TRANSCRIPT:
Welcome back to Financial Foundations, brought to you by Based Wealth Management, where we are the foundation to your financial plan. I’m your host, Dustin Taylor. I’m your co-host, Alex Wolfe, certified financial planner. And today we’re talking about donor advised funds, which have become increasingly popular for charitable giving and for good reason. Here with us now is Jeremy Riggs, Based Wealth Management advisor, and he is here to talk to us about these donor advised funds. So why have they become so popular, Jeremy? Hey, thanks for having me back. I love to talk about donor advised funds. Very near and dear. In previous roles, I worked with executives where I was talking about, you know, how do we still support the charities that are important to us, but can we be more tax efficient? And this solves that beautifully because it gives you the control, and that’s the biggest thing with these. So I’ll walk you through. There’s a few items that you need to be aware of with a donor advised fund. So I’ll illustrate how a typical donation works versus how a donor advised fund works, and we’ll go from there. So most people are familiar with a donation. You give money to an organization that you want to support.
They give you a receipt and then you can write that off on your taxes assuming that you can itemize. What the donor advised fund does is you still give money into a charitable account and then that account holds the funds for you. So you’re getting the donation in the year that you put the money in but maybe that money is not just for this year’s donations. Maybe it’s for future years as well. So the money can sit in that advised fund and what that allows you to do is lock in the tax deduction that you want in one year and give the money out at a later year. So that’s where the control piece comes from. Yeah, I love that aspect of it. Being able to get the tax deduction now but you don’t necessarily have to give all that money to the charity or charities that you support until a later date. So it gives you that control and flexibility but it also allows you to super fund it. Can you talk about that? Oh yeah, I love that especially when someone’s getting towards the end of their working career and it’s like they’re in a very high tax bracket, maybe they’re an executive and they’re making a lot of income so they’re looking for ways to reduce taxes. So I can go through a couple examples here with you. So with super funding it, what you’re referring to is stacking multiple years of donations. So maybe you have someone that they’re charitably inclined, they give $5,000 a year. Maybe we’re going to take the next 10 years of charitable donations and put it all into one $50,000 donation for this year. So what that can really do is drive the taxes for you. So if you think about it, give you an example, say someone’s making $425,000 a year, they’ve filed standard married, so they get the standard deduction that brings their taxable income down to about $395,000 give or take. They’re in the 32% tax bracket. They’re going to pay roughly about $70,000 in taxes.
So that’s if they just take the standard deduction. Well, if they give $5,000 a year, well, there’s no reason for them to itemize. They’re not going to have more than the standard deduction. So that same scenario, 425,000, what if we did a $50,000 deduction instead of taking the standard deduction? So we put that into the donor advised fund. Well, what that’s gonna do is that’s gonna drive the income down. So when we run the math on that, well now, not only have we driven the income down, we’ve driven it down to where we’ve dropped to the 24% bracket. So now your taxes that you’re gonna be owed on that are gonna be about 64,000. So that’s where you’re super funding it. Your charities are still gonna get the money they want, but now we’re getting some more tax efficiency out of it.
Right, I think that’s a great way in the way you framed it because you touched on standard deduction versus itemizing. And with the way our tax codes or laws are written now, it’s so difficult for common people to be able to come up with enough deductions to be able to itemize where in your example there with super funding a donor advised fund could help you accomplish that in reducing your tax liability in that tax year while still being able to support the organizations that you want to donate to. And one thing that is present here is through the donor advised fund you’re able to do that in a much more easy process than going out to all those organizations and writing checks from your checking account.
And we’re going to talk about why it’s better from a tax standpoint and for simplicity to use a donor advised fund than just writing checks from your bank account. That’s a really great point you know that instead of giving throughout the year all these different organizations and then you’re waiting on them to send you receipts. So it’s more work on you more stress like I know I gave this you know, charity, a donation, but I haven’t gotten it back. So now you’re having to wait to file your taxes. If you do a donation to a donor advised fund, you’re getting one receipt. It’s, it happens immediately. Absolutely. And that’s one thing that I found with clients who are the, the kind that in the past had written checks, especially at the end of the year, and they’re waiting for that organization to cash it and it’s December 30th and you’re like, am I going to get that now if they cash it, or am I going to have to wait till next tax year? Yeah. Especially if you’re supporting maybe a smaller charity, like maybe it’s not done electronically. You’re waiting for a paper receipt. Um, and we can get into the simplicity of it. A lot of times the donor advised funds that I use, they have an app. So you can literally have an organization’s name. I do this all the time. I’ll tell, Hey, what’s a charity you like to support? Let me type it in and pull it up and we can automate it. Hey, do you want to send this as a one-time gift, or do you want to send them $100 a month or like maybe you move your local church, Hey, let’s just set this up where it just deducts from the donor advised fund and it makes it very simple for you. And if you want to do a one-off donation, hey, great.
Pull up your app and send the money. Right. I think it also is a great way. If you don’t really have an organization that is close to you, uh, the website. Fidelity charitable is a great way to find some organizations to support too, because there’s thousands. Speaking of the charities and which one you can support, are there any restrictions on those? It has to be a recognized charity. So, and that’s really easy to do. If you look and put their name in there, make sure the address and city match up. You should be able to see and search that list that Alex was referencing. You can also, if look them up, if you have their tax ID, that’s another way we can check. Um, a lot of smaller charities, maybe they’re not listed. We always submit a request saying hey is this something that can be added for a charitable deduction and they’re pretty responsive to us. There’s thousands that are on there electronically but if they’re one of these small organizations that are not but there’s still a qualified 501c3 then you can still tell Fidelity if that’s who you’re using for your donor advice fund the name and address and they’ll send them a check but still they can be added as someone who can be done electronically in the future too. Yeah and even if it say all of your charities that you support the donor advice fund is sending them a paper check that’s fine you’re still getting the electronic receipt of your donation when it goes out to the charity has no impact on when you get the tax deduction so there’s a lot less work.
Can you talk about why a donor advice fund is better from a tax standpoint too, and the types of things you can contribute to it versus writing a check? Yeah. So when I look at, a lot of people would use just writing a check or cash. So you can do that, but what I like to look at is, hey, do you have any appreciated stock? Because when we sell a stock, even if you’ve held it for long term, you’re probably going to pay about 15% capital gains, maybe give or take, depending on your tax bracket. Especially if it’s an appreciated stock that you’ve held for 10, 20 years. Yeah. Maybe you have some Apple or some other tech stock that’s appreciated a lot, and you’re like, well, I don’t really know what to do with this because, for example, say that $50,000 we’re going to donate, we’re going to do it with an appreciated stock, and half of it is your basis and half of it is gains. Well, if you just sell that on the open market, now we’ve created another tax issue we have to work on.
The beautiful thing about giving appreciated stock is we can pick up that whole $50,000 of appreciated stock, put it into the charitable account, you get the deduction for the whole value, and you pay no taxes because it was wrapped up as part of the gift. So now we’ve saved you a tax bracket by making the itemized deduction instead of the standard deduction. And now we’ve also taken $25,000 of capital gains that you would have to have paid, and now those are part of your standard deduction. So what happens to the money that you put into the donor advised fund before you grant it to the charities? I’m glad you asked. So in the charitable account, you have options that you can invest in. So we can be as conservative as the money market. We can put it into something that tracks the S&P 500. So that’s where we can look at what’s the timeframe. Is this a donation we’re making this year, or is it 10 years from now? And are you fine with there being a fluctuation on what the charity gets? It doesn’t affect your tax deduction, but if we’re doing a super funding and putting and 20 years worth of donations in here, well, let’s get a little more gross.
If a charity doesn’t get $50,000, maybe they get $60,000 because the market’s grown over that time period. Yeah, I think it’s a great way to, you know, possibly give them more than what you originally put into the donor advice fund. And then again, you can give funds to any recognized charity in any amount. Doesn’t all have to go to one charity. You can hand-select the charities that you support inside the donor advice fund. Yeah, I think donor advice funds are a beautiful example of how do you make your money work harder for you. As you can see, donor advice funds offer immediate tax benefits now and long-term flexibility with your charitable giving. Whether you’re looking to make a substantial donation this year or plan for your charitable giving in the future, a donor advice fund may be a great way to help you achieve your philanthropic goals. For more tips and strategies like this, be sure to check out our website at basewealthmanagement.com where you can find videos, articles, and other podcast episodes with more information. You can also submit any questions or topics you’d like to see us cover on the podcast, send those in to us at question at BaseWealthManagement.com. And also make sure you’re subscribed to our podcast on your favorite podcast listening app. If you would like more information specifically about donor advised funds, be sure to reach out to Jeremy at Jeremy at BaseWealthManagement.com. Thanks again for joining us, Jeremy. Thanks for having me back. Enjoy the time. I’m your host, Dustin Taylor. I’m your co-host, Alex Wolfe.
