Giving with Impact:

MICHAEL GORDON VOSS: Welcome to Season 3 of Giving with Impact, an original podcast series from Stanford's Social Innovation Review developed with the support of Schwab Charitable. I'm your host, Michael Gordon Voss, publisher of SSIR. In this series, we strive to create a collaborative space for leading voices from across the philanthropic ecosystem to engage in both practical and aspirational conversations around relevant topics at the heart of achieving more effective philanthropy.

The vast majority of Americans tend to handle their charitable contributions using fairly straightforward means, opening their wallet or personal checkbook. But for many people, there may be advantages to the use of what are broadly referred to as a planned giving vehicle. Benefits can typically include favorable tax treatments of assets in the vehicle or the ability to take a tax deduction in the current year for gifts that are made in the future, among others. So what are these various types of giving vehicles and how can you determine which one might be best aligned with your charitable goals and objectives?

Are they mutually exclusive or can they be combined in a broader philanthropic strategy? And once you've decided which to pursue, how do you get started?

To shed some light on the various options available to donors, we're joined today by two individuals who have dedicated themselves to providing practical, real-world answers to donors' pressing financial questions.

Vonny Carrington is a partner with Cerity Partners, a financial planning advisory that provides unique diverse solutions for for-profit companies, nonprofit organizations, individual donors, and families. Vonny has more than 14 years of industry experience. Prior to joining Cerity Partners, Vonny served as Vice President of Financial Counseling at the Ayco company, which is part of Goldman Sachs. Vonny holds an MBA from Montclair State University and a bachelor of science from Bucknell University.

A fairly frequent guest on our podcast is Julia Reed, Director of Relationship Management with Schwab Charitable. Julia leads the Schwab Charitable Relationship Management team, serving advisors, family offices, and donors nationwide with charitable planning consultation and resources designed to help wealth management professionals and their clients maximize impact.

Julia holds a BA in business administration from John F. Kennedy University and serves on the board of community housing partnership, HomeRise in San Francisco, where she lives with her family.

Vonny, Julia, thank you both for joining me today, as we discuss how various giving vehicles might work best to support donors' strategic charitable giving. Let's get started.

Vonny, let me ask you to help ease us into this discussion. As I mentioned in the intro, there are, obviously, many different ways that someone could choose to manage her or his philanthropic giving, from vehicles such as private foundations and donor-advised funds, to simply giving directly using a checkbook or credit card. How does someone start to figure out which way or combination of ways might work best to help achieve their philanthropic goals, and why is it important to do so?

VONNY CARRINGTON:  Well, thank you for allowing me to join today's panel, and this is, indeed, a great question and it's a good idea to consider which vehicle to use to meet your charitable goals in an efficient manner.

I want to highlight this is not only for wealthy individuals. So here I'll outline a few items to consider that would impact your decision.

The first is tax benefit considerations. We've been in a bull market for the past few years and investors may have securities that have appreciated in value. They could use those stocks to give to charity and avoid paying a capital gains tax. And depending on your tax situation, there may be an opportunity for multi-year planning.

The second would be involvement of your family. There are vehicles out there that will allow you to involve a family immediately, or even down the road when you're ready to turn over the reins.

And the next one would be just to be thoughtful and strategic in order to maximize your charitable impact.

I should mention that these vehicles won't be a fit for every donor, but there are other ways to achieve your goal, which I'm sure we'll get to later in the podcast.

MICHAEL:  Vonny, thanks. Those are all important considerations.

Julia, let me ask you, now that Vonny has helped our listeners to understand how and why it's important to think about various giving vehicles, I'd like to start looking at some of those vehicles. So with 3.7 billion in grants for your prior fiscal year, Schwab Charitable is one of the largest donor-advised funds in the US, so let's start with that. For anyone who isn't already familiar with them, could you briefly you describe what a donor-advised fund is and why a donor might select that vehicle?

JULIA REED:  Sure. A donor-advised fund is a simple, efficient, and tax-smart solution for charitable giving. It's an account that helps donors make tax-efficient, charitable donations, invest for potential tax-free growth over time, and then give to charities, potentially even over generations. Donor-advised funds are administered by a sponsoring charity, such as a community foundation or national provider, like Schwab Charitable.

The vehicle is growing in popularity with donors for a few key reasons. Ease of use, flexibility, simplicity, their comparatively low cost and their efficiency from an estate and legacy planning perspective.

Let's start with the ease. Donor-advised fund accounts are easy to establish and simple to manage.

Irrevocable contributions qualify for a same-year tax deduction if the donor itemizes. The deduction is based on fair market value or qualified appraisal if the gift is non-cash and has been held for more than a year. There is an opportunity to reduce taxes, but also give more to the charities that you care about.

Flexibility. The decision of when, where, and how much to give to a nonprofit is not tied to a tax deadline or calendar year-end when you fund a donor-advised fund. The donor can give when it makes the most sense strategically and/or reactively, and can even schedule future and recurring grants to the organizations they support.

The simplicity of using a donor-advised fund requires no account administration on the part of the donor. The vehicle is built for scale, to serve each donor or family with a centralized administrative team. The sponsoring organization handles charity due diligence, grant processing, recordkeeping and tax filing. So, essentially, all the administration is outsourced.

Affordability. Most donor-advised funds have no or low startup costs and lower operating expenses than a private foundation, typically. The administrative fees charged as a percentage of the account value, cover the expenses of operating the account.

And, finally, the efficiency related to estate or legacy planning. Donors can create a charitable legacy to continue their giving with options that include the designation of their account as a beneficiary of their retirement plan, a will, or revocable living trust. We even have donors that don't fund their accounts at all in their lifetime. Whether or not they're using the account for lifetime giving, the account can be set up to succeed them in perpetuity by naming individuals to assume account-holder privileges, for example, or charitable beneficiaries to receive their gift at once, or over time, or some combination of these options.

MICHAEL:  So, Julia, now that we've gone through the benefits to the donor of a donor-advised fund, can you share an example of how the choice of a DAF helped a donor to reach their charitable goals?

JULIA:  I mentioned that a donor might consider a donor-advised fund if they have appreciated non-cash that they want to give to charity. If they choose to contribute appreciated securities, for example, to a donor advised-fund account, they avoid paying capital gains tax, whether they are itemizing or not, and can give as much as 20% more to the charities they support. Charities, including donor-advised funds, don't pay capital gains tax when they sell an asset. Proceeds can be redeployed for potential tax-free growth. If you itemize deductions on your tax return, instead of taking the standard deduction, donating non-cash assets can help you unlock additional funds for charity in two ways. As we just described, you potentially eliminate the capital gains tax you would incur if you sold the assets yourself and then donated the proceeds, but you could also claim a fair market value charitable deduction for the tax year in which the gift is made and choose to pass on that savings in the form of more giving.

MICHAEL:  So, Vonny, one of the things that Julia mentioned in her earlier response was private foundations, which is another type of endowment giving vehicle. Can you briefly explain how these work and when a donor might choose to use a private foundation as their giving vehicle?

VONNY:  Sure. We're seeing a move toward the preference for more control over charitable giving, which can be achieved through the use of a private foundation. And what it is, is a legal entity that's set up solely for charitable purposes. It differs from a public charity, in that it relies on funding from a single individual, a family, or even a corporation, while public charities rely more on public funding to support their activities.

Private foundations are tax-exempt, nonprofit organizations, and they've got to pay out 5% of their endowment each year in the form of grants or other administrative expenses, such as salaries of staff. The IRS will require them to file an annual form, and it's made publicly available, and it describes the foundation's grants, investments, and expenses.

From the donor's perspective, you can claim a tax induction when you transfer assets to a private foundation and it will have a board of directors, typically of three or more people. And in a private foundation, staff can be paid for management and also administrative work. You can set the foundation up to exist across multiple generations, or you can set up the foundations such that all the assets are spent within a lifetime or over some set period of time.

The tax benefits of contributing to a private foundation depend on the asset. And, generally speaking, donors who itemize their deductions get to deduct up to 30% of their adjusted gross income for cash contributions and 20% for appreciated securities, both of which have a five-year carry forward. So, generally, for publicly-traded assets, the valuation of deduction will be the fair market value. For appreciated assets that are held privately, the valuation will be limited to cost basis.

MICHAEL:  Vonny, are there situations where donors might want to choose to use both a private foundation and a donor-advised fund?

VONNY:  Yes, there are different scenarios where a combination of the vehicles can help a donor reach their philanthropic goals. One example is a multi-generational family, where the newer generations are keen to exercise their philanthropy, at least in part outside of the mission of the private foundation.

MICHAEL:  So, Julia, let me come back to you. We've been talking about endowment vehicles, but there are other types, including income-producing vehicles. What should donors be thinking about in that category?

JULIA:  Well, the first of these types of income-producing vehicles that donors may want to consider is a charitable remainder trust. Charitable remainder trusts are irrevocable trusts from which there are taxable payouts for life or some term up to 20 years to a non-charitable beneficiary, such as the donor or a family member of the donor, after which one or more charities would receive whatever is left, also known as the remainder.

Like outright gifts to charity or a donor-advised fund, if a CRT is funded with cash, the donor can claim a charitable deduction of up to 60% of adjusted gross income. If appreciated assets are used to fund the trust, up to 30% of their AGI may be deducted in the current tax year.

As Vonny just mentioned, if the donor cannot use the whole deduction in the year of the gift, he or she can carry over the deduction for up to five additional years.

The upfront deduction for funding a CRT, though, is not typically the primary driver like it would be for a foundation or donor-advised fund. Typically, a CRT is appealing to a donor for its deferral of tax, which is paid over time on the distributions versus all at once if the contributed assets were sold. This is why CRTs are such a popular vehicle for donors that have low basis appreciated stock positions or other non-cash. When donors are considering giving vehicles such as private foundations, donor-advised funds and charitable remainder trusts, this is not an either/or situation. There are instances, for sure, where a combination would be the best way to meet charitable goals.

MICHAEL:  And, Vonny, to that point, are there additional points about charitable remainder trusts or other income-producing vehicles that we should be considering here?

VONNY:  Absolutely, Michael. For clients who are charitably inclined, but don't have a crystal ball, they may want to hedge their bets in the fulfillment of their charitable desires by keeping control of the assets, rather than making an irrevocable gift. So one popular and flexible life income plan is this charitable remainder trust, which Julia just mentioned, abbreviated CRUT.

The trustee, manages the trust assets and pays you or others, you choose, a variable income for life or for a term of years. And when the trust terminates, the remaining assets are then transferred to a charitable organization of your choice.

So if I were to describe the typical donor, they would need income for life, or for a specified term of years, they would desire more income as the trust value increases.

They would be able to tolerate some investment risk to provide for growth, they want to be able to make additional gifts to the trust, and, generally, they're between the ages of 55 and 80.

Some of the features and benefits of making the gift are income for life, variable payments, the charitable income tax deduction, you have the ability to designate multiple beneficiaries, the assets that were transferred into the trust can be reinvested, you can choose the trustee, and it may even be the donor, and the investment possibilities are pretty flexible.

VONNY:  Another popular plan is a charitable remainder annuity trust, abbreviated CRAT. It's similar to the CRUT, with some exceptions, such as the donor desires a fixed income based on the original value of the assets transferred, and they do not plan to make additional donations to the trust in the future.

MICHAEL:  And Julia, I know there are also testamentary options to consider. Could you share some details about those?

JULIA:  Sure. Those that are charitably inclined may want that reflected in their estate or legacy plan. You can name a charity as beneficiary on various assets, including your retirement account, your IRA, in your living trust or will, even on your life insurance policy. But not everyone fits into the various scenarios that Vonny and I have been discussing, and so we thought it might be good to include some non-vehicle-related strategies in this discussion.

MICHAEL:  Thanks, Julia. Vonny, any closing thoughts or comments on these or other options donors can consider to support their charitable giving?

VONNY:  As Julia said, these vehicles will not be a fit for every donor, and so if none are right for you, you can still take advantage of tax benefits in other ways. For example, younger donors might consider giving stocks directly to charity.

For charitably-minded retirees with traditional IRAs, there's a tax relief strategy available, and it's called the qualified charitable distribution. The QCD gifting option allows you, starting at age 70-1/2, to instruct your IRA custodian to direct IRA distributions up to $100,000 a year to a qualified charity. Because the IRA income goes directly to the charity, you do not report the QCD as taxable income, and you do not owe any taxes on that QCD, which may be particularly beneficial to you if you're forced to take required minimum distributions and you do not need the extra money.

In addition to avoiding taxable income, your IRA distribution can be put to good use by your favorite qualified charity. If you regularly support charities, you may find that the QCD gift option provides you with a greater tax savings than even cash donations. Why is that? It's because reducing your adjusted gross income generally provides a greater tax benefit than claiming a tax deduction because AGI is used in several calculations, such as determining the taxable portion of your Social Security benefits, or how much you would pay for Medicare premiums, or what deductions and credits you qualify for receiving.

A QCD allows you to receive a tax benefit for your charitable contribution even if you do not itemize reductions, because, once again, that QCD is excluded from your taxable income. One caveat, one big caveat, obviously, is if tax laws were to change.

MICHAEL:  Well Vonny, I think that's a great way for us to wrap up our conversation. I want to thank you and Julia, both, for joining me today, and taking us through the why and how of thinking about the array of giving vehicles open to donors who are looking to make a positive impact in the world. It's obvious that supporting this kind of thoughtful, deliberative decision-making is something important to both of you, and that comes through clearly in both your work and in today's discussion. So thank you, again.

Thank you for listening. We hope you've enjoyed this episode. Please consider leaving us a review on Apple Podcast or your favorite listening app, as it helps others discover the show. We encourage you to listen to other episodes in this series, as well as other podcasts from SSIR. This podcast series is made possible with the support of Schwab Charitable, who played an important role in the selection of topics and speakers. For important disclosures and a transcript of this episode, visit schwabcharitable.org/impactpodcast.