Mark and Susan had given money to charity every year of their 35 years together – it’s a line item in their budget that never gets missed. They’ve also been responsible investors and were just about ready to retire or, as they put it, “take on full time grandparenting”. They came to us for help with two goals:
- Make sure we don’t outlive our money in retirement.
- Find ways to increase our giving if we can afford it.
We found that they had saved more than enough to meet their retirement goal – always good news! After walking through recommended strategies to provide their retirement income, we moved on to their charitable goal. Here’s a bit of detail on their historical giving:
- Mark and Susan had a $40,000 annual giving goal.
- Most of their giving came from company stock accumulated over the years from Susan’s career as a marketing executive.
- They generally sold $45,000 in stock, set aside $5,000 to pay the capital gain tax, and donated the remaining $40,000.
The bottom line? Their favorite charity gets a $40,000 donation, Mark and Susan get a $40,000 tax deduction, and the IRS gets $5,000 in taxes. Fortunately, Mark and Susan – and their favorite cause – have an opportunity to increase the impact of the same dollars through a Donor Advised Fund, or DAF.
What is a Donor Advised Fund?
A Donor Advised Fund is a charitable investment account used in three steps.
- Make a tax-deductible donation. You can give cash, stocks, mutual funds, real estate, or even interests in private businesses and receive an immediate tax deduction. This is an irrevocable donation and funds must be used to make contributions to charities.
- Grow your contributions, tax-free. Your donation will no longer be subject to taxes of any kind. You can continue to grow the investment or sell immediately – with no capital gain tax due.
- Give flexibly to charities you care about. You can give to almost any IRS-qualified charitable organization directly from your DAF now or over multiple years.
The Donor Advised Fund allows for an upfront tax deduction, eliminates taxes you would otherwise pay on capital gains and income. So, what was the impact on Mark and Susan’s situation?
Increased donation through reduced taxes
By gifting their stock to a new Donor Advised Fund, they were able to save the capital gains tax bill and pass that along to their charities. When added to their original giving plan, here was the impact:
- Mark and Susan gave the $45,000 in stock directly to their DAF.
- Once in the DAF, they sold the stock and donated the full $45,000 to charity.
- They saved the $5,000 in capital gain tax and donated that to their charity instead.
- They received a tax deduction for the full $45,000 donation.
When the adjustments were made, they increased their giving by 12.5% without it costing them anything more. They also increased their tax deduction which allowed them to add to their retirement goal. With a few small tweaks, they increased giving, reduced taxes, and added to their retirement!
About the Author
Zach graduated from Gonzaga University with degrees in Marketing and Finance. While growing up, Zach heard stories from his grandfather about his work as an insurance agent, and other stories from his dad who was an investment manager. They both spoke financial “languages” but had completely different dialects. Recognizing the breadth of the financial vocabulary ultimately led to Zach’s passion for financial planning. He credits his family for this enthusiasm. Zach sees his time with clients as an opportunity to translate all of the different – and often confusing – information they’ve heard and provide clear guidance for each unique situation.
Zach enjoys working with people – his clients – who also appreciate that their financial decisions have an impact not just on themselves, but also on their families, charities and their own life legacy. Many of Zach’s clients have a strong desire to “make a difference”, and they rely on his financial expertise to magnify their philanthropic goals.
The “Alterra” name was coined by joining the Latin roots “alter”, the origin of the word “altruism” with “terra” meaning earth or land. This name reflects the company philosophy of “clients before profits” and providing firmly grounded advice.