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Mutual Fund Education

How to Choose Donor-Advised Funds

Brian Mathews Jan 30, 2018


Investors, especially those in high tax brackets, should be familiar with donor-advised funds, as contributions immediately get a tax deduction, just like contributions made directly to a charity. A benefit to donating to a donor-advised fund is that the donor controls the payout to the charity of their choice. The fund invests the proceeds and the original contributor can dictate when, where and how much can be donated.

With the growing popularity of these donor-advised funds, it has been increasingly difficult for individual investors to decide which fund best fits their individual needs. All donor-advised funds typically work in a similar fashion, with the general premise of pooling together donor funds that will eventually be distributed to charities.

However, there are several factors that could influence a potential donor’s decision on which is the best fund for them.

Click here to learn more about donor-advised funds.


Factors to Consider While Exploring Donor-Advised Funds


 
1. Donation Minimums

The first question anyone interested in using a donor-advised fund should ask is how much they are looking to donate.

Many funds have a minimum size in both initial contribution and how much is distributed to the charity. The three largest donor-advised funds are Fidelity Charitable, Schwab Charitable and Vanguard Charitable. Both Fidelity and Schwab have a minimum initial donation of $5,000, while Vanguard has a minimum of $25,000. Each has a different minimum for additional donations as well. Fidelity does not have a minimum, while Schwab has a $500 minimum and Vanguard has a $5,000 minimum for additional donations. For minimum gifts to charity, both Fidelity and Schwab have a $50 minimum, while Vanguard has a $500 minimum.

Since these three are large institutions, each accepts fairly low donation minimums. However, for smaller donor-advised funds, minimums could be considerably higher and less flexible.

 
2. Investment Costs

Another difference between donor-advised funds is administration and investment fees. Administrative fees are the charge a fund uses to operate, taken directly from the donor’s funds. Fidelity and Schwab both charge the greater of $100 or 0.6%. Both also have breakpoints available, depending on the total asset size of the donation. For example, Schwab’s fees drops to 0.3% when the total asset size exceeds $500,000. Its lowest breakpoint is 0.1% of assets, earmarked for total assets $15 million and above.

In addition to administrative fees, each donor-advised fund charges investment fees like any mutual fund or pooled investment vehicle. Fidelity’s investment fees range from 0.015% to 1.11%, depending on the investment style or strategy. Same goes for Schwab, where the most expensive Growth Pool asset allocation model charges 1.01% and the least expensive Total Market Equity Index pool charges only 0.03%. Typically, the more advanced or aggressive an investment strategy is, the more expensive it will be to run.

As a result, potential donors should always consider this factor when deciding which donor-advised fund works best for them.

 
3. Investment Options

Many donor-advised funds offer a variety of different investment options.

Fidelity, for example, allows its donors to use seven different asset allocation pools, a variety of single asset class investments, a social impact investing pool and even a charitable legacy pool that is intended for long-term growth. Schwab allows its donors four different pre-allocated investment pools or ten different single asset class pools to invest it. For accounts larger than $250,000, Schwab offers donors access to a professional managed account where individual securities like stocks, bonds or mutual funds can be used. Schwab even goes as far as allowing alternative investments like hedge funds or real estate funds to be used as well.

 
4. Types of Contributions

One of the benefits of contributing to a donor-advised fund is the ability to give highly appreciated assets as a form of donation. This way, the donor can still have the tax deduction, without having to pay capital gains tax if they were to sell it outright.

Every donor-advised fund allows basic cash donations, but not all DAFs accept all forms of non-cash contributions. Appreciated publicly traded securities, like stocks, bonds, mutual funds and ETFs, are often also accepted. However, Fidelity and Schwab, for instance, also allow privately held business interests like private C-corp and S-corp stocks, LLC and LP interests and private equity. Restricted stock, life insurance, real estate, oil and gas interests and even Bitcoin are also accepted as a form of donation by some donor-advised funds.

Check here to learn how mutual funds are taxed.

 
5. Distribution of Proceeds

Most donor-advised funds will allow you to donate to almost any 501©(3) public charity organization. However, if an investor has a particular charity in mind, they should first verify with a donor-advised fund that it is an eligible charity. Some funds are more specific to particular charity groups, like the New York Community Trust donor-advised fund, which is designed to help New York City–based charities. Larger donor-advised funds like the Fidelity, Schwab or Vanguard funds have hundreds of charities that a donor’s proceeds can go towards.


The Bottom Line


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