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Use a Donor Advised Fund to Save on Taxes
Episode 4721st December 2021 • Financial Planning for Entrepreneurs and Tech Professionals • Mike Morton, CFP®, ChFC®
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A Donor Advised Fund (DAF) is an account that you own and manage, just like your brokerage account.  The difference is how it’s treated when it comes to paying taxes.

Money that you put into the DAF is treated by the IRS as having been given away to a non-profit organization, even though it’s still under your control.  That means you get to deduct it from your income and pay less in taxes!  Eventually, the money in your DAF must be given out to charities, but you can do that over the next months and years.

The big benefit of this account is when you have a year with a very high income.  If you are charitably minded, go ahead and donate 3-4 years’ worth of giving into the DAF.  That means you save more on taxes, while still supporting your favorite organizations over the coming years.

Find out more about Mike at https://www.mortonfinancialadvice.com and connect at https://www.linkedin.com/in/mwsmorton/

Transcripts

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[00:00:16] Mike: Hey, Matt, it's always great to be here. 


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If not, with the trends out there in the world, we are, we are totally hip we're. So hip, we can't walk because , you know, what's really big these days reboots. And what we're going to do today is a reboot. I know you have talked on your podcast before. About the topic of donor advised funds, but here's the good news. 


We're about to do it better. We're rebooting this with an updated modern cast. There's a twist. I think M night Shyamalan is involved. It's going to be great. I know all of his movies have been terrible since the sixth sense. I don't care. The point is we're talking about donor advised funds and I understand this is actually a really interesting topic. 


Even if you have no idea what this is, or if you think it probably doesn't apply to you, maybe it does. What are donor advised funds? 


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And I do have quite a few of these clients that are just great savers and they've done a tremendous job. Saving for retirement. So they have quite a large portfolio ready to support, you know, their retirement and everything that they want to do. And lots of flexibility for doing things. So they love to give to charities and they do maybe $10,000. 


That they will give out to charities and a donor advised fund. What we are talking about is an account that you own and just like your IRA or your brokerage or your checking and savings, it's in your name. And you can put money into this account. And when you do it's as if you gave it to charity from an IRS perspective. 


So from a tax perspective, it's as if you've given money directly to the charity, And so you get to take it off your taxes. We'll talk all about that, but then it's still your account. You still kind of own it and manage it. And over time, the money does have to go to charities, but you can decide how to do that over time. 


So back to my client, he's got his last couple of years before retirement, they're making she's, they're doing really well. Her long career, maybe 500,000. Of income this year. and if he does about 10,000 a year in charitable giving, I was encouraging him you know, like I said, it. Maybe it could do some more feel really great about that. 


So I was encouraging him to put into the donor advised fund 50 to a hundred thousand dollars this year. So from his $500,000 of income, if he puts in a hundred thousand, he'll get to deduct a hundred thousand and pay taxes on just 400,000 of income saving, probably $30,000 of tax. 


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[00:03:13] Mike: Okay, so you put in a hundred thousand, you save 30,000, the cherries will still get a hundred thousand. 


nor advised fund this year in:

So really up into his, his yearly contribution to charities, he saves massively on taxes this year. So it's kind of a win all the way around. 


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To let your kids completely dissipate all of your hard work later in their life. So you may have applied yourself to business or, you know, doing something in manufacturing, you know, real work that involves getting callouses on your brain or your hands. And they can go to college for, you know creative writing or something and totally waste all the resources that you've built up in life or. 


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[00:04:21] Matt: I pretty much, pretty much. I mean, that's one option. The other option is you could do what your client is doing. You can have an awesome retirement. You can give appropriate amounts of intergenerational wealth to, to help your kids and your grandkids. And you can do awesome things like turn your lifetime of heart. 


And do a lot of good in the world, which, you know, look, you're mentioning the holiday season. All the Christmas Carol versions are on TV right now. This is the lesson, right? Is turn your hard work into charitable giving. Don't be Ebeneezer, Scrooge. So first thing to unpack besides my little rant there. 


Wait a second. Are you saying that you get to create your own charity? Like you get to create your own fund. That's basically a charity you give to this. It's like, I've just given to Matt Robinson, charitable enterprises they get to 


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[00:05:10] Matt: That's right. Yeah. I'm a charity. 


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organization. 


But in the meantime, It's an account that you own, and you can manage the money within that account. So it is your own donor advised fund and you do name it, Matt. So you could be the charitable enterprises. 


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Good. Just start there, like, why is this good? So why is this good? Why is this a better option than just giving to charity right off the bat or I don't know, doing something else with your money. 


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This year, that's about to go to zero. In the next couple of years. So they'd rather give lots of money. 


away. Now save that 30% on their taxes and then have the money to Dole out over time. And that's really one of the tax strategies for this account. But that's really, for me, that's the big reason, rather than having to go through and set up your own private foundation and go through a bunch of loops and stuff who, you know, jumped through stuff, you can just do this right away and the other, and there's all kinds of ways that might make sense for you. You've got a big bonus this year. Your company got bought, you had an IPO and you're selling stuff. Like there's all kinds of situations where you have a really high income year. And so this is a strategy that you can use. You can use this type of account for really saving on taxes. 


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I believe in, you know, society it's brought us a lot of good things like, you know, protection from wolves and whatnot. I mean, I like the 


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[00:07:54] Matt: Well that's because we have a society, man. That's because, you know, we 


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[00:07:59] Matt: like yeah, like roads, you know, I know where we're going. We don't need roads. 


I'm like, I kind of believe in all that stuff. So I'm not like, I don't think like taxes are evil, but what I like is that what you're saying is essentially, it's just kind of a waste, you know, there's a lot of good you can do with your money in the world and you get some control of this and what you're really getting. 


Is some leverage. So , it's saving on your taxes, but it's also about leveraging more. I mean, another way of using the example of your clients is, you know, they're going to give a hundred thousand this year to a donor advised fund, and they're only going to, because they're going to save 30,000 on their taxes. 


It's only a $70,000 hit to them. But the key part of the sentence is that the charities still get the hundred thousand. So you're basically magnifying the impact of your charitable giving. Another way of saying it is, well, you know, my total budget. To give is a hundred thousand. So you could actually give more than that. 


And because of the tax savings, it will dial back down the net impact. You will be a hundred thousand. So you're basically just magnifying the impact of what you can do. 


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To think through and say, wow, what is really important to you? And can you maximize that? And I lose, like, it it's like automatic savings at the other end. If you're young, Hey, just put all, you know, maximize your 401k. You never see the money. You never think about it and it's gone. So I kind of feel the same way with these donor advised funds. 


Like, okay, I'm going to give away 10,000 or 50,000 or a hundred thousand. It's like, that's hard. But once you've given it away into the donor advised fund, Great. Where's it going like? And then I see people using it way faster than they were expecting to and then wrapping it up or whatever. So it's, it's really great from that perspective as well 


from a mental. 


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[00:10:12] Mike: Yup. Yeah. Yeah, you can do it anytime. So let's get back to some of the mechanics of the donor advised fund. I told you, you just open it up. So say you have your, your brokerage account at one of the big firms, fidelity or TD or Schwab or wherever they all have. These donor advised funds. You just log in. 


Open donor advised fund and a few clicks later, boom, you've got this new account, you know, with its own number and stuff. Then what you want to do is you can, you can put money in there. Like we just said, you could just transfer $10,000 of your cash, you know, over to the donor advised fund. And then therefore you have given away, you know, $10,000 for that year in terms of the IRS's eyes. 


Okay. In terms of tax planning, but better than just giving away cash, let's give away appreciated. Okay. So you bought Amazon stock 10 years ago. Congratulations. I hope you held onto it the whole time. That's that's awesome. And it's worth a little bit more now. So if you go ahead and sell the, those couple of shares of Amazon, you're going to have to pay capital gains tax. 


So you're going to, you're going to sell $10,000 worth of shares to donate $10,000. Well, you're going to pay 15% of that $10,000. So you're gonna pay $1,500. So you really only get to give away 8,500. But if you give away the two, the couple shares of Amazon stock into your donor advised fund, you log into your brokerage. 


You have easy drop-downs trust me that you just say, oh, I'm going to do these shares. They even tell you here's your most appreciated shares, which ones you want to donate. You click $10,000 worth of Amazon stock. All 10,000 goes into donor advised fund. You don't sell it so you don't have to pay $1,500 of taxes. 


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[00:12:03] Mike: That'll do good with your money, Matt. 


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And I know that I agree the way to think about this is. You know, you can give more to charity. That's really what this is about, but you also get these financial benefits for you. So whichever way support, comfortable to think about it. does sound pretty cool. So you were starting to rattle off now at the top of the show, you were saying you have literally today, this client who's in this situation where this is right for them, and you very quickly hit on a few other situations where this might make a lot of sense. 


I want to just dig into that for a second. Just to catch people's ear. When might, this makes super-duper sense 


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definitely want to explore it when you're charitably minus. When this is part of your, 


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[00:13:04] Mike: when you, when you like to support organizations you believe in. Okay. And when you have a high income year, significantly higher income year than your normal average year. 


Or your income is about to change I E retirement or taking a year off work or something like that. So , those two things. So charitably minded loved supporting organizations, my church, my nonprofits, whatever it is. And you have a significantly higher income in one, one year this year versus other. 


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[00:13:40] Mike: there, there is one other scenario that I don't want to get into today. Cause I know we're going to run out of time. I still have some, some points I want to get to it. I mentioned this in a previous one, we said we're going to do an episode on the bunching strategy. Okay. That comes into play with the donor advised fund. 


And that applies to just the people that are charitably minded. Don't have to have super high income year, but people that are charitably minded that giveaway money. $5,008,000 a year. You know, even on that order donor advised bunching strategy will be a good one for you. And I don't want to explain it today. 


We're going to do an episode on it, but if that, you know, hits you in the right way, just do a Google search, bunching strategy, donor advise fund, you'll find it. 


And it's really good. One. 


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There's so many needs. In the world. And look, if you live, especially in a big city, like I grew up in New York city and it was always hard for me to decide what do I do with people who are asking for money on the street? It really bothers me. It's, it's kind of my number one charitable issue that bothers me the most that I want to do something that has an impact. 


One thing that that advisers say, and they recommend is set aside. Make a budget. And look, if that involves handing money to people on the street. Great. That do it. But if you want to have a plan, that's going to take care of your desire to help people in those kinds of situations, do it as part of a plan charitable giving program. 


And it sounds like a donor advised. Falls right into that rubric, but let's put that in the parking lot for a whole other episode on bunching. Cause I think that's a great conversation to have. I know we've only got a few minutes left, so I do want you to be able to hit those other points that you wanted to bring in to the donor advised fund discussion. 


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Same with charitable giving. If you want to do a 25 bucks. You know, and feel great about that. Cool. You know, that's the plan. And so having a plan is just really critical for the mental aspect of financial planning. So on the donor advised fund, just a couple of nuts and bolts, we talked about opening the account super easy donated, appreciated stock is often a great way of going again, saving that 15 even 20% on not paying capital gains. 


What happens there. So you go in. You say, I'm going to donate these a few shares of Amazon stock over to my donor advised fund. It's literally a couple of clicks. They will go into the donor advised fund. You'll see them there, but they'll sell them. Okay. 


So in the donor advised funds, you don't own kind of individual stocks and funds and things. 


They're commingled pools of money. All right. That's just a fancy way of saying that you can choose the mix of stocks. Within your donor advised fund. I told you, it's your account. It's got a number. It's got your name on it. You named it. Matt. Robeson's enterprising charitable giving. And so you can choose. 


I want to be super aggressive. I'll go a hundred percent in the stock market, or I can go super conservative, a hundred percent just cast. Or anywhere in between. All right. So you can decide the mix of the portfolio within that account. And you want to do that with an eye towards when you're going to use the money, just like everything else we talk about on the show. 


If you're going to spend the money, you know, if you're going to give it to charity 10 years, plus from now, you can be more aggressive. If you're giving it out next year, you want to be more conservative. Okay. 


But you can decide. And then what happens is the money sits there. Your $10,000 now is sitting there invested and over time, whenever you want, you can log in and give some money. 


All right. And the way you do that is by doing a grant recommendation within the interface you say, yeah, my local church or this big nonprofit or whatever it is, I'd like to give them $1,500, a couple of form things. You fill out, click the button and usually 24 to 48 hours later, they'll say, great. We've sent the check. 


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[00:18:02] Mike: Yes, you can. Yeah, you can put in recurring monthly or yearly the amount, all kinds of stuff. Yup. You can do that as well. And super easy to set up. And I would say this before doing the donor advised fund, I always recommend if there are specific charities that you like to support, go ahead and make sure they're on the list. 


I mean, I'm sure they will. But I wouldn't want you to be in a situation where, because the donor advised? 


fund, they only, only quote unquote support thousands of nonprofits and charities that are in their database. And so just make sure that whatever, if you have a specific one, just make sure that that's going to be on that. 


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[00:18:41] Mike: No, that's pretty much it. I mean, it's you know, fairly straightforward. It's a new account, donate stuff, appreciated stock, and then you get to take it. Whatever you donate into the donor advised fund comes off of your taxes now in taxes. And again, this will be in the bunching street strategy. 


Episode taxes are a whole nother situation. Investing his opinion, but taxes are facts and they are complicated. And so you may or may not be getting a deduction for your charitable giving. I'm just throwing that out there. If you take the standard deduction, then this, the charitable giving is not coming off of your taxes. 


And that's where plug for the bunching strategy is going to come into play. 


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[00:19:28] Mike: Thanks, Matt. Thanks for joining us on financial planning for entrepreneurs. If you like, what you heard, please subscribe to and rate the podcast on Apple iTunes, Google play Spotify, or wherever you get your podcasts. You can connect with me on linkedin or mortonfinancialadvice.com. I'd love to get your feedback. If you have a comment or question, please email me at financialplanningpod@gmail.com. Until next time thanks for tuning in