Using Donor Advised Funds To Achieve Your Philanthropic Goals

Yfat Yossifor

A Donor Advised Fund (DAF) is a simple, flexible, and tax-efficient way to give to your favorite charities. Consider three examples of DAFs in action:

Temporary surge in income. As a senior executive at a major corporation, Sally’s compensation package includes annual stock option grants that vest over four years. Sally decided earlier this year to exercise some of her vested stock options and use the proceeds to purchase a second home and add funds to her investment accounts. Because gains on stock option sales are taxed as ordinary income, Sally was looking for a way to reduce the tax bill on her temporary surge in income. A regular contributor to various philanthropic causes, Sally elected to pre-fund 5 years of charitable donations in a DAF. Because DAF contributions are treated as a gift to a public charity, the donor receives an upfront tax deduction while the distributions to charities can be postponed to a later date.

Helping charities who cannot accept appreciated securities. Donating appreciated securities rather than cash is a popular way to support charities. By doing so, the donor avoids paying capital gains taxes on the increase in value while simultaneously receiving a tax deduction equal to the value of the appreciated securities. But many charities, especially smaller ones, may only be able to accept cash. Funding a DAF with appreciated securities, which are then sold, can be a tax-efficient way to get proceeds into the coffers of charities who only accept cash.

Rebalancing an investment portfolio. John and Laura, now in their early 70s, had a large investment portfolio, but it was highly concentrated in just a handful of stocks. To reduce their risk, they elected to lower their concentrated positions and redeploy the capital into a more diversified and lower risk investment portfolio. To help lower the long-term capital gains taxes they would pay on the sale of the securities, they contributed appreciated securities to a DAF to pre-fund future charitable contributions. Like Sally in the first example, this enabled them to get an upfront tax deduction.                  

How do DAFs work in practice?

With a DAF, you transfer your assets, watch them grow, and decide which charities to contribute to when you are ready. DAFs are a particularly good choice for year-end giving if you are still not sure which charities to support.

Make a tax-deductible donation. Donate cash, stocks, bonds or more complex assets like real estate, private business interests and private company stock and get your tax receipt. You will be eligible for an immediate tax deduction based on the fair-market-value of the donated property. The DAF platform provider you select will then sell the contributed assets and credit your account with sale proceeds.

Support charities that are important to you, now or over time. You can use money in your DAF to support any IRS-qualified public charity. The DAF platform provider sponsoring your account will conduct due diligence to ensure the funds granted out of your account will be used for charitable purposes and is IRS-qualified.

Grow your donation, tax-free. While deciding which charities to support, you can elect to have your account invested in different investment products, creating the potential for even more money to be available for distribution to charities of your choice.

You cannot fulfill a pledge with your DAF. This rule is based on semantics. When a pledge is considered legally binding and a financial obligation of the donor, and the pledge is fulfilled using a DAF, the donor is viewed as getting a benefit from the DAF.  This violates the Internal Revenue Code.  However, a donor can set up recurring gifts from the DAF if there is no legally binding pledge behind the gifts. Fidelity Charitable, for example, recommends that donors avoid language with fund-raisers that imply a pledge and replace it with a non-binding letter of intent. For more on this topic, click here

How popular are DAFs?

Congress created the legal structure for DAFs in the late 1960s, but it took time for the concept to grow in popularity. It has since become the fastest growing charitable giving vehicle in the United States.

The National Philanthropic Trust, a non-profit focused on charitable giving, reported that $85.2 billion of charitable assets were held in approximately 285,000 DAF accounts in 2016. Total contributions to DAF accounts last year totaled $23.3 billion, with $15.8 billion being paid out to various charitable organizations.  

Some of the biggest DAF providers include Fidelity Charitable, Schwab Charitable, and Vanguard Charitable. All of them have user-friendly web platforms that make donating and granting easy.

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Dalya Inhaber, Ph.D., CFP ® is a financial advisor based in New York. She is the founder of Minerva Wealth Advisory, a Registered Investment Advisory firm. The mission of the company is to provide clients with tailored and unbiased financial planning and investment management. Dalya holds a Ph.D. in economics and statistics from the University of Michigan.  The firm is named after Minerva - the Roman goddess of wisdom and knowledge. Minerva is often depicted with her sacred creature the owl, whose keen eyesight helps her navigate a path forward.

Negotiating Major Charitable Gift Agreements

Americans are extraordinarily philanthropic. The Charities Aid Foundation recently ranked the United States first among twenty-four countries based on the value of charitable giving when expressed as a percent of GDP.

Individuals sometimes find themselves in a fortunate position where they can consider making a major charitable gift. Perhaps they received a substantial inheritance and now want to share some of it with a non-profit where they have been active. Or they recently sold a family business and want to use some of the sale proceeds to fund a merit-based scholarship program at a university they attended. While the motivations to be generous are various, gifts of this magnitude necessitate entering into a gift agreement with the non-profit. A carefully negotiated and well-drafted agreement is essential for the donor to have a fulfilling charitable experience.

What goes into a gift agreement?

Most charities have routine gift agreements that specify the obligations and rights of the donor and the charity. The larger the gift, especially when compared to other major gifts received by the non-profit, the greater the negotiating leverage of the donor. Gift agreements should memorialize the goals and objectives mutually agreed to by the donor and charity, along with building in some flexibility in case of unforeseen circumstances. In a recent white paper, UBS highlighted a variety of issues that can be addressed in a gift agreement:

· The charity’s use of the gifted assets

· Recognition for the donor and/or the donor’s family (i.e., naming rights, publicity)

· Permitted participation or monitoring by the donor of the use of the funds. For example, if the donor is endowing a professorship, it is unlikely that the donor will have any role in selecting the professor. In the case of a scholarship, the donor may be able to serve as part of a selection committee or have some say in the recipients of the scholarship.

· Ongoing reporting obligations of the charity to the donor

· Measurements for success of the donor’s goal (incorporating realistic short-term and long-term benchmarks)

· Mechanisms to modify the agreement by the parties

· Alternative plans and procedures if the original purpose of the gift becomes impractical or impossible to sustain

· Circumstances under which naming rights might be changed (i.e., if the donor receives negative publicity)

· Terms and circumstances under which the charity may sell the gifted assets

Who should a donor consult when negotiating a gift agreement?

Donors can potentially receive substantial tax benefits associated with their charitable gifts. For example, a New York City resident in the highest income tax bracket in 2017 could potentially receive an income tax benefit equal to almost 50 percent of the value of their charitable gift. But the tax benefits can vary dramatically based on individual circumstances. As a result, it is vital that donors include their financial and tax advisors in their gift negotiation team, along with a qualified lawyer.

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Dalya Inhaber, Ph.D., CFP ® is a financial advisor based in New York. She is the founder of Minerva Wealth Advisory, a Registered Investment Advisory firm. The mission of the company is to provide clients with tailored and unbiased financial planning and investment management. Dalya holds a Ph.D. in economics and statistics from the University of Michigan. The firm is named after Minerva - the Roman goddess of wisdom and knowledge. Minerva is often depicted with her sacred creature the owl, whose keen eyesight helps her navigate a path forward.

A Better Way to Give – Using Appreciated Securities Rather Than Cash

Andy Warhol,9 Dollar Bills, 1982

With the stock market at record highs, many people have substantial long-term capital gains in their investment portfolios. When it comes to being generous with charities or family members, using appreciated securities is sometimes wiser than using cash. Let’s consider two important cases.

Charitable Giving

Suppose you want to make a $5,000 contribution to a charitable organization. You write a check and get a $5,000 charitable deduction. Assuming you are a NYC resident in the 33 percent federal tax bracket (making approximately $200,000 to $400,000) who itemizes deductions, you save approximately $2,200 in federal, state, and local income taxes.

Instead, suppose you have appreciated securities in your portfolio that you would like to sell, perhaps to lower your equity exposure or simply rebalance your portfolio. When the securities are sold, you will need to pay capital gains tax on the appreciated value. If you are in the 15% capital gains tax bracket and live in NYC, you will pay approximately $.25 for every dollar of appreciation. If the securities you are considering selling have doubled in value (which is not unusual in the eighth year of a bull market), then selling $5,000 of appreciated securities will create $2,500 in capital gains and a capital gains tax of approximately $625.

However, if the $5,000 in appreciated stock is donated to the charity, then you still get the $5,000 deduction and the associated income tax savings, but also save $625 in capital gains taxes. For these reasons, appreciated securities are often a better way to make charitable donations. 

Gifting appreciated securities to your children or grandchildren

Suppose you want to gift your daughter $14,000 per year as part of your estate plan. Under current law, you can gift $14,000 a year per individual and maintain your estate tax exemption amount.

If you gift $14,000 of appreciated securities, you will not have to pay capital gains taxes nor gift taxes. You have just gotten $14,000 out of your estate without incurring any taxes. However, your daughter receives the securities at your original cost basis. When she sells the securities, she will have to pay the capital gains taxes. So effectively, the capital gains taxes were transferred from you to your daughter, who still comes out ahead because she received a gift, but the gift is potentially worth less than $14,000 when she nets out the capital gains taxes. Since the tax is not avoided, why do this at all?

The answer depends on your child’s tax bracket. If your child just graduated from college and will work full time for only part of the year, then it is likely that her capital gains tax will be zero if she sells the security during that year. As long as your child’s capital gains tax bracket is lower than yours, your family will save on capital gains taxes even if you don’t avoid them altogether. For this strategy to work, your child must sell the securities while her income is low. If she holds on to the securities and sells them after her income has increased as she matures in her career, then the strategy won’t work.

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Dalya Inhaber, Ph.D., CFP ® is a financial advisor based in New York. She is the founder of Minerva Wealth Advisory, a Registered Investment Advisory firm. The mission of the company is to provide clients with tailored and unbiased financial planning and investment management. Dalya holds a Ph.D. in economics and statistics from the University of Michigan. The firm is named after Minerva - the Roman goddess of wisdom and knowledge. Minerva is often depicted with her sacred creature the owl, whose keen eyesight helps her navigate a path forward.

What Does It Take To Be a 1-Percenter?

I went in search of information on what it takes to be in the top 1 percent. The answer depends dramatically on where you live and whether the focus is on income or wealth.

What does it take to be in the top 1 percent in the world? Based on income, you need to make $32,400. To make the cut based on wealth, which includes everything from the equity in your home to the value of your investments, you need net worth of $770,000. Given that median household income in the United States was $55,775 in 2015, does this mean that most U.S. households are in the top 1 percent? It does. It reflects a very wealthy U.S. population of 324 million relative to a worldwide population of 7.4 billion.

In the United States, what does it take to be in the top 1 percent based on income? Nationally, a family needs an income of $389,000 to get into the top 1 percent. But the cutoff point varies considerable by state. The highest cutoff is in Connecticut, where residents need $660,000 to make it into the top 1 percent, while in Kentucky, they only need $268,000. The highest and lowest states based on cutoff points are shown below.

What is the cutoff point in the U.S. based on wealth? To be in the top 1 percent based on wealth, a household needs to have net worth of $7.9 million. But to be in the top 10 percent, the cutoff point is much lower at $942,000.

Sources: The worldwide wealth and income estimates are from Daniel Kurt, “Are You in the Top One Percent of the World?” Investopedia, July 20, 2016. The income cutoff points by state are from Estelle Sommeiller, Mark Price, and Ellis Wazeter, “Income inequality in the U.S. by state, metropolitan area, and county,” Economic Policy Institute, June 16, 2016. The wealth cutoff points for the United States are from “Nine Charts about Wealth Inequality in America,” Urban Institute Report. Available at http://apps.urban.org/features/wealth-inequality-charts

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DISCLAIMER:  This information is not intended to provide legal or accounting advice, or to address specific situations. Please consult with your legal or tax advisor to supplement and verify what you learn here. This is presented for informational or educational purposes only and does not constitute a recommendation to buy/sell any security investment or other product, nor is this an offer or a solicitation of an offer to buy/sell any security investment or other product. Any opinion or estimate constitutes that of the writer only, and is subject to change without notice. The above may contain information obtained from sources believed to be reliable. No guarantees are made about the accuracy or completeness of information provided. Past performance is no guarantee of future results. 

Postnuptual Agreements: When to Get a Financial Planner Involved

Marriage is about love, but it is also a state-based contract with laws about how things will be divided up in the event of divorce. Most couples considering marriage don’t know their financial rights and responsibilities in the marriage and its potential dissolution. If they have significant assets or high incomes, they might consult an attorney for a prenuptial agreement (“prenup”). Everyone has heard about prenups: an agreement signed before marriage where both parties agree on how assets and income would be divided up in the event of a divorce or separation. But what if circumstances have changed since the wedding? The couple may consider a postnuptial agreement (“postnup”). In a 2015 survey conducted by The American Academy of Matrimonial Lawyers, half of the divorce attorneys noted an increase in the number of spouses seeking postnuptial agreements.   

What is a postnup? 

A postnuptial agreement is a contract signed by a married couple that details how the couple’s assets and income would be divided in the event of a divorce or separation. The most commonly covered items in postnup agreements, as per the American Academy survey, are property division (90 percent of the postnups), alimony/spousal maintenance (73 percent), retirement accounts (45 percent), and occupancy of the marital residence (30 percent). 

How a Financial Planner Can Help

When couples want to protect their rights to specific assets, the goal of the postnuptual agreement is straightforward, even if the negotiations aren’t. When the agreement addresses several assets and support, a financial advisor may help the client avoid pitfalls. First, not all equally valued assets are equal. For example, assets may produce different amounts of income at different times and the tax treatment of the assets will not necessarily be equal. As examples, an investment portfolio will contain securities with different levels of unrealized capital gains; withdrawals from IRAs are fully taxable as income while withdrawals from Roth IRAs are tax free. 

In addition, assets such as homes, require cash flow to maintain. If the primary residence is sold after a divorce because of a lack of income, the capital gains exemption will now be $250,000 for a single owner instead of $500,000, for a married couple. 

Long term considerations also need to be taken into account. Would the settlement be sufficient to meet the client’s goals through their retirement years, or will it support them only for the next five or ten years?  How will Social Security benefits, which are not negotiable, fit into the overall plan? If a postnup does not provide for a client through retirement, then he or she may need to reassess their career plans.

When should postnups be considered?

1. Roles or Circumstances Have Changed. As the marriage and the couple mature, their finances may become more sophisticated or one of them would like to take a different role at home or with their career. If one of the spouses does not want to be constrained or surprised by guidelines on division of property or support in divorce law, they may want to consider a postnup. Two examples are leaving the labor to raise children or moving to another country as an expat spouse.
2. Revisions to prenups. Over the past 30 years, prenups have become much more prevalent across the United States. Circumstances change, which can lead a couple to enter into a postnup to modify prenup contract provisions. For example, at the time of marriage, one party may have felt strongly about keeping a family vacation home as a separate asset. But with the passage of time, they now want the vacation home to be a joint asset.
3. Infidelity. When discovered, it can raise serious issues about whether the marriage will survive. Some couples use postnups as a healing tool. They recommit to the marriage, but do so with eyes wide open about what will happen if either party elects at some future date to end the marriage.
4. Financial Infidelity. As examples, one spouse has incurred debts, mortgaged the family home, failed to pay income taxes or invested in risky ventures without the knowledge of their spouse. These actions are usually perceived as betrayals, and a postnup can provide the deceived spouse with some needed reassurance about their financial security if they choose to remain in the marriage.

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DISCLAIMER:  This information is not intended to provide legal or accounting advice, or to address specific situations. Please consult with your legal or tax advisor to supplement and verify what you learn here. This is presented for informational or educational purposes only and does not constitute a recommendation to buy/sell any security investment or other product, nor is this an offer or a solicitation of an offer to buy/sell any security investment or other product. Any opinion or estimate constitutes that of the writer only, and is subject to change without notice. The above may contain information obtained from sources believed to be reliable. No guarantees are made about the accuracy or completeness of information provided. Past performance is no guarantee of future results. 

Managing the Financial Affairs of Elderly Parents: Framing the Issues

Many of us are taking more responsibility for the financial affairs of our elderly parents. Some of our parents are now unable to monitor fully their investments and interact with their advisor effectively. The reasons are various, including visual impairments, physical impairments, dementia, or the loss of a spouse who handled the finances.

In the case of dementia, the need for the children to get involved can sneak up on everyone. In one case, the surviving spouse had for years been highly organized and was always on top of household financial matters. But as he got into his mid-80s, he started having more and more trouble sorting through his mail, filing his various financial statements, and throwing out unsolicited requests from nonprofits. Tasks that used to take him an hour started to take half a day, if not more. Soon piles of paper covered the den couch and table tops.   Even financially competent parents are not going to stay financially competent forever.

While the specifics of when and how you get involved overseeing a parent’s financial affairs are highly situational, the issues you will need to investigate are not. The purpose of this blog post is to frame the issues you need to assess. In future blog posts, I will take these topics and share insight and options you have for addressing them.      

 When you get involved helping to manage the financial affairs of your parents, you will likely need to spend time on some or all of the following eight topics:

1.       Investment portfolio. They are likely to have multiple investment accounts spread across a number of different financial institutions. Getting a bird’s-eye view of the investment portfolio is the first order of business so that you can understand how both the taxable and retirement accounts have been invested. Issues you may find include: excessive fees for actively managed mutual funds, large single stock positions, and inconsistency between the portfolio asset allocation and the likely drawdowns from the accounts.     

2.       Required minimum distributions. When you turn 70 ½, Federal law requires that you start taking what are called required minimum distributions (RMD) from your retirement accounts, i.e., your IRA and 401(k) accounts. Not only do you need to confirm that your parents have been taking these distributions, which are subject to complicated IRS rules, but also that they are taking the money from the right accounts.

3.       Insurance. It is not uncommon to find elderly parents who have accumulated a complicated portfolio of different insurance products: life insurance, disability insurance, long-term care insurance, liability insurance, and auto and home insurance. Often times, the agents they bought these products from have long since retired. Understanding what they have in place, which may have made sense years ago when the products were first purchased, can form the basis for figuring out what should stay, what should go, and what needs to be modified.

4.       Bill paying. Making changes to who and how bills get paid can be a particularly sensitive topic because many elderly parents see bill paying as a way of maintaining control. There are ways to partner up with parents on this fraught topic so that they feel a sense of control, while at the same time, the children can be assured that the bills are being paid and that there are no unauthorized leakages from the accounts. 

5.       Debt. Neither good nor bad: it all depends on the situation and circumstances. For example, if your parents will have a large estate with a lot of low cost basis assets, then it may make sense for them to take on additional debt to finance living expenses, gifts to grandchildren or philanthropy in their lifetimes rather than selling low cost basis assets and incurring capital gains taxes.

6.       Account titles and beneficiaries. It is something you need to be aware of because most of the time they are out of date and will cause a lot of headaches if not corrected before your parents pass. 

7.       Essential documents. There are three important documents that you need to make sure your parents have in place: a power of attorney, a health care proxy, and a will. If your parents have recently moved to a different state to be near relatives or moved into an assisted living facility, they will need new wills and perhaps will need to add revocable trusts to their estate plan.

8.       Working with your parent’s advisor team. Your parents are likely to have long standing relationships with many different advisors: the accountant who prepares their taxes, the lawyer who drafted their will and perhaps a trust, the financial advisor they turned to for investment advice. It is likely, however, that some of the people on the team have inherited the account from colleagues who have since retired. You will need to take a fresh look at how much care is given to your parent’s account and how effectively the team is working together.   

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DISCLAIMER:  This information is not intended to provide legal or accounting advice, or to address specific situations. Please consult with your legal or tax advisor to supplement and verify what you learn here. This is presented for informational or educational purposes only and does not constitute a recommendation to buy/sell any security investment or other product, nor is this an offer or a solicitation of an offer to buy/sell any security investment or other product. Any opinion or estimate constitutes that of the writer only, and is subject to change without notice. The above may contain information obtained from sources believed to be reliable. No guarantees are made about the accuracy or completeness of information provided. Past performance is no guarantee of future results. 

The Rise of Manufacturing Entrepreneurs: Time To Be Optimistic About The American Economy?

The loss of middle class manufacturing jobs over the past 30 years has dramatically impacted employment in many industrial cities across the US. But the stories of loss, luckily, are starting to be overshadowed by the rise of manufacturing entrepreneurs. I think it is time to start being more optimistic about the long term potential of the US economy. 

“Startups are beginning to transform manufacturing just as they transformed service industries like taxi-hailing and short-term room lets. New techniques such as 3D printing, combined with a rapid decline in the cost of computing power, are making it easier for small firms to compete with big ones. Crowdfunding sources such as Kickstarter are making it easier for them to raise capital. And big companies such as GE are trying to crowdsource innovation by providing small manufacturing firms with space and seed-money. Exponents of this ‘hardware renaissance’ frequently locate themselves in old industrial towns such as Pittsburgh and Detroit, in part because there is lots of cheap space available and in part because they can draw on established manufacturing skill,” from The Economist Magazine, May 5, 2016.

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DISCLAIMER:  This information is not intended to provide legal or accounting advice, or to address specific situations. Please consult with your legal or tax advisor to supplement and verify what you learn here. This is presented for informational or educational purposes only and does not constitute a recommendation to buy/sell any security investment or other product, nor is this an offer or a solicitation of an offer to buy/sell any security investment or other product. Any opinion or estimate constitutes that of the writer only, and is subject to change without notice. The above may contain information obtained from sources believed to be reliable. No guarantees are made about the accuracy or completeness of information provided. Past performance is no guarantee of future results.