I have been thinking about how to write my will and handle my estate. Once the estate pays off all of its bills, a lot of the remaining money will go to different charities I have supported over the years. However some of the money is in my deferred compensation account and another chunk is in an IRA that was converted from my old 401k account. I never paid any income taxes on the contributions to those two accounts and the idea is that when I need the money and withdraw it, I will pay taxes on it as ordinary income (including the gains). If I die, whoever gets the remaining money would be able to keep the money in the account for a little while maybe, but eventually would have to withdraw it and pay income taxes on it. My regular investments and my Roth IRA do not work this way. No taxes would be due and the cost basis of the investments is adjusted to whatever the value would be on the day I died. So investment assets can be inherited without any taxes being due, but not 401k’s and conventional IRA’s.
Charities apparently don’t pay income tax, so if I made a charity the beneficiary of my IRA account, they would get all of the remaining money when I died and owe no income taxes. That’s a pretty neat loophole, costing the government some revenue, but giving the charity a lot more. Some people create trusts so that their assets will pass to the trust when they die. There are things you can do with trusts to help pass items to heirs or set up a charitable trust, but you end up paying a lot to lawyers to set all of that up. Then I found out about Donor-Advised Funds.
A Donor-Advised Fund is an account that you can set up at a lot of big financial services companies like Schwab, Fidelity, or Vanguard. It lets you basically run your own charitable foundation without all the headaches. The fund you set up qualifies as a charity and you can get a tax deduction by donating money or assets to it. But once money is in the fund, the only way out is for the money to be donated to legitimate charities vetted by the financial institution. Instead of giving to 20 different charities and keeping up with 20 receipts, you make one donation to your fund, get one receipt, and then you tell the fund to make 20 donations. But for me I think a big plus would be that I can make the fund be the beneficiary of my tax-deferred retirement accounts, so all of the unused money in those accounts could be transferred to the fund when I die and no taxes would be owed! If I need the 401k or IRA money before I die, no problem, I can make withdrawals from my retirement funds and pay income taxes, just like normal. I can’t transfer money from the tax deferred retirement accounts to the DAF before I die (with some exceptions). Then I just make my executor (or executrix) the “successor” to my DAF and he or she can then distribute funds according to any plan I might have given them. Fidelity runs the cheapest fund, charging 0.6% of assets or a minimum of $100 per year (Vanguard charges the same percentage, but has a $250 minimum fee).
To have the fund be a beneficiary of a retirement account, it has to be set up before you die, which means you have to pay to maintain it every year. If you are going to have the account anyway, you might as well use it. Since I have to pay the greater of $100 or 0.6% of assets, I can keep up to $16,666 in the account and not pay any more than if I keep $10 in the account. One nice way to use it is to fund charitable contributions I would make anyway by transferring investments that have big capital gains so that I don’t have to pay taxes on the gains. And I get to write off the entire amount of the appreciated assets on my taxes. You can do that with individual charities, but you have to get their information and coordinate with each charity for the brokerage transfer, so it might only make sense for big donations. But by using the DAF, I can control all of it pretty easily and donate as little as $50 to any charity once the money is in my DAF. I set up my account at Fidelity today and found a link where they are supposed to put $100 in the account at some point. In the meantime I entered a transfer at Vanguard to move a few shares of Vanguard Midcap Index Fund over to my Fidelity Charitable DAF. I have some shares in that fund with a 70% gain so a lot of capital gains taxes would be due if I ever sold them (even though it is long-term). The transfer is a little tricky, but I found some recent instructions at Bogleheads and published here. Fidelity will cash in the shares when they receive them, but no taxes are due. And then I can divide that into as many donations as I want or let it sit indefinitely.
While money sits in the DAF, it can be invested and grow, though at least at Fidelity, the choices are limited to about 20 “pools” (not actual mutual funds, though some are invested in an underlying named mutual fund), mostly with expense ratios of 0.6% (which seems high), but some as low as 0.015% (reasonable for an index fund). To donate money to a charity, you “recommend” Fidelity give some amount of money from your fund to a charity in their exhaustive list. I guess they don’t have to do it, and may reject it, but most charities seem to be listed. Fidelity then either mails them a check or sends the money electronically (they tell you up front which method is used for a given charity), so the charities should get 100% of the money, unlike when you donate with a credit card or via a website. I have been using PayPal Giving for the last few years because they have a similar payment scheme where you pick a charity from a list and they take money from your PayPal account or via a draft on your bank account and send it to the charity without any fees. Fidelity lets you donate in your name, the name of your fund, anonymously, or in honor of someone. And you can include instructions on how the donation is to be used. So this is a pretty neat thing, I think.
I entered my transfer of VIMAX shares to Fidelity on Saturday. No record of it as of this morning. They say it can take 7-10 days, but people online said it happened next day or within 2 days (I think because they were doing stocks). So I went through the process again today thinking maybe I didn’t hit the final Submit or something. It said I should receive an email and can monitor the status. I did another 6 shares (should have done 5 or 7 so I could identify batches instead of having two orders of 6 shares). I had a lot of problems when transferring Roth IRA shares from Vanguard to Fidelity a few years ago. It is a terrible process, so much worse than starting the DAF in the first place, which was simple.
I still hadn’t heard anything as of Thursday afternoon, so I called Vanguard to see what was going on. It is surprising that there was no way to see any record of my request to push shares to Fidelity and nothing in the account showing anything was pending, not even an email. However, on their end they were able to see both orders and said they were being processed. It turns out that I messed up and the first order was for 6 shares of VSMAX instead of VIMAX, so maybe that mismatch between what I told Fidelity and what I told Vanguard messed things up? Or maybe because it was the first time? Maybe they were waiting to hear from me? Not sure. They said the first trade would be finalized that day (they said the delay was they were waiting for the order to settle) and today (Friday) I did see in my Vanguard account that the shares had been subtracted the day before. Then later today, Fidelity showed it as an incoming contribution, but the money wouldn’t be available in my balance until they sell the shares, and I guess wait for that to settle (“pending settlement”). Fidelity also showed my original transfer request as waiting since I had correctly entered VIMAX shares at Fidelity and they haven’t seen those shares yet (“pending receipt”).
Selling shares of VSMAX instead of VIMAX was a goof on my part and not great. I bought those shares earlier this year and they had about an 11% capital loss, so I would have been better off selling the shares outright, taking a reportable loss, and then contributing the money. However, the share price of VSMAX is about a third of VIMAX, so the amount of money was less than a thousand dollars and the loss was only $65. It did make me think about harvesting some capital losses this year, so I sold some other shares to max out my allowable capital losses for the year ($3,000) and reinvested that money into something else. I might sell more later which should ensure I cancel out any possible gains this year and have some to carry over for next year.
My first contribution to the fund was finalized today, a little over a week after I initiated it. One reason it may have been slower than indicated on the Bogleheads forum was that they were donating stocks and I was donating shares of mutual funds. There is a wait first at Vanguard and then another wait at Fidelity for orders to settle. The second contribution just showed up at Fidelity but has not cleared yet. Anyway that allowed me to make a donation from the fund, which happened to be a place that they have to mail a check to. By the end of the day the donation had been approved and the next two steps were mailing the check (edit: next morning it showed up as mailed; that was quick!) and then showing the check has cleared. That’s pretty good tracking.
Using appreciated shares helps, but not by much. If I donate $100 of shares that have gone up 70%, then I would only be avoiding long term gains taxes of 15% on $41 of that, so I am saving $6 on a $100 donation. It’s not nothing and fortunately it is easier to do now. But it would take a lot of donations to pay for the $100 yearly fee to actually have the fund ($1600). But that isn’t really why I opened the fund, just something I can do since I set it up anyway.
Today I received the $100 bonus for starting the account. I think they charge their yearly $100 fee in January, so basically it will just go to that.
I donated some more shares of VIMAX to fund my Donor Advised Fund at Fidelity again last year. I wound up using the DAF to make nearly all of my charitable contributions, the main exceptions being memberships for museums or PBS where I was getting something in return (a membership) for the contribution. This year I contributed with VIMAX shares again, entering the sale on the morning of January 2. Finally this morning I see that the shares were actually deducted as of January 11, so Vanguard took more than a week to process the request. Now I will wait for Fidelity to receive and process the shares before I can make a donation, so maybe next week sometime. Although Fidelity is supposed to charge $100 per year to run my fund, last year they only charged me $49.97.
Working on my taxes for 2023, I ended up itemizing my deductions like I usually do. The standard deduction for 2023 is $13,850, but my itemized total is above that. Since I don’t pay mortgage interest, my only deductions are state income tax, county property tax, and charitable contributions. Since combined state and property tax cannot exceed $10,000, I am not really getting any credit for my charitable contributions until I hit at least $3,850. So if I remember, I should do another yearly donation in early December, which will all be over the standard deduction when I file taxes for 2024. Then in 2025, I will donate nothing and use the standard deduction to get $3,850 (or whatever it is for 2025) of tax deduction that didn’t cost me anything. That could save me (or cost the government) about $1,000 in taxes. I knew lumping contributions was a tax advantage of Donor Advised Funds, but I didn’t think it was worth the trouble. However, it is just a matter of moving a contribution I was going to make anyway by a month. And for 2025, it will also simplify my tax return if I use the standard deduction. The only caveat is you can’t donate appreciated assets worth more than 30% of your income in a year, but I should be under that (the limit is 60% for cash donations).