Finance in a Flash: Donor Advised Funds
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Transcript
Nick (00:00): Hey, everybody. Welcome back to finance in a flash on this episode Chip and I discussed a very important topic in donor advised funds. This podcast is a little bit of a different format and that it's more of a Q & A format instead of a regular discussion, but we think it is very informative and we go through an overview of what donor advise funds are and the benefits of using them. Thanks for listening to finance in a Flash. Let's go.
Nick (00:28): All right, let's get rolling again. That is Chip and I here to tackle this episode. And on this episode, we are going to be discussing donor advised funds, I think we've written an article done a video and it's one of the most viewed articles on our website ever is our article on donor advised funds. So, we've had a, you know, a lot of traction here and people who have had a lot of questions and we just really wanted to come do a quick dive into what actually a donor advise fund is and the benefits of having one or using that as a strategy. So Chip first, I think you're the expert on this, can you define for everyone what a donor advised fund actually is?
Chip (01:13): Yeah, sure. It's a, you know, a donor advise fund is simply an account, that is established for the pure purpose of making gifts to, various nonprofit organizations and charities. Yeah.
Nick (01:27): So what would be a major benefit of this account, versus I'll just write a thousand dollar check to my church?
Chip (01:39): So, you know, the way that the tax laws are now is that it really behooves people to do what we call charitable bunching. And that means you for someone who's charitably inclined. If you gift, say two years worth of charitable contributions into one year, those gifts become more deductible. So, that is one of the big benefits and, and the popularity around donor advised funds has kind of accelerated recently, because of the fact that most people, are not itemizing, their deductions rather, and they're taking the standard deduction because they just don't have enough, an itemized deductions, to take that tax deduction. So by using a donor advised fund, to bunch gifts into one year, you can, make the contribution to the donor advised fund, that is deductible in the year, that contribution to the fund is made, but then once it's in the fund, you can spread your gifts to the charities out, over a number of years.
Chip (02:53): So the good part about that is, you know, if you, instead of writing, let's say a $10,000 check to your church in one year, you know, if you do that, the church might come back next year and say, you know, Oh, where's the $10,000 you gave last year. We kind of have the expectation that you're going to keep giving it the same level. You know, the donor advised fund allows you to spread that out over time, which is beneficial to the individual because they are likely to have, a better tax deduction by going that route. It's great for the, the nonprofit or charitable organization as well, because they also like consistent, gifts a donor advise fund can definitely facilitate that.
Nick (03:39): That's great. So I do have one question. So can you only contribute cash or can you contribute stocks mutual funds and to a donor advise funds where there could be a potential situation where let's say I have, you know, Amazon stock, I got a really low, the cost basis is low. The capital gains tax is going to be a lot, but could I just gift that to the donor advised fund and let that grow? And if so, would there be any tax implications for that?
Chip (04:12): Yeah, so that's a good, point to mention is that, you know, and this was a great strategy. You look in your portfolio at those investments and Amazon would likely be a big one where, you know, the cost basis is low. And so let's say you paid a thousand dollars for shares of Amazon that are now worth $10,000. Well, if you sold that investment in order to pay a charitable, write a check for a charitable contribution, you'd pay taxes on that $9,000 capital gains. But what you could do with a donor advised fund is simply transfer the shares into the donor advised fund. And you can transfer shares of stock mutual funds, ETFs, donor advise funds except real estate, all kinds of different types of assets, can be contributed into a donor advised fund. And you could avoid the capital gains from that and receive a full tax deduction, know on the gift.
Nick (05:14): Okay. Awesome. So in, in regards to that, is there usually a fund minimum now I know, you know, donor advise funds, they're pretty much all different or there's different varieties of them, but generically speaking, is there a large, I guess initial amount or limit that you have to contribute to have a donor advised fund?
Chip (05:37): Well, each donor advise fund is a little bit different. So you kind of have to go in to the custodian and, you know, Schwab ,TD Ameritrade, T Rowe, price, Vanguard, fidelity, American funds. They all have donor advised funds, that you can utilize, but they are all little bit different structurally. So they might have different minimums, they'll have different investment strategies because you can invest once, the funds hit the donor advisor. So you gift Amazon to a donor advised fund. Amazon is sold by the donor advise fund, and then the asset is redeployed into another investment objective and you, and it's mutual funds usually. And so, you know, once that happens, you can then either, you know, formulate some kind of gifting strategy, or it can sit there for awhile, until you decide, which charities to, to make the gifts to.
Nick (06:35): Okay, perfect. I know this is, this is a little different than our typical podcast, kind of like a Q&A, of a donor advise fund, because I thought it'd be a better way to do this podcast rather as a discussion. And so this year, a way people satisfied their requirement of distribution, which is, there's a specified amount of money that you have to take out of your IRA every year after you're 70 and a half, which I think is now 72 and a half, depending on when you were born. Correct.
Chip (07:09): Yeah, it's 70. They changed it recently to 72. But you can still make qualified charitable distributions after the age of 70 and a half. So it's kind of a, it used to be kind of the same. And now it's, it's the qualified charitable distribution from an IRA is not at the same age as the required minimum distribution. It's just one of those funny ways that Congress and the IRS likes to keep us on our toes a little bit. So if you're above the age of 70 and a half, that qualified charitable distribution is another way that you could make a gift.
Nick (07:45): Perfect. So on that, on the back of that, can you, if you were to take qualified charitable distribution, could that money or that distribution go into a donor advised fund or no.
Chip (07:56): Well, under most of the donor advised funds that we are talking about in this podcast, fidelity, T Rowe price, Vanguard, no, you really shouldn't go that route, with your qualified charitable distribution. However, there are some, vendors that may work now, the funny thing about it is, you really have to kind of specify. Oh, this donor advised fund is going to go to one specific charity. You know, so you couldn't say, you know, you couldn't say, okay, I'm going to contribute to this donor advised fund and give to 10 different charities. You know, this, this donor advise fund from the onset kind of has to be earmarked towards the charity itself. And there are a few vendors that can handle that, but there are, there are definitely some hoops to jump through for that.
Nick (08:52): Okay. Makes sense. it's just what makes sense if it was easy. So, especially when we're dealing with things like these, and I have, I think one last question on this. So are there any, charities or organizations that you can't give to? I think that might be a better, a better question then to ask you which ones you can give to or give money to.
Chip (09:21): So in general, political types of organizations, generally you can't make those types of gifts too, from a donor advised fund, but the vast majority of nonprofits: United way, American red cross, all churches, any kind of, any type of wildly publicized charity, you can absolutely, it's an easy way to gift and it's all electronic, so you log onto your interface with Vanguard or fidelity or whoever you're using and you make, oftentimes there's already an electronic link to that charity. If there's not one, you can submit a request that the custodian establishes this link, and then you can make, start making the gifts electronically. And, these grants, again, just like the minimums we talked about earlier, there's every minimum is going to differ for the dependent on the fund company that you use or custodian.
Chip (10:25): The minimum gift is going to vary as well. And there are some that are as low as like $50. And so it, it really does facilitate a very easy and streamlined way to make gifts. And also donor advise funds can help you make anonymous gifts. So that's a really important thing if you, if you've ever made a gift to a charity, you suddenly are on their mailing list and get all kinds of solicitations. And so this donor advise funds, that's one of the benefits that not many people talk about, but you can, you can make anonymous gifts to charities and you know, that your money gets there. But you're not being barraged by the solicitations and that sort of thing that happens once you're kind of on their radar.
Nick (11:15): Yeah, you mentioned a few times, but so would, and this is no advertisement of any kind, but if someone was looking for a place, a place to open one fairly easily and to kind of get started, would you suggest, you know, fidelity, Vanguard be maybe the main places to go initially?
Chip (11:36): Yeah. I mean, to me, I think that, you know, those are easy. Vanguard is usually my custodian of choice for a lot of things simply because they're low cost, but I believe that Vanguard does have like a $25,000 minimum. So there are other custodians, I think Charles Schwab's is like 5,000 and so it just depends on, you know, what level you're thinking about gifting and also, you know, which custodian you prefer. I mean, Vanguard's portfolios that your money kind of goes, and you can, and you can designate, you know, conservative, moderate, aggressive Vanguard, total stock. I mean, there's lots of investment options that you have. But you know, they're all, of course with Vanguard, they're going to use Vanguard funds, which we actually like they're pretty low cost, they're very low cost, and tax efficient.
Chip (12:29): And, you know, just internally they're very diversified and that sort of thing. So, um, you know, but to me, that's kind of where I'd start, if you have your money already with Charles Schwab, it may be easier just logistically to have a Charles Schwab, a donor advise fund. But you can scrutinize T Rowe price and others and just check them out and do the due diligence. But, you know, it just depends on, your specific goals and that sort of thing. Perfect. Well, I think, you know, that was a great overview of, of donor advised funds. And like I said, this is a little bit of a different format from our usual form of a podcast, which would be in discussion. This was kind of more of a Q&A, which I think works with something. So I appreciate that Chip. And if you had anything else to add on, on donor advised fund is as we close out here.
Chip (13:16): I mean, over the years, I've seen, people really enjoy making gifts to donor advise funds. It's an easy way to incorporate your family. People will bring in their kids and they'll have some families have like annual meetings and generally happens like over the holidays. And they'll talk about, Hey, which kind of gift do you think we should do this year? And who should it, you know, who should we benefit and who, and,some families really get into it and do research on charity navigator and, you know, kind of look at the you know, some families have very strong beliefs in certain types of charities. So they'll kind of make it a family thing.
Chip (14:07): You can actually, some vendors allow you to make gifts and you can kind of make a gift to a, another individual, and then they can in turn, choose the charity. So it's kind of a very neat thing. And, we enjoy helping people in this aspect of their, of their planning, for sure.
Nick (14:25): Alright, well that wraps up this episode. Thanks again, Chip for, being gone and thanks to everyone for listening to finance in a flash. If you want to learn more about us or our company, go to beacon, financial strategies.com, you can find all of our podcasts and blogs there as well as iTunes, Spotify, and Google play. Alright. Thanks guys.