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.
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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. <\/p>\n
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). <\/p>\n
To have the fund be a beneficiary of a retirement account, it has to be set up before you die, and since I don’t know when that will happen, I have to do that now. And that means I 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<\/a> and published here<\/a>. 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.<\/p>\n 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.<\/p>\n","protected":false},"excerpt":{"rendered":" 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 … Continue reading “Donor Advised Fund”<\/span><\/a><\/p>\n","protected":false},"author":15,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[1],"tags":[],"class_list":["post-4539","post","type-post","status-publish","format-standard","hentry","category-uncategorized"],"_links":{"self":[{"href":"https:\/\/www.fiveforks.com\/ted\/wp-json\/wp\/v2\/posts\/4539","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.fiveforks.com\/ted\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.fiveforks.com\/ted\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.fiveforks.com\/ted\/wp-json\/wp\/v2\/users\/15"}],"replies":[{"embeddable":true,"href":"https:\/\/www.fiveforks.com\/ted\/wp-json\/wp\/v2\/comments?post=4539"}],"version-history":[{"count":8,"href":"https:\/\/www.fiveforks.com\/ted\/wp-json\/wp\/v2\/posts\/4539\/revisions"}],"predecessor-version":[{"id":4781,"href":"https:\/\/www.fiveforks.com\/ted\/wp-json\/wp\/v2\/posts\/4539\/revisions\/4781"}],"wp:attachment":[{"href":"https:\/\/www.fiveforks.com\/ted\/wp-json\/wp\/v2\/media?parent=4539"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.fiveforks.com\/ted\/wp-json\/wp\/v2\/categories?post=4539"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.fiveforks.com\/ted\/wp-json\/wp\/v2\/tags?post=4539"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}