"The ease of transferring appreciated stock with donor-advised funds sounds so delicious.” — Anonymous
The charitably minded swear by their donor-advised funds. These are third party vehicles which allow donors to make a charitable contribution while receiving an immediate tax benefit. At the same time, they don’t have to disperse the money to a charity or charities directly. It can be over time. Those who participate say, “They’re easy to use. I love them.”
This is true. Donor-advised funds take the pain out of giving appreciated stock to a charity. This is because directing a donor-advised fund to transfer a donation to a charity of choice is much less work than transferring appreciated stock to that organization yourself — believe me, I know. I’ve done the latter too many times to count and it is a headache.
There are other perks of donor-advised funds as well. They accept all kind of assets including bitcoin! When sold, capital gains are eliminated, and the current tax deduction is at fair market value rather than cost basis. For example, if Stock X had a cost basis of $40,000 and quadrupled in price over the last four years, it would sell for $160,000. By transferring it to a donor-advised fund (or transferring to the charity directly yourself — more work), the tax deduction would be $160,000.
This maneuver is especially enticing now when the market is high. Gains can be preserved after transfer of stock to the donor-advised fund and it is sold by using treasuries or similar until the donor is ready to distribute.
Another appealing donor scenario is a special circumstance, for example, a sale of a home which brings a large gain. Then, the transfer of offsetting money to the donor-advised fund helps neutralize the gain for that tax year.
These financial advantages with the donor-advised fund, easier than making the transfer oneself, come with some cautions, however. One is the charges levied on the account. The administrative fee is generally 0.6 percent up to $500,000 where a break occurs. The greater the monies in the donor’s account, the lower the fee. There are also investment expenses which must be paid.
(minimum initial donation)
The administrative fees, of course, do not go to charity, but rather to the donor-advised fund. After all, they do have to be paid for their service. These charges, every year, add up.
According to James Andreoni's, University of California, San Diego, 2017 paper, “The Benefits and Costs of Donor Advised Funds,” the average donor-advised fund “earns a tax benefit immediately and accumulates investment income for three to four years before the balance of money in the account is taken from inventory and invested in a charity.” This means for a $150,000 account balance at Fidelity the administrative fees would be $3,600 for four years or $2,700 for three years. Additionally, the donor transfers control of her monies to the fund, though she may be able to indicate a preference for investments.
While in the donor-advised fund, the money could go up in value, but, it could also diminish if the market goes down or the money market in which some/all the monies are placed charge a higher fee than the return. There is also a minimum transfer to charities, from $50 on up, depending on the fund.
In closing, there are many donor-advised funds. For those who feel comfortable pursuing this route, there is a list of Administrative Fees here. Sadly, it is from 2012, and I cannot find an updated list.
Please note that certain donor-advised funds charge considerably more than Fidelity. A good resource on the subject is by Karen Wallace for Morningstar, “Is a Donor-Advised Fund Right for You?” and “5 Questions to Ask When Choosing a Donor-Advised Fund.”
For me, at this time, I still haven’t decided what to do about my charitable inclinations. Do I want to pay to play, i.e. transfer appreciated assets to a donor-advised fund so they make charitable transfers for me? This would make my life easier and maybe even smarter in terms of controlling when the contribution is made, or, do I want to slug it out and take the pain of the transfer myself? Both have pros and cons.