Donor Advised Funds

💰 Everyday Islamic Finance Taxes
#1

Salam,

If you haven’t looked into these by now, you should at least google it to learn more. I’m writing this as a PSA because I made an ignorant assumption that these things don’t apply to me but only “rich folks” and only relatively recently learned I was wrong.

Why use a DAF?

  • You own stocks/mutual funds/anything that can be sold and incur capital gains tax
  • You are able to sell those and buy them back again if you really wanted to hold them
  • You donate any non-trivial amounts in cash (e.g. if you could save 15% of what you donated, you’d care about it)
  • You could donate stocks but see donating stocks to charities as a hassle (not every charity can accept it, and those that do all have different procedures to handle them).

If the above applies to you, do yourself a favor and read up about it, so you don’t think why have I not done it earlier.

One big misconception I had was that I had to donate more than standard deduction (now over 24K married filing jointly) in order to benefit. That’s not true, unless you expect to pay zero capital gains taxes on stocks you own now or down the line. Otherwise, you save from having to pay those gains to Uncle Sam and can instead forward what you saved in the process to your charity of choice. If you happen to cross over standard deduction, your tax savings are even more because you can claim the full value of the stock donated as a deduction at that point.

As for DAF options, I have personally looked into four sources: Fidelity, Schwab, CharityVest, and American Muslim Community Foundation. I tried the first three, though initially I considered the last though decided against it due to lack of visibility (no online account interface to keep track of funds and see how they are invested). I highly recommend Fidelity for their ease of use, and it’s a no-brainer if you happen to already have a brokerage account with them with appreciated stocks you could donate. Schwab is okay, though I would only use it if I had an account with them and wanted to donate stocks I hold there. Both those places would charge you an annual fee, but if you have no balance when it is computed annually they won’t leave you with a negative balance - perfect for my use case of transferring stocks only to sell and donate immediatelly. CharityVest had a nice online interface and free to use, but there was no consistency on the time it took to donate/settle funds or from request to contribute to when a charity got their check, so that was a deal-breaker for me.

If for some reason you didn’t want to immediately donate what went into the DAF, then the issue is lack of halal investment options, so if that’s your use case you may want to consider AMCF as it’s supposed to be halal-only investments (and they will take a cut of those returns as a fee, as any DAF does).

Hope this helps someone!

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#2

Thanks so much for sharing this insightful PSA, @Omar! I’m a fan of CharityVest and have used it to distribute zakat the last few Ramadans. :+1:

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#3

I have used Fidelity Donor Advise funds, and all well known islamic chartieis you can easily donate from it.

#4

Yes, there are reasons I found that Fidelity is a degree above the other options I tried:

  1. Many Islamic nonprofits have EFT set up with Fidelity, so they will quickly receive donations rather than wait for mailed checks.
  2. Very quick approval of custom designations where it doesn’t appear to benefit any individual (e.g. Zakat for orphans in xyz country). Sometimes it appears to be instantly, so it looks like they may use pattern matching to automate. I don’t recall it taking more than a day.
  3. Ability to schedule grant the same day as a stock sale settles. This way I don’t have to deal with purifying returns and can schedule donations for the full amount of the settled stock proceeds and leave 0 balance.

#3 is my biggest issue with Schwab, as they won’t disburse a grant request using settled cash, but hold that cash in order to buy your core position (money market in my case), only to sell it again, and that money market position has lately been going down slightly every day. If you scheduled a grant for the full amount, it will fail at that point due to insufficient funds (this happened to me more than once). They also don’t have EFT and have delayed approval in some cases for a few days.

The advantage of the DAF being held in a brokerage by the same company is that you can schedule a donation just after the end of trading day, and you will know what your tax deductible value is (average of highest and lowest values of the stock that day) and it generally sells the next day. If you hold a volatile stock, you may see big price swings until it actually gets transferred and then sold if donating from a brokerage to a DAF held elsewhere (I faced this when using CharityVest).

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