Writing a check or swiping your credit card can feel like the easiest way but you're doing it with your post-tax money. It's certainly fast but it is far from efficient. With just a little effort and planning, you can do better. In fact, much better.
How about stock that you bought years ago that has appreciated, perhaps even doubled? Say you bought $500 worth of stock many years ago and it is now worth $1000. You sell the stock and think you can now donate $1000 - but wait! You owe taxes on your capital gains of $500. Uncle Sam will want upto 20% and your state will want its share. In California, depending on your income level this could be as much as 13% so between the two, a third of your gains could go to taxes. So you really have only 500 + (2/3)*500 = $833 that you can donate. $167 just vanished. You can do better!
This is where a Donor Advised Fund or a DAF comes in. The beauty of a DAF is in the tax treatment. You can start a DAF at one of the big brokerage firms - Vanguard, Schwab, or Fidelity in a few minutes. Now, you can certainly fund the DAF by writing a check. This has the same tax disadvantages as the first option but here's a much better approach: donate the $1000 in appreciated stock from your brokerage account to your DAF. You can now immediately take a $1000 deduction on your taxes in the current year. Plus, you lose absolutely nothing in capital gains taxes so you can write a check from your DAF to your favorite charity and they will get the full 100% of your donation rather than just 67%!
This is worth repeating: in both scenarios, your net worth still goes down by $1000 (since you made a donation) and in both cases you can get a $1000 deduction on your taxes. BUT if you donate via a DAF your favorite charity gets the full $1000 whereas in the first case, your favorite charity gets only $833 and the tax man pockets the difference.
The donation you made to your DAF is, by defintion, no longer your money but in reality it is just no longer your money to spend on yourself. You can still invest it and donate it over time. So if you invest the amount in your DAF - in what else but an index fund! - that will grow tax free and a few years later that $1000 might be worth $1100 or $1200! Imagine that you donate $1000 each year to your DAF. At the end of 10 years your DAF will be worth not just $10,000 but over $16,500 (assuming 8% returns a year as it grows tax free). You just 'generated' $6500 worth of donations out of nothing. You can do 65% more good this way! Over your lifetime, the donations you make to your DAF and the tax-free compounding could mean that you could have a material impact on causes that are near to your heart.
This is also worth repeating: when you write a check as a donation, your $1000 is gone instantly. In the case of a DAF your $1000 is still growing - and doing so tax free - and will be a much larger amount over the long term. You get the tax benefits rightaway but you can take years to be thoughtful about where to donate the money.
Here are the best known DAFs:
Finally, you can easily move money from one DAF to another. If you currently have a Vanguard DAF and would like to make a $100 donation, you won't be able to because of their $500 minumim. In that event, you can start a Schwab or Fidelity DAF, seed it with $500 from your Vanguard DAF (which is Vanguard's minimum grant/donation) and then donate $50 or $100 or $200 from your Schwab/Fidelity DAF to your favorite charities. It's quite simple to set up and operate.
And now we are at the end of the journey. Thank you for reading. Before you go, here are some closing thoughts.