What if I told you there’s a way you can increase your giving by up to 50% or more (depending on your tax bracket) at no cost to you? For every dollar you put in, you’d have $1.50 to give to a charity of your choice? Interested? Read on then.

Lending a hand while climbing

Why Give?

First, why give in the first place?

If you’re a software developer, chances are, you are well paid. For example, compensation at Lyft start at $236,000. If you make that much, you’re in the top 2% within the United States.

If you read my blog, you most certainly exhibit good judgment, you are smart, and you’re good looking. You worked hard for your success, but your success isn’t solely due to your own efforts. You have much to be thankful for. Be thankful for free public education, paved roads, and a stable (more or less) economy. Most of all, be thankful that the government funded DARPA which created ARPANET which became the Internet. For most of you, if there was no Internet, you wouldn’t have quite the job that you have.

Not everyone is as fortunate as you. Not everyone has had the opportunity you and I did. This is why I think it’s worthwhile to give back.

What to do with a Windfall?

Suppose you work at a start-up that hits gold via an IPO or acquisition by a major technology company. What next? You could make a large one-time donation, but it takes time to figure out what charities you’d like to support. You could just go about things as normal and give to charity over time. But that leaves money on the table that could go to the charity.

Even if you don’t have a windfall, you still want your charitable giving to go further, right?

This is why I was pleased to learn about Donor Advised Funds (DAF).

What is a DAF?

This Kitces blog post has a great overview of Donor Advised Funds:

The basic concept of a “Donor-Advised Fund” is that it’s a form of tax-preferenced investment account, specifically ear-marked for charitable giving.

In short, a Donor Advised Fund is a lot like a private trust, but much simpler and cheaper to set up and maintain. A donor advised fund lets you make a charitable contribution into a fund and receive an immediate tax deduction, but delay when you donate funds to a 501(c)(3) public charity.

If you have a charitable heart, this is a great way to maximize your giving power. Especially during a year where you receive a windfall. You can offset your windfall by setting up a DAF, but delay giving to specific charities over your lifetime.

You can continue to contribute to the DAF over your lifetime. And when you die, you can pass the fund to your children to administer. Also, the funds within the DAF grow tax free.

Even cooler, if you have a large amount of stock, you can donate the stock and both receive the tax deduction for the full market value of the stock. This actually increases your donation over 20% (see this Fidelity page for details) because you don’t have to sell it and pay long term capital gains.

I took advantage of this when the Microsoft acquisition of GitHub closed. I donated a decent sum of MSFT stock and effectively increased the amount I have available to give to charities by 20%. Since my tax bracket is over 30%, this actually increases my total giving power over 50% since I can contribute the deduction I receive to the DAF as well.

Note to my former GitHub colleagues, you should check this out if you were an accredited investor and received Microsoft stock.

My children live a life full of opportunity and privilege. It’s important to me that they develop a charitable habit. Our plan is to sit down as a family together once a year and decide on the charities we want to support for the year. We’ll then set up monthly contributions to each charity. I think it’ll be fun for the kids to research and support charities they care about.

Downsides

There’s a few minor downsides to a DAF. First, each of the donor advised funds charge fees. In my mind, this is more than made up for by the benefits. And the fees are significantly less than the cost to operate a private foundation.

You do lose a little bit of control over how you donate. For example, you have to recommend grants via the DAF provider. For example, you don’t get a credit card or checkbook you can just use to donate to a local charity fund raiser.

Notably, a donor-advised fund is not technically required to follow the donor’s guidance about how to invest the funds, nor about where grants will be made, although from a practical perspective a donor-advised fund that did not follow the guidance of its donors would quickly see its new contributions fall to $0.

You also have a bit less control over how the funds in the DAF are invested. You are limited by the options that the DAF provider offers. In my case, I use Fidelity Charitable and they have a decent set of index fund options. One of the options is a sustainable option focused on social good. I was happy to see that as an option.

Once you put money in, it must go to a public 501(c)(3) charity in good standing with the IRS. So if you hit hard times, you can’t take the money out.

One major criticism of DAFs is there are no minimum giving requirements in any given year. For example, trusts are required to give out 5% of their net investment assets on an annual basis. This may be good for you in terms of giving you control, but I see it as an overall negative to society. I think it’s important that charities receive the benefit of DAFs and would like to see a minimum disbursement rule in place.

Our current plan is to contribute 4 to 5% a year depending on the growth of our fund in any given year.

Where do I set one up?

I set one up with Fidelity Charitable since I already had an account with Fidelity because of my GitHub 401(k). Schwab offers one, as does Vanguard.

It was pretty quick and painless. Unfortunately, it might be too late for you to receive this tax benefit in 2018, but 2019 feels like a good year to set up a charitable giving vehicle and get your kids involved.

If you set one up, let me hear about it in the comments!