Stop Missing Out on Potential Tax Deductions

A Case for Donor-Advised Funds to Facilitate Tax-Smart Philanthropy

With the beginning of a new year, another deadline looms in April – Tax Day. While investors rush to provide their tax advisors with year-end documents, we want to take this opportunity to focus on a specific area of an often-overlooked component of tax planning – charitable giving and, more specifically, the utilization of Donor-advised funds as a mechanism to facilitate your donations optimally. Donor-advised funds are more commonly referred to as DAFs. Among some particularly complex charitable giving vehicles, DAFs offer a relatively simple, inexpensive, and convenient way to pool charitable donations and capitalize on more significant tax savings for your generous donations. This can be important for many charitably inclined individuals – especially those who often find it difficult to generate tax deductions above their standard deduction. Let’s dive in below.

So, what exactly is a DAF?

We think Fidelity Charitable said it succinctly – “[a] DAF is like a charitable investment account for the sole purpose of supporting charitable organizations that you care about1.” From a high level, that is exactly right. However, there are a few more intricacies of DAFs we want our clients to be aware of. While “Fidelity” is likely a household name for investors across America, the average investor may not have heard of “Fidelity Charitable.” Each DAF has a sponsoring organization, and Fidelity Charitable is the charitable arm associated with Fidelity that sponsors their DAF. The same can be said for most other financial institutions that have DAFs. For example, there is also Schwab and Schwab Charitable or Vanguard and Vanguard Charitable, to name a few others. These charitable organizations partner with large financial institutions to support these types of accounts and allow our clients and other everyday investors to donate to a DAF and specify grants to their favorite IRS-recognized non-profits and charities. This can be done either in lump sums or more slowly over time. Furthermore, these non-profit pairings with institutional investment managers and custodians occasionally allow financial advisors to professionally invest these charitable savings on clients’ behalf, or individuals can invest on their own.

Benefits of using a DAF

As we mentioned at the start of this post, a DAF allows one to pool charitable donations, which is a big benefit enabling you to potentially moderate your taxes when it is convenient for you. This can be especially beneficial for those needing more tax deductions to itemize their annual tax filing. These individuals can benefit from DAFs, as they likely rarely receive any tax benefits from their giving. Let’s explore the following scenario to see the power a DAF can provide to charitably inclined investors:

Suppose you donate $25,000 annually (~$2,000 per month) to a favorite charity. Also, suppose you have retired and have a significant tax liability from deferred compensation and will be subject to the taxes owed on $250,000 of additional income this year. If this individual were to donate 10 years’ worth of their charitable giving to a DAF, they could immediately recognize a sizable tax deduction and potentially eliminate the liability entirely. Furthermore, if they donated highly appreciated and low-basis stock directly to the DAF, they could use that to offset their income taxes and avoid having to pay capital gains taxes on liquidating the appreciated stock, all while pooling the next 10 years of their charitable donations in a segregated investment account. If all goes well, the investments could also appreciate over the subsequent 10 years and create even more charitable assets for you to grant. DAFs and charitable deductions are also generally very flexible. The deductions can be used to offset ordinary income, as displayed above (likely the best bang for your buck), but they can also offset capital gains. DAFs even accept many kinds of property as donations, which could include, but are not necessarily limited to, appreciated public stock, stakes in privately held investments, real estate, and even business holdings. While the average investor may not utilize this feature, it can be advantageous for the right individual.

While the above presents an excellent case for using DAFs, there is a catch that investors should be aware of. As with any charitable donation, you can only receive a deduction for up to 30% of your adjusted gross income (AGI) for non-cash donations and 60% for cash donations. Meaning that in the example above, if your AGI is $400,000 (including the $250,000 of deferred compensation) and you donate highly appreciated stock (let’s assume $250,000 of stock with a cost basis of $1) to the DAF, the maximum deduction you can receive would be $120,000 ($400,000 * 30%) this year. If you chose to donate cash, the deduction (in this example) could rise to $240,000 ($400,000 * 60%) this year. However, charitable deductions work similarly to carry forward losses, and if your donation generates tax savings above your limit, you can utilize unused deductions in later years. If you are concerned about the best strategy, we encourage you to talk with your financial advisor and tax professional.

How do I pick the best DAF for me?

We have analyzed the administrative fees of the DAFs discussed above and some other key factors to account for when considering adding a DAF to your portfolio:

(Data as of January 2023)

Vanguard Charitable
Administrative Fee Schedule	AUM Fee by Tier
$0 – $500,000	0.60%
$500,000 – $1,000,000	0.30%
$1,000,000 – $5,000,000	0.12%
$5,000,000 – $15,000,000	0.10%
$15,000,000 – $30,000,000	0.08%
$30,000,000 – $100,000,000	0.05%
$100,000,000+	Contact Vanguard

Vanguard Charitable Minimums
New Account	$25,000
Additional Contribution	$5,000
Charitable Grant/Donation	$500

Schwab Charitable
Administrative Fee Schedule	AUM Fee by Tier
$0 – $500,000	0.60%
$500,000 – $1,000,000	0.30%
$1,000,000 – $2,500,000	0.20%
$2,500,000 – $5,000,000	0.15%
$5,000,000 – $10,000,000	0.13%
$10,000,000 – $150,000,000	0.12%
$150,000,000+	0.10%

Schwab Charitable Minimums
Core Account		Professionally Managed
New Account	No Minimum	New Account	$250,000
Additional Contribution	No Minimum	Additional Contribution	No Minimum
Charitable Grant/Donation	$50	Charitable Grant/Donation	$50

Fidelity Charitable
Administrative Fee Schedule	AUM Fee by Tier
$0 – $500,000	0.60% or $100, whichever is greater
$500,000 – $1,000,000	0.30%
$1,000,000 – $2,500,000	0.20%
$2,500,000 – $5,000,000	0.15%
$5,000,000 – $10,000,000	0.13%

Fidelity Charitable Minimums
Core Account		Professionally Managed
New Account	No Minimum	New Account	$250,000
Additional Contribution	No Minimum	Additional Contribution	No Minimum
Charitable Grant/Donation	$50	Charitable Grant/Donation	$50

Note that each fund or investment pool within the DAF will also have its own investment-related fund fees, so be mindful of this when considering what DAF is best for you.

From a purely quantitative perspective, we favor Schwab and Fidelity’s DAF over Vanguard’s for account balances under $1,000,000. Vanguard’s DAF offers a superior fee breakpoint for accounts over $1,000,000, but larger minimums for account openings, additions, and donations make their DAF less user-friendly for many. Furthermore, Schwab and Fidelity offer the ability for your advisor to professionally manage the assets within your DAF for balances over $250,000. Since Schwab and Fidelity are two of Condor’s primary custodians, we could seamlessly integrate your DAF into your overall investment strategy and reporting view to transfer assets between your other accounts and your DAF efficiently. We could also incorporate several of our in-house investment strategies tailored to your needs directly into the DAF account through Schwab or Fidelity. Vanguard does not offer this feature regardless of the size of your DAF, so you are limited to the retail investment style blends provided by them. The same can be said at Schwab and Fidelity if you want to invest the funds on your own, but there is an option for professional customization on balances over $250,000. Finally, please note that many other charitable organizations with various degrees of service and cost are also available; we have only touched on three of the biggest and most popular.

Written by: Caelan McCarthy, CFP®; Financial Advisor, Condor Capital Wealth Management
Edited by: Thomas Leahy, CFA; Financial Advisor, Condor Capital Wealth Management