Contributing to charity (tzedakah) is fundamental to Jewish life. Most donations are done as cash or checkbook contributions, sometimes in a mad scramble at the end of the year. Infrequently, donors contribute securities; non-financial assets, such as real estate or fine art; or even interests in private companies. Thus tzedakah can take many forms, but one of the best mechanisms for giving is what I call “Enhanced Tzedakah With Donor-Advised Funds,” or my preferred shorthand, the acronym EZ-DAF.
In a donor-advised fund (DAF), the donor makes an irrevocable charitable contribution that is immediately tax-deductible. The fund invests the money in an account, which accrues earnings until the donor requests the fund to issue contributions to recognized 501(c)(3) charities that she/he selects.
Charitable record keeping is simplified because you only need to keep a record of your contribution to the DAF to fulfill IRS documentation requirements, regardless of how many contributions the DAF ultimately makes using your funds. Charitable donations of appreciated stock allow you to take a tax deduction for the higher current value of the stock. If you sold the stock and paid capital gains tax, you would have less to give to the charity. The same holds true for other appreciated assets such as real estate and fine art. However, many charities are not equipped to accept such assets as donations. But the DAF can liquidate these assets and make cash contributions directly to the charity.
It also may be more compatible with one’s tzedakah goals to distribute the proceeds from a stock sale among several different charities rather than giving a large lump-sum contribution to a single charity. DAFs can readily divide and disperse large sums.
I have studied the following DAFs: Fidelity, iShares, Schwab, TD Ameritrade, Vanguard, and the Jewish Communal Fund. Fidelity and Schwab have the most favorable cost arrangements. The Jewish Communal Fund (JCF) is attractive because of its ties to the community. However, the JCF base fee is 25 percent higher than Fidelity or Schwab, JCF adds a surcharge to accounts with balances below $20,000, and it does not permit accounts to contain less than $500. As a Registered Investment Advisor with a fiduciary responsibility, I am obliged to point out these distinctions so that you can make an informed decision.
Both Fidelity and Schwab require an initial minimum contribution of $5000 and charge an annual fee of 0.60 percent of the balance of the donated funds they hold on your behalf. Lower fees apply to accounts with assets exceeding $500,000. The minimum contribution to a charity from Fidelity is $50 and from Schwab $100. There are no minimum balances required after the initial minimum $5000 contribution.
I personally have been using Fidelity for the past four years after switching from a more expensive fund. It is very easy for me to make my charitable transactions via the FidelityCharitable website. As in the case with all DAFs, since the tax deduction occurs when it receives the contribution, there is no urgency to distribute multiple contributions before the end of the tax year.
Your personal DAF can be named in honor or in memory of any person or cause you select. Contributions are then designated accordingly. Unlike charitable foundations whose transactions are public information, records of financial transactions in your DAF accounts are not publicly disclosed.
What are the disadvantages with a DAF? There is the cost of 0.6 percent, or more, of retained funds. Tax savings, simplified record keeping, and avoiding other administrative fees offset this cost. Some may view the initial minimum investment as an impediment. Others may feel constrained because contributions are restricted to 501(c)(3)-designated charities. Private foundations have more flexibility in this matter.
Although I have focused on just a few, DAFs are widely available from brokerages, some community charitable foundations, service organizations, and universities. In sum, they are simple to establish and easy to use. EZ-DAF permits donations via a tax-advantaged vehicle that can maximize the benefits and dollar yield of your charitable contributions.
Norman Sohn is Managing Director, Beacon Wealth Management, LLC, 505 Main St., Hackensack, NJ 07601, [email protected].
By Norman Sohn, MD, MBA, CRPC®
