What is a Donor Advised Fund?

The first donor advised fund was set up in 1931 however, these charitable saving vehicles did not become very popular until 1986. In 1986, sweeping tax reform increased regulations on private foundations raising interest in the donor advised fund as an alternative. Shortly after, in 1991 Fidelity launched The Giving Account its donor advised fund which has grown to the largest in the world.

A donor advised fund is an escrow or holding account that you advise on. You place your asset, usually cash or appreciated stock, in the donor advised fund and take a charitable tax deduction today. The cash and appreciated stock can then be invested and given to your favorite charities under your advisement. Donor advised funds allow you to bifurcate when you take the charitable deduction on your tax return and when you ultimately donate to your favorite charity.

Your Charitable Tax Deduction Explained

There is a great deal of misunderstanding on how your charitable tax deduction works. Charitable contributions are considered itemized deductions. Itemized deductions for years 2019-2025 are the sum of your state and local taxes (capped at $10,000), interest expense, medical expenses over 10% of your AGI, and charitable contributions. The IRS allows you to take the LARGER of your total itemized deductions or the standard deduction. The 2019 standard deduction for single taxpayers is $12,200 and those married filing joint is $24,400. If you are over age 65 or blind there is an additional increase of $1,650 for single filers and $1,300 per spouse over 65 or blind for married filers.

Itemized vs. Standard Deduction

Itemized DeductionsOR2019 Standard Deduction
Medical (over 10% AGI) +$12,200 Single / $24,400 Married Filing Joint
State & Local Taxes ($10k cap) +
Interest Expense +
Charitable Contributions

Many taxpayers do not realize that if their total itemized deductions in the left column above do not exceed their standard deduction in the right column above then it does not matter how much they give to charity from a tax perspective. There is no tax benefit for your charitable contributions whatsoever if the standard deduction is higher.

Jill and Bill want to make sure they receive a tax benefit from their charitable contributions. They have zero medical expenses, $10,000 of state & local taxes, $7,000 of mortgage interest, and $7,000 of charitable contributions for 2019. Jill and Bill total their itemized deductions to $24,000 and realize the standard deduction of $24,400 is higher. In order words Jill and Bill could have donated zero to charity and they would still receive the $24,400 deduction. There was no tax benefit to their $7,000 of donations.

The Benefits of Donor Advised Funds

Donor advised funds have three primary benefits which has led to recent increased adoption.

1) Tax Benefits

Charitable giving is about more than the tax benefits, but there is no reason to leave the IRS a tip on your tax bill. The recent Tax Cuts and Jobs Act which took effect in 2018 effectively doubled the standard deduction and limited the state and local tax deduction to $10,000 causing a significant amount of people’s itemized deductions to no longer exceed the standard deduction as seen previously with Jill and Bill. The standard deduction increase is great for taxpayers but leaves many searching for a way to receive a benefit for their annual contributions. One way to maximize this new higher standard deduction is to “bunch” your charitable contributions every other year.

Jill and Bill decide to make charitable contributions of $14,000 in 2019, zero in 2020, $14,000 in 2021, zero in 2022, etc. This bunching strategy will result in an extra $7,000 deduction every two years when compared with donating $7,000 annually.

Jill & Bill’s total deductions over the four years are $97,600 under the $7,000 annual giving option and $110,800 under the bunching method. The bunching method results in $3,168 of true tax dollar savings over four years if they fall in the 24% tax bracket.

$7,000 Annually

YearItemized Ded.Standard Ded.
2019$24,000$24,400
2020$24,000$24,400
2021$24,000$24,400
2022$24,000$24,400

$14,000 Every Other Year

YearItemized Ded.Standard Ded.
2019$31,000$24,400
2020$17,000$24,400
2021$31,000$24,400
2022$17,000$24,400

2) Flexibility

Donor advised funds act as your personal escrow account for your charitable funds. Jill & Bill without hesitation choose to bunch their charitable contributions every other year but do not like the idea of not donating to any charities in 2020 and 2022. Jill & Bill can set up a donor advised fund with $14,000 in 2019 and instruct their fund to donate monthly to their preferred charities for all of 2019 and 2020. The donor advised fund effectively allows you to separate the tax deduction from the donation to the end charity which provides great flexibility.

3) Simplicity

Do you hate tax time every spring? You are not alone. One of the most burdensome pieces of the tax process is gathering all your charitable receipts. Donor advised funds eliminate this burden. In the eyes of the IRS you are making one donation to the donor advised fund. As long as the funds are eventually given to qualifying charities it does not matter whether it is one charity or thousands, the IRS sees one donation to the donor advised fund. That means one charitable receipt for tax time.

Additionally, most donor advised funds such as the East Texas Communities Foundation or Fidelity make transferring the funds to the end charity as easy as a quick online form or emailing or calling and requesting a donation be made. The simplicity of having all your charitable contributions in one place is a priceless benefit to many donors.

The Costs of Donor Advised Funds

There are relatively few downsides to donor advised funds. The primary reason for lack of adoption is lump sum giving requires having a lump sum. In order for Jill & Bill to bunch their donations they would need $14,000 worth of property in 2019 to contribute to the donor advised fund. If Jill and Bill were making monthly contributions of $583 (totaling $7,000 annually) and did not have $14,000 upfront the only way for them to take advantage of bunching would be to save $583 a month for 24 months and make the donor advised fund contribution at the end of 2020. This would work just as well but Jill & Bill might not be willing to have a 24-month gap in their giving.

Some donor advised funds have minimum opening contributions seen below which can dissuade those interested. Likewise, the administrative expenses and investment options vary from fund to fund. Below is a summary of a few funds as of November of 2019. There are many more options to choose from than those below so shop around to find the best donor advised fund for you and your family.

Donor Advised Fund Comparison

ETCFFidelityVanguardSchwab
WebsiteEast Texas Communities FoundationFidelityVanguardSchwab
Min Opening ContributionNo Minimum$5,000$25,000$5,000
Min Additional ContributionNo MinimumNo Minimum$5,000$500
Min Donation$100$50$500$50
Admin Fees<$1M = 1%
$1M-$2M = .75%
$2M-$5M = .5%
$5M-$10M = .35%
>$10M = .25%
<$500k = .6%
$500k-$1M = .3%
$1M-$2.5M = .2%
$2.5M-$5M = .15%
>$5M = Call Fidelity
<$500k = .6%
$500k-$1M = .3%
$1M-$29M = .13% for select .3% for standard
>$29M = Call Vanguard
<$500k = .6%
$500k-$1M = .3%
$1M-$2.5M = .2%
$2.5M-$5M = .15%
$5M-$10M = .13%
$10M-$15M = .12%
>$15M = .1%
Investment FeesExpense ratio for each investment.015% to 1.11% depending on investment selectionDepends on investment selection. Average .07%.03% to .91% depending on investment selection

Conclusion

While donor advised funds are not for everyone there are definite advantages to using these funds to manage your charitable giving including increased tax benefits, administrative ease, and flexibility. My wife and I recently began using a donor advised fund set up through our custodian and if a donor advised fund seems it would add value to you and your family we highly encourage you follow through.