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Hi, and welcome to tax effective charitable giving part two. My name is Patrick Runyen. I’m a principal and wealth manager at Modera Wealth Management. In this section, we’ll be discussing donor advised funds. So in the introductory video, I mentioned that donor advised funds have become a lot more popular in the last few years due to some recent tax law changes. So let’s start out and determine what is a donor advised fund. Well, the way I like to describe it is, think about any account that you own that holds assets, whether it be your bank account, an IRA, a 401k at work, whatever the case may be. The donor advised fund is the charitable version of that account. So these accounts have particular tax benefits where you can put assets into them and you get an immediate tax benefit by doing so. The trade-off is that you are, um, giving up access to those funds permanently.
It’s an irrevocable charitable contribution. The benefit to these funds though, is that you don’t ultimately have to commit to who your, the organization or the group that you’re giving that money to over the long run. So it acts as a bit of a holding spot for future charitable giving. So donor advised funds by definition, when money goes into them, a charitable contribution has been made. Okay, but you still have control of the funds. You can’t take them back into your possession, but you can invest them, manage them within the, within the actual account. And then as you see fit along the way, donate those funds to particular charitable organizations. So, um, let me tell you, I think the best way to describe this is through a quick story. Had a client, a very successful, who worked in a family business.
There were no other children that wanted to continue on in the business. So he explored selling his business and eventually found somebody to purchase it. He walked away with about $20 million in that year. So, given that this was a long held business, there was a significant tax implications to that transaction. And we discussed how are there ways to offset the tax? And one of the things that I always knew about him is he was very charitably inclined though. He didn’t take the time while he was working to really determine what that meant. So what I asked him to do, and what we did in terms of modeling was determined. What amount was he comfortable committing to charity today, knowing that he can always make the decision on who the charitable organizations that ultimately benefit from these funds will be down the road. He does not have to make that decision today.
So we explored opening and eventually funding a donor advised fund, and he ended up doing it for a significant amount of money and saved roughly $750,000 in taxes in the year he sold his business. So the, the neat thing for him was, and the really the selling point was he could fund this, this, this staff and not have to commit to giving it to a charity. And now he and his family are still determining, you know, what type of impact they want to make along the way. So it’s a great spot to, to hold assets that you all you’re comfortable committing, but don’t have the actual organizations in mind of who you want to give it to. So again, there’s an immediate tax deduction. It allows for multi-year charitable planning. So the tax change that made this more popular, was when the government a couple of years ago increased the standard deduction and also reduced, uh, some itemized deductions.
So what ended up happening were folks were maybe giving to charity at a few thousand dollars a year, but because the standard deduction on their tax return was so high, they didn’t have enough in the way of itemized deductions for it to give them any type of tax benefit. So what a lot of folks are doing is instead of just giving to charity in the same way, they always have, they are taking a sum of money, putting it strategically into a donor advised fund, and essentially pre-funding three, four or five years of future gifting that they plan to do to charities and why, when they do that, what we call bunching of deductions, they put all the money in, in one year, they overcome the standard deduction and get a tax benefit for the charitable giving. And then they still distribute it to the charities as they always have in the same increments to just make sure that they’re getting a tax benefit for doing so.
So what can go into a donor advised fund? A lot of assets, um, cash can obviously be used, but there’s also other assets that are listed here. The one that I’ll point out that we’re going to speak about next time is appreciated securities. Um, so that means something that you purchased previously. That’s a capital asset, think of a stock, a bond, a mutual fund, an ETF, and it’s risen in value. And you can use those assets to fund the donor advised fund and ultimately benefit a charity down the road. So we can talk about that a little bit in the next section, but just know that donor advise funds are a very flexible vehicle to pre-fund future giving and give you an immediate tax benefit in the year of contribution. So in the next section, we’ll talk about it, appreciated securities, look forward to seeing you then thank you.