I’ve always been fascinated with the idea of recurring revenue. Building a business or a portfolio of investments which passively create recurring income has been interesting to me since I got my first paycheck.

Over the last year I’ve been thinking: why can’t I (slowly) create a charitable asset that kicks off income each year which can go tax-free to charities? This way, instead of giving to an organization once, you can build a mix of assets that generate enough income to perpetually give to the organizations you carry about?

This idea, combined with the recent tax law changes that made it more challenging to get a deduction from charitable donations (10k SALT limitation makes it harder to itemize), got me researching. I ended up finding an interesting vechicle which I hadn’t heard of before: the Donor Advised Fund (DAF).

Obviously, I’m not a financial advisor, lawyer, CPA, etc. Don’t trust anything you read here, and always consult your own advisors. 

How a Donor Advised Fund Works

Here’s the basics of how a DAF works:

• You ‘join’ a DAF run by an independent organization. There’s a minimum (~$5k) to opening up an account with DAFs (Fidelity, Vanguard, etc).
• These organizations charge a management fee (~0.5% of assets).
• You donate to the tax-deductible DAF. When you donate to the DAF, you are giving away any legal control over that money. The DAF can technically do whatever they’d like with it.
• However, you can ‘advise’ the fund where you’d like them to donate. Essentially, this means you control exactly where the money in the fund flows.
• You don’t have to donate everything that you put into the fund within the same calendar year

Here’s why it’s powerful:

• You only have one tax slip at the end of the year from the DAF. No more chasing down charities to properly document your charitable giving!
• You can ‘batch’ donations in a single year to the DAF get above the standard dedution, but distribute money to charities across a number of years.
• While the money is in the DAF and not distributed to a charity you can invest the cash in low-cost index funds. You could structure the DAF so you only distribute earnings from your invested cash.
• If you have a cash windfall, you can make a large donation in the same tax year to the DAF to get the deduction, but decide later exactly what charity you’d like to distribute the funds.
• It’s easier to control the organizations you donate to: instead of organizations charging your card every month, you can setup monthly/quarterly/yearly donations which are sent to various organizations. You don’t have to worry about organizations not canceling your recurring donation or contacting them to change your donation. You can manage all your donations from a central dashboard.

I’ve been using the Fidelity Charitable DAF for the last year and it’s been awesome. The management fees and minimums made the most sense for my situation, plus it seemed like they had the best website. The Vanguard and Schwab options seemed about the same.

Some interesting threads/links I found along the way:

• Reddit Analysis of DAFs
• Boglehead Thread
• Alliance for Good

What’s the Catch?

From what I can tell, there isn’t any.

For some reason, the DAF hasn’t been advertised heavily. Probably because the number of folks willing to donate about the minimums (~5k for the initial setup) isn’t huge, and non-profits have an incentive to maintain a direct relationship with the donor and ping their card every month (with a DAF you control the fund outflow).

However, there are some limitations/downsides to be aware of:

• You are legally removing control over the money. Theoritically, the organization managing the DAF could do whatever they’d like with it.
• There are some limitations to organizations beyond 501(c)(3) you can donate to.
• A ~0.5% management fee is charged on a yearly basis.

What About Foundations? Or a 501(c)(3)?

I’ve heard differing opinions on if it makes sense to open up your own foundation.

Some folks have said that the legal and compliance overhead with foundations are not worth it unless you have 100s of thousands to give away. 5-10 This seems to align with what I’ve seen (through my wife who worked in non-profit development)—only very large donors seem to maintain a foundation in their name, and foundations seem to have a bunch more rules to follow and compliance to worry about.

I’ve also heard about some folks who open their own 501(c)(3) and park their charitable donations there. From my cursory research, non-profit organizations have the same or more overhead compared to a foundation.

In my analysis, the simplicity and relatively low management fees of the DAF make it the best choice for most folks.

A foundation or 501(c)(3) would make sense for very high net-worth individuals, or the unique person who has the time/savvy/interest to read through & file the paperwork and ensure there aren’t any compliance issues. I’m more keen to keep things simple and eliminate overhead, even if it means reduced control or slightly higher costs. KISS, baby.

Why Everyone Should Give

You might ask why this matters, or why you should give at all. Here’s my perspective.

I believe strongly that everyone, regardless of their income level, should give something to the community they are a part of. This doesn’t always mean money, but it does mean something valuable (time, things, ideas, etc) that helps others around you.

It’s easy to become very self-centered and giving counteracts the natural force that makes life all about us. For most of us, many other people have been given a set of circumstances that make life much harder than our own. Giving (especially when it’s significant enough to ‘hurt’) makes us aware of those around us less fortunate and ensures we live a life for others, and not ourselves.