Ep # 14: Smarter Charitable Gifting Big & Small

Benjamin Haas |
  • Small Gifts: check out "Giving Tuesday" podcast
  • ”BIG” Gifting assets can mean many things to many people. BUT, we can separate that into two very different camps:

    • Planned giving on an annual basis
    • More substantial gifting through an entity or through one’s estate



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Full Transcript:

Benjamin Haas  00:03

Hi everyone and welcome to A/B Conversations, where we will help you CFP your way out of it. A podcast where you get into the minds of a couple of Certified Financial Planners on how we think and feel about everyday financial planning questions, and what should really matter most to you.  A healthier financial life starts...now! Welcome back!  Podcast time of the week. So let's get on the topic we hit on not too long ago. We did some conversation on charitable giving for Giving Tuesday and I think we'll preface this by saying we're very fortunate to work with a lot of philanthropic people. But I think when we talk about smarter ways of giving, and that's the way that we want to articulate it today. Usually, that means thinking a little bit more outside the box than the typical annual giving that people may do. We reference that as check writing, offering in the plate, to your local favorite charity. We want to talk today about moving from smaller annual gifts, that what we'll define as bigger gifts. What I didn't want to have happen today and what I need your help with, is not to get too technical. So here's my idea. Let's talk about charitable giving through the lens of a client that we would work with. What, per se would be the situation where bigger giving would be something that happens? How did they get comfortable doing so? Then maybe let's give some ideas on what those gifting ideas are. Are you along for the ride?

Adam Werner  01:55

I don't think I have much choice at this point because we are doing this live.

Benjamin Haas  02:01

A/B Conversations means you're along for the ride.

Adam Werner  02:05

That's right. So yeah, let's use an example and we'll call this person, Kim, the example of the client that we'll use. I'll preface this by saying in this scenario or at least where we typically see, the larger gifts are tied to phase of life. They usually happen at retirement or they've been in retirement for a few years and are feeling okay. Then that next thought process of well, if I know I'm okay from a retirement perspective, then can I start to give some of my assets away while I'm living and see the benefit of that through a bigger giving process? So for us, shocker, that first step is, hey, let's do a financial plan and make sure that you're okay with your assets for your lifetime. Through that process, we can help and we do this very conservatively. Let's make conservative assumptions on inflation, rates of return, taxes, all of these things to try to poke holes and then if we can still say yes, with this amount of money, you're going to be okay. If there's an excess beyond that, let's start to look at ways that we can start to allocate that to your charitable giving goals in a more efficient manner.

Benjamin Haas  03:28

Okay, so then the first question that pops into my head, when we are using the word, hey, we're going from maybe smaller annual gifts to bigger gifts. Let's not let any misconceptions out there. What do we mean by “bigger gifts”?

Adam Werner  03:45

$1 million dollars (Austin Powers reference)

Benjamin Haas  03:49

No, no.

Adam Werner  03:52

I hope people got that reference, but maybe not. So anything above the standard deduction, right? If you're going to itemize your deductions on your tax return, which it's in that $25,000 range is going to be different moving forward, it's been increasing with a little bit of cost of living. We'll call it 25,000 for our purposes, if they have itemized deductions, including charitable gifts, we would call that kind of that threshold, at least a starting point.

Benjamin Haas  04:22

So then, I think the comment I wanted to make there knowing what your answer would be, not a million dollars. That can include a lot of people. It's not an insignificant amount of money but even for those not at that phase of life that are retired and looking to make more money last their lifetime. If you had some sort of windfall, or you had a tax event, where you're going, Wow, I really want to offset some of those taxes. Maybe you're younger, though. Anything over that standard deduction may mean that you want to gift something away. If that's not directly to an institution, there are different ways then we're going to talk about educating people on what the heck's out there to use that may fit different situations depending on what your priorities or what your concerns are. I think that was a good place to start. Big does not mean millions but it certainly can. I think if you'll follow my logic here, let's start with maybe the more simple to set up and easier entities and then we can certainly work to the situations where something larger and more permanent. What those would be? So let's go back to Kim and let's start at the beginning. If she is in a spot where she can give some dollars away and that's clearly a priority of hers, what would be the questions that she might ask or how would we get to deciding what's the best way for her to go about?

Adam Werner  05:51

The first question that pops into my head is just what should I be gifting? Is it cash? Is it securities?  I don't know what else is there?

Benjamin Haas  06:05

We touched on some of that, we would give the advice that gifting of cash can mean that you get bigger actual deductions. The tax code does a good of segregating are you gifting cash or are you giving other appreciated securities. You gift away art. Anything really can be gifted, for this sake but certainly, if you're gifting appreciated securities, the good thing to know is that you may be avoiding certain taxes, like capital gains taxes by gifting something away but you may be getting less of a deduction. I think the follow up question that we would want to maybe answer after that is: gifting to where? If it's not directly to an institution, let's go down that educational rabbit hole. If it's not directly to an institution, let's give some education that you can create your own charitable entity. And it may sound like, Oh my gosh, I know really rich people create these foundations. I'm not in that spot. Let's go all the way back to the beginning. What are those entities that somebody like Kim might use if she's saying, Look, I've got some company stock, I don't necessarily want to flop it on the lap of my local church here. Where could it go?

Adam Werner  07:26

In the scenario you had laid out, if there was some other taxable event that we're looking to do a bigger chunk in any given year, if we're looking to offset maybe higher income, sale of a business, or whatever that may be, I think, more and more we're seeing this for ourselves that it's an entity called a donor advised fund. It's one of the easiest and simplest ways to put a larger lump sum into an entity that can then do gifting over time, to your point, it's not going directly to a charity, it's going to an entity that can then be the intermediary between your money and the charity, where you can get that deduction today, for the full amount that you're putting in. Then you and with help of this fund, can decide how to spread that out and actually give to your charity over time while you're getting the deduction today. Hopefully, if you're putting in more than that standard deduction amount, you can do that all in one year. Whereas if, let's just give a scenario, let's say you give $5,000 a year to a charity, it would take you five years worth of gifting to get above that standard deduction, right of $25,000, you could essentially pile that into one year, get the deduction in year one, and then do your gifting for the next five years out of that fund.

Benjamin Haas  08:50

So where do you find an entity like that?

Adam Werner  08:53

Just walking down the street {sarcasm}. If you look to the left, no, a lot of institutions have them. So it's usually through either an already charitable organization may have a component to it, but we see it in our world, a lot of investment providers have the charitable side to them and they can run these types of entities.

Benjamin Haas  09:15

So it really could be as simple as I want to transfer X amount of shares of an appreciated security into this entity so that I could get a deduction.

Adam Werner  09:24


Benjamin Haas  09:25

Then you are going to be able to dictate how much goes out and gifting later in life.

Adam Werner  09:31

Yes, precisely.

Benjamin Haas  09:33

Okay. So I see that as being really beneficial for a Kim of the world who may have decided that, hey, I'm going to offset a Roth conversion or I'm going to offset another large taxable event where maybe I had to sell an appreciated security. I can offset those types of taxable events in my life with some sort of bigger charitable gifts to an entity that's not going to require a bunch of attorneys to set that up or anything.

Adam Werner  10:05

No, no, it's pretty simple and straightforward. You can handle it yourself, or obviously, we play a role there too. But it's directly with, like I said, either an investment provider or charitable organization.

Benjamin Haas  10:18

Then I'm thinking again of Kim and I do have a certain client in mind who, maybe the question is, well fine but what if it was going to be a bigger lump and I may not be as comfortable irrevocably giving that away, meaning that once I gift it, I have no retained interest in it.

Adam Werner  10:40

That's a good point. With a donor advised fund, whatever that gift is, it's as if you're giving it to charity at that time. There's not a scenario where that's going to come back on to your balance sheet, you are irrevocably gifting that away. So I'll pose the question back to you if not giving it away completely and it's not coming back, are there other entities where you can give to charities and have a charitable deduction, but then retain some sort of either income back to me or the asset will come back to me at some point?

Benjamin Haas  11:16

Sure and I think that's where you can do that on your own or, like you said, there are going to be certain charitable institutions or even public institutions that will offer you some sort of charitable trust structure where you're making some sort of gift, but you do have either an income interest or where that money could come back to the family estate when you pass away and that it's not 100% gone. We see that more frequently with somebody that says, well look, I really wanted to leave money to charity at my passing, but, gee, if I gift this away and don't have that money, am I going to be sure that I have a solid enough income stream at the end of my life when maybe, there are health care bills, there are increased expenses? Well, that's where some sort of charitable entity, a charitable trust you can say, I want this balance to go to a charity when I pass away but in the meantime, pay me 5% every year, and that's certainly going to help offset some bills. So that exists.

Adam Werner  12:26

So in that scenario, how does that work, then from a tax perspective or from a deduction perspective, if you have that retained interest?

Benjamin Haas  12:36

This is where I guess we would go back to Financial Planning and Priorities because you have that retained interest, your financial planners, wink, wink, nudge nudge, do some work on the front end to say you're not going to get as big of a deduction, the IRS is going to say, here's the income based on your age and formulas that we anticipate based on our formula having for the rest of your life and therefore, we're not going to include that in the deduction. It's not the most efficient way to get a lump sum deduction but again, it checks the box of maybe filling some sort of other priority like income and it doesn't need to be income to you, it could be income to support somebody else in your life. There are many creative ways to utilize an entity like that, again, let's keep the main thing the main thing and that is to be charitable. But it is not just lump sum giving money to a charity on day one, like I think we naturally think about gifting. I could say something else about that real quickly. We talked about that income interest, you could flip that around, there are entities out there, where if your objective is to make sure that a charity is getting the help now as opposed to through your estate or when you pass away, you could put money aside in an entity that's going to give them the income stream. Then when you pass away, whatever is left comes back to the family or your heirs. So again, I think it comes back to Kim's priorities in this situation with how we structure that.

Adam Werner  14:14

I was going to say that deciding which one fits really does come down to personal preference and what fits Kim's situation at that time and what does she prioritize?

Benjamin Haas  14:28

That could be as easy, your joke about walking down the street. If your alma mater, your favorite charity may have one of those already structured where the onus is not on you to create that entity or have responsibility on an annual basis with tax filings. Those exist out there, if it is to create your own entity in order to accomplish some of those things and maybe have more flexibility or include multiple charities, then It's not as simple as that Donor Advised fund that would probably require an attorney to set up an entity, a tax preparer or a trustee, let's say to be responsible for the taxes and the reporting every year. Again, it would have to meet priorities that are more important than also having that maintenance there.

Adam Werner  15:22

I think that part of the discussion and even figuring out which one fits best, part of that conversation comes down to how much control does Kim want over those charitable gifts while she is living? So can you maybe go into the pros or cons or just how they are different from that aspect?

Benjamin Haas  15:50

I often think based on our conversations with clients on gifting that, again, the natural reaction is just to write that check and you know exactly the entity that's going to get it. They're going to give you some sort of tax letter that says, thank you so much for your gift, we appreciate it. By the way, we are a charitable organization, keep this for your tax records. Donor Advised funds, really your control over that may not be as much as you would want in that there is different tax code rules on is this a charity or a supporting organization of another charity? Is it not? We're going to get deep into the weeds here but you are really giving control to the institution that has that Donor Advised fund to follow through on your exact wishes. It's not unlike that with a charitable trust. Clearly from an IRS standpoint, these institutions need to have that 501c3. It's not giving to individuals. There are some guardrails to that I should say.

Adam Werner  17:00

I've heard a lot about a private foundation and you certainly hear it. I mean, I hear it in the news, I see it in on Facebook and Twitter. I see it in the vein of professional athletes starting their own foundation. Do you need a huge estate to start your own foundation and really start to control your gifting at a maybe a more local level?

Benjamin Haas  17:25

Historically, I think the answer that is yes. Then your joke on a million dollars, you know? I think in our experience, a foundation, the reason that clients may consider that would be their different priorities. That they want to have a broader structure on what those annual gifts would look like on an annual basis. Maybe it's not so much about the income for them, like a charitable trust but it's more about the ability to make decisions every year on, Are there going to be new grants that I'm going to give out or are there going to be new charitable gifts that I can give? Even more importantly, a foundation is an entity that's living well beyond any individual. That is its own thing that's not tied to Kim in this sense. Kim passes away, well the Foundation has a board probably, people that can make those decisions. Kim in that sense, maybe wants to include other family members to be a part of that family legacy of gifting and that's a way to do it. I would say it's about probably a higher level of wealth, a million dollars or more, we'll throw that out there. I'm sure there’s foundations that have $250,000 or $500,000. But just like a charitable trust, it may require certainly more legal work on the front end and is certainly going to probably require more tax work. You almost have to think of that, like a business and for that reason, the upfront expense of starting that, we wouldn't want people to take that lightly and that's maybe why it usually includes a little bit more money.

Adam Werner  19:10

So with all of that said, what's our role in this process in terms of helping people navigate all of these options?

Benjamin Haas  19:22

Such a loaded question and I love it.

Adam Werner  19:24


Benjamin Haas  19:26

Financial Planning, right? Hopefully even in these 15 minutes, there are many different ways that charitable gifting can go and it comes back to priorities and that's really the whole point of financial planning. It's that there is no straight line to these things and there is no right or wrong answer crystal clear for any one individual. It's going to come down to the give and take of what matters most and what doesn't. Certain things are going to change over time but if we can keep the main thing, the main thing, what we are about and how we are supposed to help our Clients is find the smartest, most efficient way to go about doing ultimately what they want to do. For some people that's as simple as continue to gift annually and do it through cash. For some people, let's do it through securities or through our IRA, and then per the podcast today, some people it's going to be, let's explore some entity that can meet those goals. What else would you say to that?

Adam Werner  20:31

Nothing else, you said at all.

Benjamin Haas  20:34

I love it when I get it right. So I think that was a summary in itself. Is there anything that you would like to add?

Adam Werner  20:43

I will add, if anybody's thinking along these lines or anything we talked about sparks their interest, give us a call. We'd love to have that conversation and help give some direction and maybe find something that fits.

Benjamin Haas  21:03

Yeah, absolutely. Thank you for the time.

Adam Werner  21:07

Thank you. Happy Holidays!

Benjamin Haas  21:08

Happy Holidays to you and to all! Hey everyone, Adam and I really appreciate you tuning in. Please note that the opinions we voiced in the show are for general information only and are not intended to provide specific recommendations for any individual. To determine which strategies or investments may be most appropriate for you, consult with your attorney, your accountant, your financial advisor, or tax advisor prior to making any decisions on investments. Thanks for listening!

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