Donor Advised Funds

0:00 The following is paid programming. Welcome to Something More with Chris Boyd. Chris Boyd is a Certified Financial Planner Practitioner and Senior Vice President and Financial Advisor at Wealth Enhancement Group, one of the nation's largest registered investment advisors. We call it Something More because we'd like to talk not only about those important dollar and cents issues, but also the quality of life issues that make the money matters matter. Welcome everybody, thanks for being with us for another segment of Something More with Chris Boyd.

0:40 I'm here with Jeff Perry and Russ Ball. We are all of the AMR team at Wealth Enhancement Group and glad to have you with us for another segment. Today, we're talking about donor advised funds. This is one of the, I think it's starting to get more traction, but this is a well-kept secret. I love donor advised funds as a resource, as a tool, we're going to talk about some of the details about how they work, some of the pros and cons, and some of the things to think about if you were to consider using a donor advised fund. Why would someone consider a donor advised fund? There's probably a lot of reasons. I'm going to start with, one of them has to do with current tax law and that current, you want to hit on that Jeff?

1:25 Well, I didn't mean to steal your thunder. No, go right ahead. Go ahead. Well, since the Tax Cut and Jobs Act and the reductions in taxes and all those changes that were made, charitable deductions, if you take the standard deduction, which most people do, you don't get to deduct individual contributions to charities. Right. It's tough to get up to these levels of deductions to make it worth your while not to take the standard deduction. Right. So a reason, not to go on a tangent, a reason to use a donor advised fund is you can contribute all at once.

2:06 You can like- You can bundle as they say, right? Yeah. Multiple years. If you give $5,000 a year to charities and you have the available cash, you can like say, okay, I'm going to $50 ,000 for the next 10 years and you can put it in a donor advised fund. Doesn't mean you're going to give it all away, but you've donated it to the fund. Therefore you qualify to deduct that $50,000 as a charitable contribution and the decisions where it goes can be made later. Yeah, essentially that's it. So we should talk about what a donor advised fund is in just a second. We'll backtrack a little bit. But this is one of the motivators. I can make a single charitable donation to this donor advised fund that essentially I can have control, and I'm putting air quotes around that, in the sense that I can later on identify, advise where I want that money to go.

3:02 That's the A in donor advised fund. I can say, I want to, let's say for example, I have a charity that I like to give to, the XYZ charity, the church of whatever, the hospital, the college, you can fill in the blank, right? If I, and maybe I do multiple charities, I don't just do a single charitable, I'd say I do all of those. But in a given year, I don't give so much that I would benefit from getting more than the standard deduction. Right. So I can give multiple years to this donor advised fund, get more than my standard deduction because of that circumstance, because of the charitable deduction that I might benefit from by contributing that to this donor advised fund, and then dole it out over years, two years, three years, five years, whatever it happens to be that I might have otherwise bundled in this situation.

4:01 It allows me to get the benefit of the standard deduction and periodically the charitable giving deduction that I want to have enhanced tax benefit from, which ultimately people don't just give for a tax benefit, but if you can - It's free giving anyway. Right. Yeah. Right. Might as well. So, okay. What's a donor advised fund? Russ, you want to like start us off or you want me to do it? I'm putting you on the spot. Why don't you start it off? All right, start us off. So, the essence of a donor advised fund is a charitable entity, it's usually offered by a foundation, lots of brokerage platforms offer these, there are others.

4:43 So we've had exposure with the American Endowment Foundation, there's charitable funds with Schwab and Fidelity and lots of others, like Local, Cape Cod Foundation we've had on many times as a guest on our show. All of these offer a donor advised fund. Okay. So essentially you could create your own fund like an endowment of sorts, but a lot less administrative headache. So- Virtually none, right? Well, it's minimal, right? And so essentially, yeah, virtually none. So I can, there's some costs associated with it, but ultimately it's modest.

5:24 We'll talk about that in a minute or two. The essence is though, I can create this fund and in this fund, I get to put the funds I want into it. I can do stocks or securities of different kinds, or I could put in, sometimes I could put in things like real estate or things that might be sometimes difficult to transact. It depends on where I'm doing it and what they- What their rules are, right? Yeah, but cash can be put into it as well, but we might be inclined to want to use highly appreciated assets as a preferred tool to put into it. I often think of someone creating the fund with a highly appreciated asset, like a stock they've had forever.

6:09 That's right. That's a great example of like, why would you, now, why would you do that? Maybe to elaborate on that. Yeah. You don't sell it, technically. You are donating it, so you never have the capital gains that are embedded in that long-term held stock. In the process, you get the benefit of the full market value as what's considered the contribution, so you've avoided that big capital gain. The charitable fund, the donor advice fund, doesn't pay taxes on it either. They just get the stepped up basis. They get it because they're not taxed as a- Right. They never get it, right. They just get to turn around and trade the transacted stock to make it useful if we wanted to give cash or whatever.

6:56 It's as good as cash. Or they could, then that's some choices we'll talk about in a minute, how the money's held once it's donated into the donor advice fund, but there's not a tax event for the charitable entity. Or for you. Or for you. So, that's appreciated to be able to use these highly appreciated assets as a way to do it. In any case, so the fund essentially says, okay, we'll accept these assets and then you can leave them in there for a while or you can turn around and donate them immediately.

7:37 Or as we said, I want to dole it out over, I put five years worth of my charitable giving into a single occasion. Oh, great. You can dole out five years or whatever it might be if you wanted to. Sometimes people do these because they want the charitable deduction, but they really don't know exactly what they want to do for the charitable intention just yet. And we can talk about that in a moment as well. I think that's something that's worth talking about, the non-financial benefits of a donor advised fund values and benefits. So just going back to conceptually, the fund is created.

8:20 You put the assets in, you get immediate benefit from a tax planning point of view, and then you can choose to dole it out quickly, gradually, leave it for a while and then donate it. You have all these options available to you. So ultimately it is intended, keep in mind, this is charitable giving. What you donate to a donor advised fund is not your money anymore. It is going to charitable intention, whether it does it immediately or indirectly through this donor advised fund, it gets there later. But it does have the opportunity to compound and grow.

9:02 So you could, in some instances, you can invest that money and later on make that donation. Now one of the things I was starting to make mention of is the values component of this. This is part of the thing I like best about these donor advised funds. You like this too, Jeff? I see you like that. So the idea is like, okay, I want to instill values in my family, perhaps. I want to pass on not only wealth, but a value system of like one of the things that we do as a family, we want to say, imagine the person saying in their mind, I want to instill community values.

9:47 I want to instill the notion that we do for others. So they might create this donor advised fund, not strictly as a tax benefit, though it has that. But also with the notion of saying, okay, as part of our planning, we're going to pass on values of, hey, this is important to us to make a priority of giving to our community or whatever it might be, certain causes or priorities. So family, let's together come up with a plan each year as to who we're going to prioritize for our charitable giving through our donor advised fund.

10:30 And so there's an opportunity for parents and children that picture these as adult children, but could be young children to say, hey, let's do this collaboratively. And as I think about my family, I think, gosh, this could, if we do this, this could be challenging because we have some of my family, we have very different priorities in our charitable giving. Our political alignments are very different. Our priorities as far as like who should we be donating to could be very different. So on the one hand, that could be a great exchange of ideas. On the other hand, it could be challenging.

11:11 But I think that that's probably a value to the idea of saying, okay, how do we deal with things when we don't agree? Yeah, you know, like that context. Right. Yeah. Right. So in any case, you know, I could see, you know, family saying, yeah, let's let's this be like really important to me. And then how do we respond to that? Okay, well, let's do what's important to you this year. Like a mini board. It's important to you next year. Let's do what's important to you another year. You know, we could go through the family. You know what I mean? I love it. Yeah. And similarly, you could otherwise say, no, no, we want consensus. What can we all agree on? You know, that's another. But these are the kind of things you'd have that opportunity to deliberate about and periodically make decisions around.

11:58 The big picture, though, is that notion of what are you saying to your family by saying I've dedicated assets, I've allocated money to this priority, which I think I want to say, I hope you will have as a priority to that we care about community and we want to be able to give back in various ways. You know, I love that. The other thing I like about the donor advised funds is that it doesn't lock you into a specific charity. You know, let's let's say I'm imagining this scenario and your kids are growing up and they have maybe let's say you say, all right, each kid is going to get X amount of dollars from this donor advised fund to this charity.

12:39 So you can divvy it up rather than doing everything into one charity in one year. That's right. So you have a lot of flexibility once the money is in the donor advised fund. And then as your kids, for example, grow up, their priorities might change. They might have different charitable leanings that that they like, a different organization or they want to contribute to something else. Yeah. Charitable organizations change, too, right? You know, maybe I don't necessarily want to give to that because that that's that's evolved or that's changed or maybe it's focused, has moved on or something. That certainly happens. Or that charity isn't as efficient with the dollars they spend. We want to look at who's who's having the most impact, you know, right. I think that notion of impact investing or something new comes to light, you know, some new cause or something, you know, in the family, you know, something you're affected by, something that's happened to the family, thinking of an illness, maybe.

13:30 Right. Okay. Now we want to prioritize donating to a cause that affects research for cancer or, you know, fill in the blank. Right. Right. Yeah, exactly. So these are all kinds of reasons that people create donor advised funds on a personal level. I'll share when my sister passed away. One of the things we did was we we contacted the local foundation, Cape Cod Foundation, and created a donor advised fund. They collected all these little donations from all these people who gave checks for twenty five dollars or whatever it was. Right. And then, you know, others that were more substantial from family and so forth.

14:11 And each year, Kristen and I and other members of our family donate to the donor advised fund and have have that continue to grow. For many years, we did that as a scholarship for local families because, you know, Bonnie was lived in Mashpee. And so we did something through the Mashpee High School now that, you know, everyone's out of that age range. We've kind of moved to change the focus to things around. Sometimes she died of melanoma. So, you know, it's melanoma research. Someone in the family has MS. We've done stuff around MS, you know, and so forth.

14:54 You know, you can kind of prioritize. So what do we want to do? There was my my sister was athletic or the kids were now adults, but or athletic. So there was something they were doing. The Cape Cod Foundation suggested there's a fundraising campaign for a YMCA further down the Cape. Maybe that would be something we wanted. So, OK, that's a good suggestion. So there's all kinds of things that you can kind of say. What's our theme? What's our priority? And sometimes evaluate, well, what we want to do. We've had clients where we've been involved, not with a scholarship intention, but with charitable giving and so forth, where we've been investing their funds for them when it's not being donated.

15:41 So through this donor advised fund, we continue to be involved, trying to grow that wealth that's ultimately going to go toward charitable intention. And I think that's been kind of a plus. Someone says, all right, I know I want to put some money aside. I have these highly appreciated shares or I've got too much in my company stock or, you know, whatever it might be. There can be different reasons. Let's oh, there's a potential change in the tax law. Let's take some money and put it into the donor advised fund. It's good for our charitable deduction that we want this year.

16:24 Great. Boom. You know, in there now we can change how it's invested, invested however we want. And off it goes. Years later, they can be making donations to, you know, charity of choice, college, hospital, any kind of nonprofit. Now that raises a question of this is donor advised. Just because you want something to go to a particular cause doesn't mean it can necessarily go to that cause. Right. Most foundations will look at this and say, well, is it an actual nonprofit?

17:05 You know, or a three B, et cetera, type of filing. Yeah. No, that's not the right. Yeah. That's what it is. Right. For three. A nonprofit. Right. 501 C3. 501 C3. Sorry, I get my numbers. Thank you. 501 C3. 403 B is the retirement account for nonprofits. Thank you. 501 C3 type charitable entity or similar. Right. And so they'll look for that kind of status. But there are, you know, churches, hospitals. It's really broad. Charities of, you know, but legitimate charities. OK. It does not necessarily get to go directly to.

17:46 All right. There's this poor person, this homeless person on the street. I really want to help them out. Right. We can't do that through a donor advised on a foundation might be able to do that. But a donor advised fund that goes to charitable organizations that they might deal with that person on the street. But indirectly, I think most families understand that you can't give it to a person, but it comes up. There is a difference between a nonprofit entity and a charitable entity as determined by the IRS. So sometimes someone may see a nonprofit and think that they can receive charitable donations that are deductible or qualifying. And sometimes they're not. Well, you mentioned 501.

18:28 There's lots of different 501 type classifications and some may be eligible and some may not be eligible. Some are related to education, you know, for and so forth. So it's go go in with your eyes wide open that perhaps you could run into a charity or if there is a specific charity that you intend on using, bet that out before you enter. Yeah, advice fund. And keep in mind, there's a couple of things that we might want to think about when selecting a donor advised fund. One is, does the donor advised fund have some of these rules about donation? Right. We came across one recently that was going to require that if you didn't make a donation within three years, they were going to start making donations for you.

19:16 If and if if you had made a donation, they'd use whoever you had most recently donated to. If not, they would make their own assessment, you know. So there's rules in some of them. Yeah. So that's one kind of thing. Oh, is there a requirement around that? Two is maybe when it comes to these donations, you know. It's advised, you're saying I'd like to go to this and it is at the discretion of the trustees, essentially of the of the foundation to decide is that something they're going to they're willing and able to do. So, you know, keep that in mind.

19:57 Another thing to be tuned into is can I move the fund? If I'm not happy with this fund, this foundation, can I move it to that fund foundation? You know, so there are times you can do that. And it's essentially just another charitable gift in effect from A to B. So like a transfer. So these are things to be tuned into. Russ, maybe you did a little just preliminary review of some of the differences and cost and so forth. What are some of the other variables that might come to your mind? Well, I think, you know, when people are talking about these donor advised funds, they may sound, you know, fancy and, you know, the high minimums and that kind of thing.

20:43 Yeah. For a lot of the donor advised funds, like through Schwab has a donor advised fund, Fidelity you mentioned, I think Vanguard has one. And these are the minimums to start a donor advised fund are really quite low for the most part. To have professional management within the fund, it's a little bit higher. It can be a little bit higher, but just it's pretty accessible to most to most investors out there. And just the idea to have even people who are donating on a monthly basis, I know a lot of people who do, they have like a basically part of their budget is their donation month to month. Yeah. And they can, you know, front load a donor advised fund at the beginning of the year, have that money grow tax free in a relatively safe invested vehicle if they choose to do so and choose which charities they want to distribute to throughout the year.

21:33 I think that's a really great option for those people who have charitable inclinations and want to do that throughout the year. But yeah, as to, you know, some of the fees, I don't know if we want to. Yeah, why not? I mean, just this is preliminary research. These things can change. We just were looking at it recently, a few few different firms. And keep in mind, there's there's countless community foundations and other options. We're just talking about some of the ones that are in our orbit that we've looked at recently that relate more to the kind of circumstances we are involved with, where we stay involved in the management of the investments as well.

22:14 But yeah, what were you going to say? So it looks like the typical expense rate is about 60 basis points on the first 500 thousand or so. So that's a reasonable pretty big range. Yeah, you will see it will be 0 .6 percent, 60 basis points, 0.6 percent rate of charge. And then if you have an investment manager involved, they choose to probably charge something on top of that. Right, right. So that's just the administrative fee for the donor advised fund that's handling the contributions. Yeah, yeah. So it scales down from there quite considerably. But I mean, from what I was seeing, I thought it was pretty competitive.

22:55 You know, 6.6 is quite reasonable compared to even some mutual funds that are out there. So yeah, there's some administrative costs. And I think, you know, again, how where you do this can vary and the scale of the amount you're involved with can vary the some of these costs as well. And, you know, I mentioned like some will allow you to the community foundation will allow you to have a scholarship. Well, most of the ones that a charitable fund that is through a brokerage platform, they're not going to do that. Right. It's a different kind of scenario. So, you know, you have to identify what are you trying to accomplish?

23:38 We will help define where it might make sense to work. One other detail I want to mention. So you're mentioning that the contribution is deductible. And so it's deductible in the year that you make the donation to the donor advised fund. So let's say as an example, let's say you make $100,000 every year. So if you do a cash donation to the donor advised fund, 60 percent of your adjusted gross income is is deductible. So you can donate if you're making $100 ,000, let's say that's your adjusted gross income. You can make a donation of $60,000 when you're in that could all be deducted off your gross income.

24:19 So I count as a charitable contribution that you get to take a deduction for. Right. And if you're doing the same with appreciated stock, it's 30 percent. So and that's the market value, the present market value of the contribution. So so there are differences and this changes from there have been times this was different amounts of different years. I remember just a few years ago, there were some differences in these numbers. I think it was at the start of the Secure Act or something along those lines. I forget which which which law came into effect that caused that. But keep that in mind, you know, that what it has been and what it will what it what it is currently may not always be the same.

25:02 But it's a good point. So, you know, that there's some incentive to use cash in that scenario. On the other hand, there are some virtue to using stock and that we get to avoid the capital gain. It doesn't have to be all or one. Can I. And I think, you know, there's other types of assets. Sometimes people have real estate. Sometimes people have art. People are going to be all kinds of interesting things that might cause people to consider use of a donor advised fund. All right. So some costs ongoing, but, you know, the other thing is, like, is it is a perpetual or can someone doesn't want someone use this for a period of time and then be done with it?

25:46 Well, it could be either. Right. Yeah, it could be something that's circumstantial and then you're done or it could be something that you're saying, hey, I want to have this live on for many years for legacy purposes. Right. There's one other reason that some families decide to do it or individuals. This can be done confidentiality confidentially, meaning, you know, sometimes people want to be philanthropic, but they don't really want for whatever reason. They don't want their name associated with the contribution that they give. Yeah. Either they don't want a bunch of people asking for more or or they they don't necessarily want the recognition. Yeah. Well, there's there's an endless list of reasons why people want to keep things private.

26:29 And you can do that through a donor advised fund. You can make the donation to the charity without disclosing your name. Some and there's different rules for foundations, so they have obligations that they have to disclose certain amounts of donations. So if you wanted to be strictly confidential and private, a donor advised fund might be a good choice. So, you know, let's just mention a couple of things as we wind down. You know, you're not going to be an expert from a quick podcast, but definitely keep this on your radar, something you might want to learn more about, maybe take take advantage of, make use of doesn't require you don't have to be a millionaire, you know, kind of big numbers to think about something along these lines.

27:15 But it's you know, it is something you you probably want to have certainly discretionary money you're willing to donate to charitable intentions. But there's tax benefits, there's charity benefits, there's control. There's a whole bunch of considerations and legacies we're just talking about. If you want to learn more, there's a nice we've got a nice little brochure. We got it on the screen for those watching on video. And you can check this out if you'd like to get a copy of this. Reach out to us. We're giving it away. It's just a little bit of information about donor advised funds. Give you a little bit of the basics. But I think it's a good good thing to consider.

27:56 Reach out to us. Probably easiest ways to connect with us through our email address. You can just connect to us with an email saying amr-info at wealthenhancement.com. Send us that. Give us a call 866-771-8901. Just let us know you're interested in the donor advised fund brochure. We'll send it to you by email. Or if you prefer, let us know if you want it in print. We'll we'll print it out for you and send it to you that way. But just let us know what you're interested in and think you'll benefit from it. Anything to add, guys, as we wrap up?

28:37 No. All right. Well, that's donor advised funds. Hope you take advantage of it if you need help. Look, as I mentioned, we certainly offer these as something we help with our clients who do want to have, you know, a donor advised fund, but may want it to continue to grow over time. We can be a resource to you or certainly point you in the right direction if it's something you want a little guidance on. So thanks for listening. Until next time, keep striving for something more. Thank you for listening to something more with Chris Boyd. Call us for help, whether it's for financial planning or portfolio management, insurance concerns or those quality of life issues that make the money matters matter.

29:20 Whatever's on your mind. Visit us at something more with Chris Boyd dot com or call us toll free at eight six six seven seven one eight nine zero one. Or send us your questions to A.M .R. dash info at Wealth Enhancement dot com. You're listening to something more with Chris Boyd. Financial talk show. Wealth Enhancement Advisory Services and Jay Christopher Boyd provide investment advice on an individual basis to clients only. Proper advice depends on a complete analysis of all facts and circumstances. The information given on this program is general financial comments and cannot be relied upon as pertaining to your specific situation. Wealth Enhancement Group cannot guarantee that using the information from this show will generate profits or ensure freedom from loss. Listeners should consult their own financial advisors or conduct their own due diligence before making any financial decisions.