Donor Advised Funds (DAF): The “Charitable Checkbook” for Tax Alpha
Donor Advised Funds (DAF): The “Charitable Checkbook” for Tax Alpha
EXECUTIVE SUMMARY
- The Vehicle: A Donor Advised Fund (DAF) is a tax-advantaged investment account dedicated to charity. Think of it as a “Personal Foundation” without the legal headaches.
- The Strategy: Instead of donating cash (which is tax-inefficient), you donate Appreciated Assets (Stocks, Crypto, Real Estate). You get a tax deduction for the full market value, AND you pay zero capital gains tax on the appreciation.
- The Timing: Use “Bunching.” Contribute 5 years’ worth of donations into your DAF in a single high-income year (e.g., IPO, Business Sale) to maximize your Itemized Deduction, then distribute the money to charities slowly over time.
For the wealthy, writing a check to charity is a rookie mistake. Smart money uses the DAF. By donating an asset that has grown in value (e.g., Apple stock bought in 2010), you effectively wipe out the IRS’s claim on your profit. It separates the “Tax Event” (Contribution) from the “Charitable Event” (Distribution). You get the tax break now, but you can decide where the money goes 10 years from now. Source: IRC ยง 170 (Charitable Contributions) / Fidelity Charitable Report
Scenario: You want to donate $50,000. You have $50,000 in Tesla stock (Cost Basis: $5,000).
- Option A (Sell Stock -> Donate Cash):
Sell Stock: $50,000.
Pay Cap Gains Tax (23.8% on $45k gain): -$10,710.
Donate Net Cash: $39,290.
Tax Deduction: Only $39,290. - Option B (Donate Stock to DAF):
Transfer Stock: $50,000.
Cap Gains Tax: $0 (Eliminated).
Donate Value: $50,000.
Tax Deduction: Full $50,000. - Result: The charity gets ~$11k more, and you get a larger tax refund. The IRS gets nothing.
Tax Efficiency Score
| Donation Method | Total Tax Benefit ($) on $50k Gift |
|---|---|
| Cash Donation | 18500 |
| Stock Donation (via DAF) | 29210 |
*Assumes 37% Income Tax bracket and 23.8% Capital Gains bracket. The DAF effectively subsidizes your generosity.
CRITICAL STRATEGY: “Bunching” (The Standard Deduction Hack)
Overcoming the $29,200 Hurdle.
| Strategy | Total Deductions (5 Years) |
|---|---|
| Annual Giving ($10k/yr) – Taken Standard Deduction | 146000 |
| Bunching ($50k in Year 1) – Itemizing Year 1 | 166800 |
Execution Protocol
Fidelity Charitable, Schwab Charitable, and Vanguard Charitable are the “Big Three.” They have low fees (0.60% or flat fees) and integrate with your brokerage account.
Look for tax lots in your taxable portfolio with the highest percentage gain (e.g., +500%). These are “toxic” to sell (high tax) but “gold” to donate. Never donate losing positions (sell those to harvest the loss, then donate cash).
Once the money is in the DAF, it is irrevocable. But you can invest it. Put it in an S&P 500 index fund inside the DAF. If it grows to $100k, that extra $50k is more money for charity, tax-free.
WEALTH STRATEGY DIRECTIVE
- Do This: Use a DAF in any year you have a “Liquidity Event” (selling a business, huge bonus, RSU vesting). It is the best way to offset a sudden spike in marginal tax rates.
- Avoid This: Donating to a DAF if you need the money back. It is a one-way street. Once contributed, the money belongs to the 501(c)(3) sponsor, not you.
Frequently Asked Questions
Can I donate to my church/school?
Yes. As long as the recipient is an IRS-qualified 501(c)(3) public charity, you can “advise” a grant from your DAF to them anytime.
Is there a minimum?
Most providers (Fidelity/Schwab) have eliminated account minimums. You can start with $0 and contribute as you go. Grant minimums are often just $50.
DAF vs. Private Foundation?
A Foundation gives you control and status but costs thousands in legal/accounting fees and publishes your data. A DAF is private (anonymous giving), free to set up, and simpler. For less than $5M, use a DAF.