Doing Well By Doing Good: Setting Up a Donor Advised Fund at Fidelity

For the past 2 years, I have written about giving money to charity (see here, here, and here).

After several years of thinking about setting up a donor advised fund (DAF), possibly with a little trepidation, I finally started mine this month. It was pretty darned easy, though a few details were a bit tricky for me.

I thought I might go over my reasons for finally opening a DAF, and then go through the steps. Of course, I can’t help commenting on some of the small print that I found interesting or amusing.

Why I decided to open a DAF

The basic idea of a donor advised fund is that you can donate money now into a fund from which you can recommend charitable donations later. This fund can be invested, so you can make a donation this year (or for several years) and over time the money grows. If the fund grows well, you might end up able to give away several more times money than you originally donated. Awesome.

For me, that means I can donate while I am working, and once I am retired, I don’t need to budget for my charitable giving. It can all come from this DAF.

The tax tail wags the dog, a bit

My accountant specifically recommended it this year because, in her words, “you are a generous giver but you can’t take a tax deduction for it.”

Strictly speaking, I could itemize by charitable donations; but, with the passing of the Tax Cuts and Jobs Act of 2017, it wasn’t really worth it. This is because the standard deduction on my Federal tax return is $25100 for 2021 (for married, filing jointly). That means that until my itemized deductions reach $25101, I don’t really get any benefit from itemizing on my tax return. And getting a tax deduction for that $1 over the limit isn’t worth very much.

Back when we could fully deduct the state and local taxes (SALT), it wasn’t as hard to reach the upper limit of our standard deduction. I pay plenty in state and local taxes. Now that the SALT limit is $10000, that means I would have to donate more than $14000 in a year to increase my tax deduction above the standard. That’s a lot of dough to give away each year.

On the other hand, if I gave away $20000 or $30000 all at once to a DAF, I could take a good tax deduction on whatever was over $14000. Then, that money could go to charity over several years. We used to do this by “bunching deductions,” (prepaying property taxes, or donating more to charity every other year); I think of this as mega-bunching my charitable donations.

I’m still giving away money, but the tax break makes it a little sweeter.

Rebalancing also plays a role

Now, I don’t know about you, but I don’t usually have tens of thousands of dollars burning a hole in my pocket. If I did, my first thought might not be: how can I give this away?

What I do have are individual stocks (I know, I know, a cardinal sin in the personal finance blog space), purchased eons ago, which have risen considerably in value in the past few years.

One particular stock now makes up 1/3rd of my taxable portfolio; this is not a great idea as far as diversification. However, my cost basis is so low, that if I were to sell it, I would be paying a ton of taxes.

Instead, I can donate some of these shares into my DAF, thereby reducing my exposure to the company, and allowing me to donate a higher amount to charity than if I sold the shares myself and then paid the taxes.

The tax thing again

In deciding how much stock to donate, I was guided by the rules on tax deductions.

Obviously, it was in my interest to make sure all of my deductions (including the donation to the DAF) totaled at least $14000. That was my floor.

I have a ceiling, too. Apparently, if I donate appreciated stock, I can only deduct up to 30% of my adjusted gross income (AGI, which last year was on line 11 of form 1040). 30% of my AGI is more than I feel like giving away right now, but that’s OK, I don’t have to donate the max. It’s just that if I were to give away more, I wouldn’t get a tax deduction.

Setting up the fund

I had a lot of anxiety about setting up my DAF. After doing a little reading, I had decided to go with Fidelity, because they allow smaller grants (as low as $50), which is more in line with many of my donations. Other companies have different minimum grants; for example, Vanguard’s DAF has a minimum grant of $500.

Getting started

I don’t think it could have been much easier to get the ball rolling–I guess Fidelity Charitable wants the money.

I will attempt two screen shots, showing 2 different ways to get a donor advised fund started.

The first is a view if logged into the Fidelity Investments website.

The second is from the Fidelity Charitable home page.

Either approach works well. If you have an account at Fidelity Investments and click on “charitable giving” while logged in, they make it even easier by autofilling your information (name, date of birth, social security number, address) to set up the account. Since I want to stay anonymous, I did not include a screen shot here.

Hard decisions

There were some tough decisions to make once I clicked the button to start the DAF.

The hardest: Deciding what to call the fund. The Mr. and Mrs. PiN Giving Fund? Some random name like The Rich Doctor Fund? Poor Blogger Fund? Should acknowledgements (if not giving anonymously) be to Mister and Physician Numbers? Or The Numbers? Too many choices, this was actually pretty stressful to me. (Looking at the small print, it appears I could change the name(s) later. I haven’t yet looked into this.)

The next hardest: I have to name a successor. That would be someone to take over the fund and advise on grants, after Mr. PiN and I die; or a charity/ charities that would get the money once we are gone. Luckily, they let me punt on this decision.

The third hardest: Deciding how much to give to fund the DAF at first. Which is to say, how much am I giving away right now out of my nest egg?

As noted above, I have a floor to get a tax deduction; and a ceiling. Deciding how much I want to give away within that range was difficult. I decided to give enough that I should see my tax bill drop a bit, but I chose not to approach my ceiling. I can always give more in the future, if I choose.

Arranging funding

This is really easy if you have money with Fidelity Investments. You can just click, and money or funds will be sent to your DAF, if not instantaneously, almost that quickly.

If you are donating funds or stocks from an outside account, Fidelity Charitable has a nice form that lets them request the stocks you plan to donate. You can expect it to take up to 2 weeks for them to hit your DAF.

I ended up asking my broker to send the stocks directly–much as I have done in the past to donate stocks for some of my larger gifts. Within 24 hours, I could see that my donation had been received in my DAF. However, it has taken a bit longer for the donation to be settled, and longer still for it to be processed. Despite the recent holiday, one week after I made the request to my broker, that money is available to donate.

As you can see, if you would like to set up your own Donor Advised Fund before the end of 2021, you may want to start very soon. Between one thing and another, it could take 1-3 weeks to get the account funded properly.

Investment choices

I hear that once my gift has been processed, I get to choose how the account is invested. I am still waiting on this, so no details yet.

Giving details

While reading the small print–which I had to agree to before the account could be opened–I found a few details of interest. I thought I might share here, in case they are helpful to you.

1. You can’t keep your money in this account forever without giving money away (recommending a grant). After one year without donations, Fidelity Charitable will get in touch with you to recommend a grant; after 2 years, they will give 5% of the money from your account on their own. On a 5-year rolling basis, at least 5% of your account needs to be given away.
2. You can’t give (or advise a grant) just any old amount. It needs to be a minimum of $50. However, you can give bigger gifts in increments of $5 or $18 (they describe the $18 as “being of cultural significance”).
3. You can advise a gift to a charitable organization, but not another DAF, or a foundation or charity run by you.
4. Of course, you can’t make a donation if you are expecting to get something great in exchange (think gala tickets).

I think some of these details are universal, and some are specific to Fidelity, so I would recommend checking that small print if these sound concerning to you.

As you can see, I am still getting the hang of using a donor advised fund. Have I convinced you that it is easy to get one started? Do you have any questions as I learn to navigate my way around mine? Any advice from experienced DAF donors?