The Adviser You Can Talk To Podcast
September 26, 2019
At Adviser Investments, many of our clients are committed to supporting the causes that matter to them. Deciding on the best way to give can be a challenge, but it doesn’t have to be.
In this episode of The Adviser You Can Talk To Podcast, portfolio executives and financial planners Charlie Toole, Kari Wolfson and Rick Winters review options that philanthropists of every stripe can use to maximize their impact while making smart tax decisions.
To listen to the podcast, click the button above. And for even more information on how to make your charitable giving impactful, check out our special report Making the Most of Your Charitable Giving.
Charlie Toole: Americans give to charity regularly. In fact, they gave a record for $427 billion in 2018, but do we place enough emphasis on how we give? Hello, this is Charlie Toole and I’m a portfolio manager here at Adviser Investments. Welcome to another The Adviser You Can Talk To Podcast. Today, I’m joined by Kari Wolfson.
Kari Wolfson: Hi, Charlie.
Charlie Toole: Hi Kari. Kari is an account executive and CERTIFIED FINANCIAL PLANNERTM working with clients here at Adviser Investments. I’m also joined by Rick Winters.
Rick Winters: Hi, guys.
Charlie Toole: Rick is a vice president and Certified Financial PlannerTM, and he’s been working with clients at Adviser since 2001. All right, Kari and Rick, all of us work with clients and that includes advising on charitable giving. Today, we’re going to discuss three benefits of having a charitable plan and the four most common strategies of plan charitable giving.
You can read more about these benefits and these strategies in our special report Making The Most of Your Charitable Giving. As I mentioned at the top, there’s a lot of money given to charity on an annual basis, but it’s likely that people aren’t giving much thought to how they give to charity. Kari, I think a little planning can go a long way.
Kari Wolfson: Definitely! It’s clear that our clients and people in general feel strongly about giving money to charities. I think it’s less a matter of whether or not they’re giving but more so how they’re giving. Are they planning ahead? There are definitely three main benefits to planning ahead. It makes it feel a little less transactional. It gives it some more meaning.
Let’s talk about those benefits: The first benefit is that creating a plan can actually maximize your impact, potentially increasing your giving and reducing your taxes. The second benefit is regarding evaluating charities ahead of time—doing a little bit of research before you decide which charities you’re going to give to. Think about anytime we make a large purchase: I know last year I purchased a car and I actually put a lot of research into that. It wasn’t the most exciting thing to do, but definitely I think paid off in the long run. Do the homework upfront.
Rick Winters: …and at number three, the benefit would be legacy planning. Think about all this effort that you’re putting forward on what charities you’re going to give to and the plan that you’ve built on how to give effectively. If you don’t think ahead and define whether this is something that you’re going to be doing in your lifetime versus the lifetime of your family, because you just never communicated with anybody is a big decision that you have to make. One way I’ll tie it together maybe to make a little bit more day-to-day sense.
Rick Winters: Let’s replace charitable giving with a running a business. You start a new business and you want it to be successful. You want your clients to be happy. You want to leave the business to your kids so that they can run it after you’re gone. However, you’ve never taken the time to communicate any of this. You didn’t build the plan. You didn’t have a mission. You didn’t have a vision. You didn’t pick the specific clients that you want to work with and you never told your kids that you wanted them to run the business later. It sounds like that’s starting to be a pretty big failure.
Kari Wolfson: I love the business analogy, Rick. I work with a lot of clients that want their kids involved but don’t really know how to get them on the same page. I think creating a plan and comparing it to a business absolutely makes sense.
Charlie Toole: I think the big takeaway here is that people can really help themselves by creating a plan and having a plan can help people be more efficient with taxes, more effective with their giving, and can help them plan their legacy in the future. This leads into a deeper dive on a few key strategies to improve tax efficiency when giving to charity. I think this is really important as there have been changes to the tax code, which can really have an impact on what you can and can’t deduct in terms of charitable giving. There’s more on this in our special report Making The Most of Your Charitable Giving. There are a few tables and graphs that can show the impact of some of these giving techniques and what they can do to help you with tax savings.
Rick Winters: One of my favorite reads on the weekend, Charlie.
Kari Wolfson: Great visuals!
Charlie Toole: It does have great visuals and it is important because people are sometimes just writing checks and they don’t necessarily take advantage of some of the tax savings that they can have. I think the four strategies that we have—qualified charitable distribution, donor-advised funds, foundations and split-interest travel trust—we’ll go through each one of those focusing on the different techniques and how they’re helping people. Our first strategy is the qualified charitable distribution, or QCD. Rick, I know this is a topic you’re very passionate about so why don’t you start it?
Rick Winters: I just had a conversation about it today meeting with a tax adviser. QCD, qualified charitable distribution: This is something that is available to anyone that is over the age of 70½ and if you have an IRA or an IRA Rollover. The strategy is because what else happens when you’re 70½ is you have to start taking your required minimum distributions.
As you’re thinking about your charitable giving, the QCD allows you to give money from your IRA directly to a charity that is non-reportable, non-deductible, which means it removes that income from your tax return altogether and that money counts as part of your required minimum distribution.
Rick Winters: A couple of things that you need to note: Who’s thinking about this? Anybody that is over 70½ and has an IRA should consider this as an option. You can give up to as much as $100,000. You can give as little as you can write a check for or request a check for out of your IRA. I would say, that’s the least you could ask for. It’s not the efficient way of getting through, but the reason that you’re doing this is because now more than ever with that new tax law that was just passed back in 2017.
Rick Winters: For most Americans, most are not able to take itemized deductions and if you’re writing checks to charity out of your checking account, that’s something that you’d have to get over that itemized deduction or the standard deduction amount to be able to take it as a deduction. If you’re not and you’re just taking standard, you’re actually not getting a tax savings. You’re not only giving the dollar away, but you’re still paying the taxes. Using that QCD would allow you to give that money directly to charity and take that income off the top.
Kari Wolfson: Talking about the QCD, not only does it lower your potential income for tax purposes, but it also has a huge benefit and potential savings for Medicare.
Rick Winters: Perfect point, Kari, I can’t believe I almost missed that. If you’re 70½, what else do you have? You have Medicaid or Medicare and every year you have to calculate your income for what’s that premium you’re going to pay. If I’m able to take income off and satisfy my charitable giving, because I have this interest, I can reduce my income for that calculation and potentially keep my premiums down.
Or if you have medical expenses, which now the threshold is even higher at 10% for the itemized deductions, you lower that income. That threshold is easier to overcome. There’s a lot here if you’re not thinking about it. I’d have to say that in most cases you’re missing out and it’s definitely something that you should be having conversations about with your investment adviser, right here, or your CPA—definitely.
Kari Wolfson: I think it’s easier to plan ahead, too, now that it’s a permanent law. We’re not rushing at the end of the year like we used to.
Charlie Toole: I know that that was always a big issue where waiting until the last minute, at the end of December and trying to identify if that was actually going to be rolled over and be law. Again, clients were calling at the last minute saying, “I want to make this donation.” Now it’s permanent. People can plan ahead as we talked about at the beginning, having a plan and taking advantage of these things.
To quickly summarize the qualified charitable distribution, you can give directly to a charity from your IRA. This does satisfy your required minimum distribution. You must be 70½ to take advantage of this and the benefit is that it lowers your income, which will lower your taxes and can help also with other things like Medicare as well. Lastly, it’s a $100,000 limit in terms of how much you can give from your IRA.
Moving on to our next giving technique: It’s a donor-advised fund and, Kari, I know this is a technique that can be used by anybody. You don’t have to be 70½ to use a donor-advised fund.
Kari Wolfson: Yes, donor-advised fund is another great strategy. Think of it like a charitable investment account or a personal savings account that you use to give to charity. Breaking it down, a donor creates an account and you can make a contribution of cash, stock or other assets—even real estate and artwork—and you can take an immediate tax deduction for the gift. The accounts are set up with a custodian like Fidelity. We manage accounts through Fidelity for our clients all of the time.
Kari Wolfson: I think the important savings feature to point out is that you can invest the assets until they’re gifted to an IRS-qualified charity. You don’t have to rush and make the decision about what charity you’re going to give it to, but you can still take the tax deduction in the year that you want to. They’re inexpensive and easy to set up and really there aren’t many administrative hassles, so they’ve definitely become popular over the years.
Rick Winters: They’re very popular for me personally. I know I get to the end of the year and I have a lot of different groups that I want to give money to, but I may not want to give as much as my accountants tell me is a good idea. I use the donor-advised fund as a way to get money instead of that mid-December and I’m writing checks to a bunch of charities I wasn’t necessarily planning on supporting. I can put it in there and save that for another day. One thing that couples into some of the things I was talking about under the QCD is that standard deduction comes up again.
Rick Winters: The standard deduction is not this mystery thing that’s out there. For a couple over the age of 65, married and filing jointly has a $27,000 standard deduction this year. That’s a mile-high threshold to get over for some folks, especially with the new limitations on the itemized deductions now.
Rick Winters: If you’re someone in a situation where you do give annually and you do it pretty consistently, what people are doing now is referred to as bunching. It’s a strategy that would say instead of just giving this year’s charitable gifts to my donor-advised fund or writing them out to charity, what I’ll do is pile up two or three or four years and in that case maybe we’re talking about $10,000; $15,000; $50,000 or more but I’m not ready to write them to charity. I put them in my donor-advised fund and get over that standard deduction threshold. Now, I’m back to itemizing and that’s just smart tax planning.
Kari Wolfson: I’m glad you brought that up. I had a few clients panic last year because they only wanted to give a certain amount and by using the bunching strategy they were actually still able to itemize. That is another huge benefit.
Rick Winters: Just a little forward thinking there…
Kari Wolfson: Yes.
Charlie Toole: I think another great benefit of these donor-advised funds we get to talk about is the legacy aspect. You can set aside a certain amount to your children and allow them to donate to the charities that they want to. It allows you to start to introduce that legacy component as well.
Rick Winters: Yes, one of those benefits we mentioned includes the family. This is definitely a place you can go long-term.
Kari Wolfson: Definitely.
Charlie Toole: To quickly summarize the donor-advised fund, it’s a low-cost way to administer your charitable giving. It allows for bunching of several years of donations at once to maximize your tax savings and the money can be invested to grow over time as it’s disbursed out to charities.
Our next technique is private foundations. A donor-advised fund can be called a simple low-cost foundation. Rick, when you discuss private foundations with clients, it’s a little bit more complicated than a donor-advised fund and it’s more than just cost that’s the difference.
Rick Winters: Yes, in total dollars, private foundations are the most popular in the United States. There’s more money in private foundations than in any other way that investors are able to save toward charitable giving, but that doesn’t mean they’re easy. These are literally run like businesses and you have that more hands-on interaction that tends to include more involvement from those that are overseeing the foundation.
The tax filing there is a required distribution and unlike the DAF, or donor-advised fund, there are no required distributions. You do have a required distribution from a private foundation. Also, there is tax application to the underlying investments so it’s not completely tax-free.
Rick Winters: The deductibility of the contributions that are being made is lesser than what your other charitable giving options, but if you are someone that is not only interested in giving to charity. You may give to one, or you may give to many. The private foundation does provide some flexibility in how that’s handled.
You can be more actively involved in the charities that you’re supporting. If you want to go and fly down to a location to help build a school and that’s part of the foundation’s focus, those expenses can be wrapped up in the foundation. If you’re going to go do that and then write a check through your donor-advised fund, none of that can be applied to that check you wrote. The donor-advised fund is simply for giving to charitable giving.
Rick Winters: I have a real-life example on both sides. We just recently wrapped up a private foundation and moved it over to a donor-advised fund because the relationship we were working with was simply writing checks to charity. Every year they had to get their distribution out. They didn’t even want to necessarily give the amount they were required to.
We talked about the donor-advised fund and they figured out that that met their needs more so. Where in another case where we had a private foundation with a family that is building it over time and the second generation and potentially even the third is already getting heavily involved with the operation of that foundation. There was no chance that the donor-advised fund was going to be a good solution for them.
Kari Wolfson: It seems like it’s all about flexibility: The private foundation offers more options, so it’s really about what you’re looking for.
Rick Winters: If you did the planning, had the mission and the vision and then got all that stuff organized early, yes, it makes sense: A private foundation is something that you could consider. The costs are worth it.
Charlie Toole: Just touching on the costs… Because of the costs, you want to have more money to put into the foundation. You’re looking at $1 or $2 million that you’re going to put into the foundation to make the cost worthwhile.
Rick Winters: Yes, establishing a private foundation to put in a meaningful gift, $1 million is just not going to be right. Again, you’re thinking about long term. I would even say, you said $1 million. I’d even push it toward $2 million to be where it could be considered. I should have just said that upfront, but thank you for clearing that up for me, Charlie.
Charlie Toole: Just to summarize foundations. They are more flexible option in terms of charitable giving. There are less constraints but they are more time consuming and they are more expensive to operate. They also are a great legacy-planning strategy. Like you said, Rick, running a business and it’s time-tested and it’s going to go through more generations over time. Our last technique is the most complicated: Split-interest charitable trusts. Kari, one of the reasons this technique is so complicated is that there are multiple parties that benefit from these trusts.
Kari Wolfson: Exactly. Complicated is a good word used to describe them, but I think it is something to consider if you want to give some of your assets to charity and reserve some for yourself or other heirs. There are two main types, a charitable-lead trust and a charitable-remainder trust. Basically, the difference is when you’re collecting the income versus gifting the asset to charities.
With a lead trust, you’re gifting the asset to charity up front and with the remainder trust you’re receiving income throughout the life of the trust and then the remainder is going to charity. Like all charitable gifts, they’re irrevocable and usually it’s not something that you’re talking small-dollar amounts. You definitely want to discuss with your adviser and your planning team before taking any action.
Kari Wolfson: I have a client that I worked with recently who set up a charitable remainder trust and it was great for her because she was in her 70s. She owned an energy stock that she really didn’t want to own. She’s very charitable and she didn’t have any taxable income. For her the charitable remainder trust made sense. She was able to get rid of the energy stock, receive income, get a big tax deduction and ended up leaving the remainder to charity anyway.
Rick Winters: What a cool example. That’s picture perfect. There are other examples that I would even use: Imagine you had a big event. The business you started just got bought out and you have, ideally, millions of dollars coming in the door. At that point, not only is your life changing, maybe your situation on what you can consider for charitable giving. The other reason for thinking about that is because you can save yourself a bunch of taxes. This is actually one of the more effective strategies using split-interest remainder trusts or split-interest leads trust to be able to take advantage of that.
Rick Winters: One other thing is something that’s very specific to the current tax laws and how you’re going to use this in your planning: If any things were to change on how IRAs are distributed in the future to your beneficiaries or how you may be able to deduct your charitable gifts on your taxes. You would always want to be leaning in and making sure that you consider one of these two options and it’s something you’re discussing with in this case, Kari, as an expert and your accountant.
Of course, you want to tie those two in and because it does involve a lot of estate planning, even your estate attorney and that three-way meeting with those three professionals is definitely going to be rewarding.
Kari Wolfson: Yes, definitely.
Charlie Toole: Kari and Rick, thank you for the great conversation today. To wrap this up, we suggest that everybody consider how they’re giving to charity and evaluate your charitable plan. Most are probably missing out on some form of tax savings if they’re just writing checks every year. Some of the strategies we’ve discussed today may apply depending on your situation and it is really important to have a conversation with your planning team.
Charlie Toole: Once again, I’ll just suggest that you download tour Making The Most of Your Charitable Giving special report. We thank you for listening to another The Adviser You Can Talk To Podcast.
If you’ve enjoyed this conversation, please subscribe to our show. You can also check us out at www.adviserinvestments.com/podcasts. If you have any topics that you’d like us to explore, please send us an email at firstname.lastname@example.org. We’d love to hear your feedback—thank you!
Podcast released on September 26, 2019. This podcast is for informational purposes only. It is not intended as financial, legal, tax or insurance advice even though these topics may be discussed. Information and events addressed in this podcast, as well as the job titles, job functions and employment of the podcast’s participants with respect to Adviser Investments, LLC may have changed since this podcast was released. For more information on each individual featured in this podcast, see the Our People section of our website.
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Our clients feel strongly about giving money to charity … what matters most is ‘How are they giving?’ and ‘Are they planning ahead?’
Our clients feel strongly about giving money to charity … what matters most is ‘How are they giving?’ and ‘Are they planning ahead?’
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