Guided Path 7-4 Donor-Advised Funds

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Let’s discover how to maximize your impact on your favorite charities while enjoying tax benefits using donor-advised funds! In this episode, Zacc Call and Laura Hadley discuss DAFs, their benefits, growth, and associated sponsors and fees. They emphasize the importance of separating tax decisions from the act of giving and the timing flexibility DAFs offer. Listen as they share a case study of a physician who optimized his charitable giving through a DAF, highlighting the flexibility and simplicity of this fund. Zacc and Laura discuss: What a Donor-Advised Fund (DAF) is and how to implement it in your financial plan, a real-life success story that highlights avoiding a higher tax rate to save money, how DAFs can help you differentiate between the reasons why you want to give, the logistics of DAFs including their minimum contributions and various fees, the benefits of using a DAF as an IRA beneficiary, and more

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[00:00:00] Welcome to The Financial Call. We are financial advisors on a mission to guide you through the financial planning everyone should have. Whether you're doing it yourself or working with a financial advisor, these episodes will help you break down complicated financial topics into practical, actionable steps.

Our mission is to guide motivated people to become financially successful. Welcome back to Season 7 Charitable Giving. Zacc and I are here today talking all about donor-advised funds. DAFs for short. This is episode four of the charitable giving season. We mentioned and alluded to DAFs a little bit in the previous episodes.

They're pretty awesome. They're basically a vehicle to be able to control and organize your charitable giving. And I laughed because in the last episode, we actually just recorded it right before this. Mention dafts and how he gets excited because you can organize and it made me giggle because I don't know how well you guys know Zacc, but he loves organization.

You should see he has folders [00:01:00] within folders of different things and packing cubes He actually gave the Capita team a thing of packing cubes because he just loves the organization of it. You know what? That's why Zacc loves Daffs, they're the packing cubes. They are. In fact, did you know that I do have an episode that says that?

Oh, do you really? Oh, I didn't know that. Okay. Well, it makes sense. Back there. So let's see. There were about 50 episodes before we brought on Laura and began the Guided Path series. And one of those episodes, I think it was somewhere in the 30s or 40s, was how daffs are the packing cubes of charitable giving.

Oh, it makes sense. It fits. It's all coming together. It's all coming together. I do love them though. I do feel like there's a little bit of justification because we'll go to a hotel and my wife will fill up all the drawers and I end up using the packing cube slid under the bed. Oh, you slide it under the bed?

Yeah, they basically become drawers for me like because I don't get access to very many drawers when we go and I'm throwing my wife under the bus here every time she's like, do you want, do you want more? Do you want more? And I'm [00:02:00] like, no, I got my packing cubes. So I full disclosure, I can't. Throw her under the bus that far.

That's so interesting. I just live out of my suitcase. Do you? I leave it all in the suitcase. I struggle with that. I struggle with it. It's so funny, though, because I feel like the fancier hotels, they don't have space under the bed. Like, the beds go to the ground. Well, you never know what's under the bed of a hotel, Zacc.

That's a little... Well, that's fair. brave to say. But I've got my packing cutes. You have your cute protecting it. Okay. It's like a pocket protector. Okay. Oh, that's funny. So, DAFs it is today. This is a really interesting concept because it is exploding right now. This article I just pulled up, it says one in every DAF accounts was created in the last year.

Oh, interesting. It's because of your Packing Cutes episode. It's all my episode. That was it. That's it. When was this article? This is not crazy recent. It was about a year ago. So at that time, one in four DAFs was created within the last year. So what's happening is people are recognizing the benefit of this and they are.

Really taking advantage of [00:03:00] it. I just want to say I never am the first person to find new music, but I've been using a DAF for over a decade. Let's just, I'm just throwing that out there. He found it before everybody else. And grants from DAFs are growing like crazy. In 2020, there were 35 billion of grants.

Grant is a donation from, we're going to talk about this, but a DAF is your personal charity account, basically. And giving money from your little personal charity account to the charities. About 35 billion in 2020, 45 billion in 21. Oh, interesting. Yeah, before that it was 27 billion and then the year before that 23 and 19.

So we've gone from 19 billion of giving in 2017 to 46 billion of giving in 21. From the DAF. It's growing fast. More people are setting them up. Back when I started, it was tough because the minimums were really high. The fees were a little bit higher. So it was hard to justify using donor advised funds for most.

Situations. [00:04:00] If I had been a client, I probably would not have advised myself to use it at that time. But I'm just so curious about stuff like this, that the best way to learn is to just start using them. But anyway, with like anything technology has improved it and we are now able to use them for a larger group of people, which is great.

I think that's part of the reason why they've grown so much. So Laura help us. We've talked already too much about it. What is a DAF? What is a DAF? So a DAF is an account that you can use and set up to time your donations. So you can put money into the DAF. In the year that you put the money into the DAF, you get to deduct it as a charitable donation.

However, it doesn't mean that it went to the charity. It could sit in the DAF for a while, then you could grant it later to a charity. You don't get any sort of deduction when you grant it, but you get a deduction when you contribute to the DAF. So any dollars that you're putting into the DAF, they're considered donated.

I mean, you can't take it back later into your own account. The DAF is actually, you're not in [00:05:00] full control of it. It's a donor advice fund. You're advising on it and you're making recommendations for the grants. But it's not your money. It's considered donated, but it does allow you to get a deduction in the year that you may need it when you may not know necessarily what charity or when you want the charity to get the funds.

It allows you to split the timing of it when you're giving to the charity versus when you're getting the tax deduction. Huge. So think about. The unknown. It's nice to have options to be able to set yourself up, not knowing what your future wants and needs are going to be. And a DAF is really, really good for that.

You may have charities that come into your life that you love. And you may have charities that go out of your life that you don't love as much anymore, or your focus on giving and impact in the world has changed. A donor advised fund makes it so that you can separate the idea of, I need a tax deduction versus, I want to do good in the world.

You don't have to have those things be in the same [00:06:00] year. That's a big deal. I think a lot of people think about their charitable giving too much. They tie it too much to their tax need when in reality charitable giving should be done for doing good in the areas you think need help and then donating and getting the tax benefit.

That's a side story. So putting the donor advised fund in the middle allows you to control your tax situation and then think very methodically about your actual giving and what you're trying to accomplish. So I like that a lot. Okay, so there are different what they call sponsors of a donor advised fund.

That's like the company that offers you the plan. There are companies like Fidelity Investments, Charles Schwab, we mentioned a couple others, Lara. American Endowment Foundation. Vanguard. That's right. National philanthropic fund or trust. There's quite a few of them and they'll have a fee associated with either the amount that stays invested in the DAF or they may have a flat fee or they [00:07:00] may have a fee for certain transactions.

So that's how the cost structure typically works. Of course, we like the ones that have the lowest fees possible. Of course. But we find, of course, Lara came in so fast with that. We love low fees. If you can, it kind of depends on your situation, if you're going to have just a very little amount in there, I would choose an asset based fee.

Clearly a percentage of a smaller dollar amount is going to be a lower fee for you. And most donor advised funds are not huge. Some of them are millions of dollars because people exited a business. We're going to talk about that next time, or just really needed a crazy tax deduction because of a high income event for them.

But most donor advised funds, I see what I'm considering kind of this new wave. Okay. So the old donor advised funds, they were all huge. The people who knew about this a decade ago. Big ones. I was out of place. It was like one thing was not like the other, but then over time more normal people have started to use donor advised funds So you see them in the order of five, ten, fifteen, [00:08:00] twenty, fifty thousand dollars instead of millions of dollars I like how you grouped yourself with the normal people.

That's right. Well only now only I am constantly making a plea that I'm normal enough to exist within society. Okay, moving on to other daft things you should understand. Okay, so we talked about sponsors, different types. Laura, you mentioned the benefit of timing and I was saying the same thing like Separate the tax decision from the giving.

Yes, timing matters and this actually was, we were reviewing this, it made me think of a Seinfeld episode for those Seinfeld viewers. Which Lara is way too young to know anything about Seinfeld, it's a classic. I bet they stopped filming before you were old enough to even know about that. Possibly, very possibly.

I don't know the year, but that could be true. But the reruns are fantastic. But there's one episode where George Costanza goes into a restaurant and George is pretty cheap. I can relate to George. Side note, George is like 30 years old when those start filming. The guy is [00:09:00] completely bald. He looks like he's 55 at the time or older.

Anyway, sorry, I didn't mean to. No, that's true. Being kind of in between those two numbers myself. I'm like feeling a little weird that he looked so old at the time. That's true. Anyway, keep going. That's true. Again, Zacc's trying to show that he's younger and normal. No, just kidding. So George goes into this restaurant and he decides to give a tip, which is a big deal for George.

So he puts the tip into the tip bucket, right? As the person, the owner's facing the other direction. So they didn't see, so he didn't get the credit. Forgiving his tip and his donation. So he wants the guy to see. So he ends up reaching into the tip bucket to get his tip back out. The guy turns around, right.

As his hand is in the tip bucket, thinks that George is stealing from his tips and kicks him out of the restaurant. So kind of funny, George is just trying to. Time is donation, correct? Trying to control the timing of it. He did poorly. Should have used a DAF to do it. But basically, if you're having a big tax year, like Zacc mentioned, maybe you're exiting a business or you're inheriting a lot of money [00:10:00] that's going to be taxable, you have to take it out.

For some reason, maybe you're bunching your donations. We talked about this in episode. Oh, two times ago. Yeah, two. Episode two, we talk about bunching your donations, but maybe you're bunching two, three, four, five years of donations in one year. So you're getting the tax deduction that year, but you don't necessarily want that charity to have seven years worth of donations.

So an example, I had a physician who was making over 500, 000 a year, a surgeon should say. So that kind of matches up, working his tail off, making a lot of money. He was going to retire into a much lower income situation because he really wasn't spending much of it. He was just saving a lot of it and working really hard to be able to retire.

You know, in retirement, we can control their taxes a whole lot better. So his tax rate was really high at that half a million dollar range, had about three years worth of work left. And he could donate a lot in those three years to a donor advised fund. Keep in mind, he [00:11:00] was already charitably inclined.

Like if you're not going to give to charities at all, you're halfway through a season of episodes that you'd need to just skip, right? But, but if you're charitably inclined at all. Then, this guy was, he sets up a DAF, drops a decent amount into it, and gets prepared to be able to have his charitable giving set aside and ready to go for when his income rate drops.

In other words, I'd much rather avoid a 30 something percent tax rate than avoid a 12 or 15 percent tax rate. huge savings there on any dollar that he can contribute to the DAF at that time. Once again, separating the timing of when he needs the tax deduction versus the good he wants to do in the world by actually giving to charities.

And in the meantime, while it's sitting in the DAF, you can control it and even invest it. You can invest it in regular stocks and bonds, or you can look for charitable investment opportunities as well. We have some people that are investing in [00:12:00] bees in Africa. Being able to donate there. It's a charitable organization, but it's also an investment.

So you can also do that inside of your DAF. We have found a smaller DAF provider that we prefer at this point. So we're able to still use the large institutions like Fidelity, Schwab. TD Ameritrade, which is merging into Schwab. We are still in liking having our clients donor advised funds sit at the larger firms, but then we are able to add on a DAF provider that is not holding the assets.

They just do the record keeping and they also help us source other unique opportunities. Like you said, we know people in our office have done basically investments or loans from their donor advised fund. Two folks in third world countries that are hoping to set up like a beekeeping business, or you can actually invest and give money to help people have a few goats.

And if you like actually very, very direct impact into a small family [00:13:00] situation, there's a project that I got introduced to there as well, that they are looking to find a way to make basically waterless bathrooms. Because in an area they don't have the ability to have like flushing water. There's this gal that worked with NASA on the actual shuttles and helped design some of the tech for that.

On the aircraft, I don't know how to say it. I'm in finance people. Space shuttle. Spaceship, I guess, space shuttle. So then, she worked in that tech, and she's trying to take that tech and implement it in third world countries. And the risk that they're having is, there's actually a lot of abuse and problems when, like women in particular, have to just go anywhere.

They end up getting taken advantage of. And so, she's trying to find, anyway, some really cool, interesting ideas, and that can all be done. through your donor advised fund. It's cool because the DAF can in some way replace like a family charity. It can be expensive to set up your own charity, but if you do it through a DAF, you still can look for opportunities to help [00:14:00] charitable organizations and to give and some people include their family in it.

Hey, let's look at these different opportunities. different ways that we can use this DAF money to give and get your family involved. I think there's something big to being involved in charitable work, no matter how much you have. I think if you can give a little bit, it's that abundance mentality. They talk about in some of the parenting, I read weird books like, how money affects kids and how to parent kids, and I'm not sure I'm doing any good with that with my own children, but they do talk about the impact of teaching your kids the habit of giving rather than worrying too much about how much is being given.

It's just the idea of if you can instill the habit. And it's the same idea of the habit of savings. If you're starting off small and you're barely making any money, and you have a habit of putting 25 into an account every month, as you make more money, eventually that'll get to 1, 000 a month. The problem that we run into with savings is when someone never builds the habit, and then all of a sudden, They now have to save [00:15:00] 000 a month to their accounts.

It hurts a lot more. So same concept, you can learn and teach like Laura said, the habit of giving through donor advised funds. Okay, so let's talk about some of the logistics around this too. Not a lot of minimum contributions. I mean, these providers will say that they have minimum contributions and they may have minimum fees.

So you don't want to put 100, 200, 300 in there and then have a minimum fee of 250 and lose most of your contribution to a minimum fee. Reality is we think donor advice funds really become more beneficial when you think you will end up leaving more than 10, 20, 30, 000 in the account year over year. If you are just putting 10 in and you're going to flush all 10 right back out to a charity, probably not a lot of benefit because You're not even really needing to separate the timing of your deduction and contribution at that time, or your deduction and donation, I should say, at that time.

The idea is if you're going to need to control the timing of 10, that is going to [00:16:00] be where the DAF will become the most valuable to you. It can make it simpler for the charity. Let's give an example. We talked about donating cash versus appreciated assets in the first episode. You can donate appreciated assets to your DAF.

The DAF can sell those investments. Let's say there's a bunch of unrealized gains in there. They sell it. There's no tax consequence to selling those. Appreciated assets inside of the DAF and then the DAF can cut a check to the charity. So it can be easier for the charity to receive a check versus appreciated assets.

So that's one way that you could use the DAF. Donate your stocks there, sell them, cut a check to the charity. You avoided realizing gains on your investments and you made the life a little bit simpler for the charity. Yeah, I have a client that she really likes that. She really likes that. She doesn't have to find the brokerage account for the charity.

Do a transfer form of it's called a DTC transfer, which is not a normal transfer. It's not like our standard transfer that you would do [00:17:00] between institutions. She'd have to do a DTC transfer, pushing the stock from her Schwab account to the charity's account, wherever brokerage firm that might be at. And then the charity has to sell it.

And then they finally are now to the point where they have usable cash. So a donor advised fund can, like Laura said, make that a lot easier for everyone. The donor just drops it in the DAF, the DAF sells it. And then the charity just receives a check. Everybody's a little bit happier. There's some benefits to simplicity, but if all you're doing is flushing cash through, you're actually creating complexity.

You could've just written a check to the charity. That's where it gets a little bit different. Let's go through, like, let's say that Lara is sitting at her desk, gets an email from a client that says, I need to give 10, 000 worth of stocks to my DAF. And, first of all, according to Capita, Laura would call the client to confirm that that's actually her for data for security reasons.

Especially nowadays. [00:18:00] Yes. That's of course, if you're a client already listening, be aware that's part of the reason we're calling you on those types of things. So Lara calls the client, determines that the client does want to truly give 10, 000 to her donor advised fund. Then we just go straight into the brokerage account.

And we look at what investments have grown the most, you need to have held them for over a year to be able to donate those positions to a donor advised fund. And let's say that there's a position that the client paid 5, 000 for and it's worth 10, 000. She can give that 10, 000 position and pay zero tax on the 5, 000 worth of growth.

That's the benefit. That's what Laura's talking about. DAF sells it. No one pays taxes on that growth. So that's important. Makes it easier than sending those stocks or positions to the charity. Now, the problem though, is we just created a 10, 000 hole in her portfolio because that stock was in there for a very specific reason.

Like the portfolios we build have Risk [00:19:00] metrics across all positions, and it's like a team. You can't pull one position out of the team and just expect it to still play the same. Especially because a lot of times we're taking The highest growing stock. So if we're always taking out the best players, we want to make sure we're replacing them.

So typically what we find the best use case for this is where the individual was going to write a check for 10, 000 to the charity, and they stopped that. They write a check for 10, 000 to their own account, give away 10, 000 worth of stocks, buy those right back within their account, and now that 5, 000 gain, it's not even going to show anymore because they actually paid 10 for those positions.

And they gave away the ones that had the 5, 000 gain. That's the process. And then that person has all the time in the world. They can do whatever they want. Usually one of the main questions we get is, How soon do I have to give that money away? Once it hits the deaf. And the answer is, you don't. And you can put beneficiaries on in two ways.

And it's probably not the best [00:20:00] word to say beneficiaries. It's probably the best word to say successors. So you can put a successor on in one of two ways, either Laura on her DAF can say, okay, I want my husband Ty to be listed as the person in charge of giving this money away or investing it and keeping it there after I pass away.

Or if Laura has a charity, she absolutely loves. She can just say, you know what, when I pass away, I just want this whole thing liquidated and sent right to the charity. And that's really nice because you can use that, I've seen that used on IRAs. So let's talk about that for just a quick second. A DAF can be a fantastic tool to be a beneficiary on an IRA.

Let's say you had a half a million dollars in IRA assets, and you have a half a million dollars in just regular brokerage accounts. And 200, 000 in a Roth IRA. So you've got 1. 2 million, 500, 000 IRA, 500, 000 joint account, and 200, 000 in a Roth. Can I choose which one I would choose as a beneficiary? Yeah, your, your, your parents, let's say your [00:21:00] parents, which we're not talking about Lara's parents specifically.

I'm just joking around. If Lara's the kid of this couple, which one do you want? I'll take the Roth and then we'll take the brokerage account because I just got a step up in cost basis. Yes. Did we cover that in a previous episode? I think we have a couple of times, just a quick refresher. Any unrealized growth inside of that account that would normally be taxable, it gets us what's called a step up in cost basis.

So the cost basis, the amount that was already taxed steps up to the value of the account at time of death. So there shouldn't be. taxable growth on the day that that person passed away. So I'll take the Roth because that's tax free and then I'll take the brokerage account because I just got another.

Basically tax free as well. Basically, yep. The IRA money is probably the least favorable. I mean, I'll take it, but I have to pay tax on it. The IRA forces withdrawals out as well. They have a time period where they have to take money out after you pass away. So that could be income on top of their own income and add a pretty good tax rate.

So if you could set up a donor advised fund, it will, first of all, again, this all goes back to, do [00:22:00] you give to charities? Do you want to be giving to charities? But let's say you do, you want to give to charities after you pass away. You could put a donor advised fund on the IRA as one of the beneficiaries.

And then maybe you have six IRAs in different places. It's probably not necessary, but let's just say you have that situation going on. You could list the DAF on each one. And let's say you change your mind about the charities you care about, you only have to change that list once on the DAF account. You don't have to go to all six IRAs and say, Okay, I removed this food bank and I added this shelter, and now I need to get forms for all six of these IRAs to then change that.

You just do it once. Or if you want a certain percentage to each charity. You don't have to try to calculate that based on how much are in each IRA, but you can just list it all on your DAF. Oh, good point. Yeah, that's true. You have to be like, okay, well 20 percent of this one, that's 20, 000. Oh no, it grew.

Now we need to adjust the percentage. And now you need to do forms for it all. You just list the DAF, have it all consolidated to one, and distribute it out. in those percentages. So that's another [00:23:00] way that donor advised funds can be a really nice organizational tool, which we go back to that. I love anything that helps organize things for you.

The main use I see for this is people front loading their charitable giving and then wanting it to grow. Oh, we didn't really talk about that. So let's say you put that 10, 000 into the DAF and it grows to 15, 000. You have 15, 000 of giveable assets, and no one pays any tax on the 5, 000 worth of growth. So long as it happens inside that DAF wrapper.

It's another way to increase the impact of your giving. Like, let's say... You know, today, you want a tax deduction. You have no clue what you want to spend it on in the future, but you know you want that money to go to some charity. You could put it in there, grow it for two decades, double it maybe once, twice, who knows?

Hopefully, that would be great. 7. 2 percent rate of return, I'll double that twice. And you end up with 40, 000, 50, 000 from the 10 that you're able to [00:24:00] now do good with. So, that concept of greater impact because you're growing the assets more in a tax free status. Had you left it in your brokerage account, And not given it, you'd have to pay taxes all along the way.

Dividends, interest, capital gains, which by the way, those are all pretty favorable tax rates. It's not the end of the world. Don't be too upset about non retirement investment taxes. They're actually pretty good. And if you manage the portfolio well, you can keep those really low, but you could just turn it off entirely if you know, it's going to go to charities.

Yeah. And the growth is going to go to charities too. If you put the 10, 000 in and it grows to 50, 000, that 50, 000 is still all. earmarked for qualified charities. You can't take out the growth and give it back to yourself. So any dollar that you put in, including the growth, is dedicated towards the charity.

But again, if you're giving to charities anyways, or you would like to, it's fantastic. Another quick benefit of this is I really, like, don't love the process of tracking receipts and [00:25:00] contribution forms and okay, am I saving those in a folder in my office at home? Inside the other folder, inside the filing cabinet, inside the office.

Is that where I'm saving them or am I taking a picture of it and saving it four folders deep within my tax planning documents on an electronic drive? So I don't love that and I end up with both inevitably because some things you pay like on the computer and then you download the PDF and other things they give you a physical receipt.

Which, by the way, a side note, I actually do everything in the cloud like this, and if I ever get anything physical, I am now taking a picture of it and uploading it to that spot, and I immediately am throwing away the paper. That's just kind of a side note. That includes medical receipts that later I want to do an HSA reimbursement for in the future.

Like, everything goes that way. I can't wait for your organization podcast. We should do one, right? We should. How to run your email inbox. Um. Yes. If you looked at mine, you'd be like, I don't want to listen to that guy on that. But okay, going back, okay, organizing it. So we [00:26:00] give to a few charities and especially as the kids have gotten into high school and junior high, there are certain dance organizations and the high school sports and things like that that we're ending up sending money to for whatever reason.

I even have the podcast banner. I don't know if you know this, at the high school, I've got a banner of our podcast, this podcast. I didn't know. Yeah, it goes sit in the stadium. Kappa does banner and our banner, our podcast banner on the stadium as you're looking. I don't think anybody notices, but they're just looking past it at the football games.

But those are the types of things that you can do charitable gifts as, and I would not keep track of all of it, but I pay for it directly with the DAF when I can. And then it gives me one nice contribution statement that shows all the money that's gone into the DAF and it makes it so much easier to keep track of all of that.

Once a year I just have to download that PDF. That's awesome. That is a summary of the donor advised funds. Let's do a more succinct, like why do you use this? You use this because you want to organize your charitable giving. You use this because you want to separate. [00:27:00] The timing of when you need the tax benefit versus the timing of when you want to give to the end charity.

Bunching up two episodes ago, DAFs can make it very useful if you're not inclined to give all that money to the charity right now. It can make it a little bit more useful. Other than that, it's just a huge organizational thing. And then the next topic for our next episode is where a DAF becomes... It's very, very impactful.

You save a lot in taxes if you are about to exit a business and you can incorporate a DAF in the process. Way more than just selling and then donating to charities after the fact. So if you are charitably inclined, you own a business and you're thinking about selling it. We need to talk about this or you need to listen to the next episode first, but we'd be happy to talk about it.

If you wait too long, then the benefit will be taken away because the IRS disallows it. If the deal is done, if your business is about to sell and you've already pretty much got the whole thing [00:28:00] organized, it's one of those important things to prep and plan before the event. But listen to the next episode.

Anything else on this today, Laura? I think that covers it. Awesome. Thank you. This podcast is intended for informational purpose only and is not a substitute for personal advice from Capita. This is not a recommendation, offer, or solicitation to buy or sell any security. Past performance is not indicative.

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