised fund even if they need to occasionally give directly in order to receive tax credits. We highly recommend such a fund for generous investors.

Photo used here under Flickr Creative Commons.

Follow David John Marotta:

President, CFP®, AIF®, AAMS®

David John Marotta is the Founder and President of Marotta Wealth Management. He played for the State Department chess team at age 11, graduated from Stanford, taught Computer and Information Science, and still loves math and strategy games. In addition to his financial writing, David is a co-author of The Haunting of Bob Cratchit.

Follow Megan Russell:

Chief Operating Officer, CFP®, APMA®

Megan Russell has worked with Marotta Wealth Management most of her life. She loves to find ways to make the complexities of financial planning accessible to everyone. She is the author of over 800 financial articles and is known for her expertise on tax planning.