Talli Sperry: Hi, I’m Talli Sperry, and welcome to tonight’s live webcast, which is all about year-end giving. This time of year is an ideal opportunity to review our financial plans and goals, and that includes our goals around philanthropy. So you may be thinking about the charitable causes you want to support or considering the appropriate mechanisms for giving. You’re probably also wondering about the tax implications given the recent changes in that area.
So in tonight’s live webcast, we’ll explore all of that with our panel of experts. Tonight we’ll talk about defining your charitable goals and motivations, understanding the new tax laws, and making philanthropy a part of your long-term legacy planning.
Now before we dive in, if you need to access technical help, it’s available by selecting the blue widget, and that’s on the right. And you can learn more about Vanguard’s services by clicking on the green Resource List widget; and that one is on the far right of your player, the blue is on your left, or you can view webcast replays or listen to our latest podcast episodes.
We’d like to thank those of you who have submitted questions in advance, and we encourage all of you to keep sending in questions as you’re watching. And do let us know if there’s something you’d like us to address or explain further. We’ll get to as many of your questions as we can. These conversations are designed to support and connect with the Vanguard community of investors, so we definitely want to hear from you.
Tonight we’re especially fortunate to have an exceptionally knowledgeable panel here in our studio, and these are the experts that I call on for answers to my client questions, and so I’m grateful for each one of them for being here and for sharing their insights with you, bringing their distinct knowledge to us tonight together reflects the kind of thoughtful and integrated approach that makes for effective wealth planning. So we’re happy to bring that to you tonight.
And without further ado, let’s meet our panelists. Joining us here to answer your questions are Rebecca Moffett, chief strategic planning officer at Vanguard Charitable; Kevin Wick, a senior wealth planning strategist with Vanguard Personal Advisor Services®; and Jacklin Youssef, a Certified Financial Planner™ professional who specializes in tax and wealth planning, and she’s also with Vanguard Personal Advisor Services.
So Jackie, before we take things any further, I’d like to turn to you as our tax expert tonight. We know from some of our presubmitted questions that there’s a lot of interest in understanding the recent changes in tax laws and how these changes might impact charitable giving. So I wonder if you could start us off with a brief overview of key updates and what we might need to know.
Jacklin Youssef: Sure, happy to do so. For starters, we actually know that Americans are generous by nature, and our tax code has recognized that generosity and provided tax benefit in the form of a charitable contribution deduction. So starting a little bit by saying that the charitable contribution deduction in general depends on what is it that you’re giving, who you’re giving it to, and how you’re giving.
Virtually, the deduction in itself has not changed. There was one enhancement that was actually made with the tax law where if an individual is giving cash to a public charity, they’re actually allowed to deduct more against their income than they were in the past. So now they’re able to deduct up to 60% of income versus 50%.
Other areas in terms of giving appreciated securities or actually transferring, maybe, dollars out of the IRA have not virtually changed. So that’s definitely good news.
Having said that, there’s been some changes around the higher standard deduction that would make it more challenging for individuals to deduct and essentially really itemize their deductions without proper planning. So we’ll address this a little bit further to talk about does it make sense for people to consider strategies, and how do they ultimately maximize the benefit of their charitable dollars.
Talli Sperry: That’s great. That’s really helpful.
Jacklin Youssef: Thank you.
Talli Sperry: Thanks for that starting off point.
And now to help Rebecca and Kevin and Jackie get to know a little bit about your perspective, we have two poll questions we’d like you to answer. So our first poll question is on your screen now, and it reads, “Which of the following best describes your primary motivation for giving?” And your answers are, you want to reduce tax liability, you want to contribute to causes you believe in, you want to set a precedent for your family to contribute to causes you all believe in, or you haven’t started giving. Please take a moment to respond, and we’ll share your answers in just a minute.
So while everyone responds to the poll, Jackie, let’s have you kick off with our first question from one of our viewers. This one comes from Sheila in Argyle, Texas. Thank you, Sheila. And she’s asking, “Can you address RMDs and charitable giving?” And just as a reminder, an RMD is a required minimum distribution. So Jackie, could you take it away?
Jacklin Youssef: Sure, great question, Sheila. I’d say the rules have been around for a number of years where an individual who is now subject to requirement, which is taking a minimum amount out of their IRAs, which means they’re 70½ and they have a minimum amount that they have to take, can make a direct transfer out of the IRA to a specific qualified charitable organization. The limit is up to $100,000. And what that would do is it would actually satisfy a number of different things.
First it would actually satisfy the required minimum distribution, where that also becomes more of making sure, again, that in that situation it’s not considered to be taxable income to Sheila and other individuals like her. But at the same time, in that situation, they’re not necessarily getting the charitable contribution deduction because it’s not considered to be taxable income.
So the new rules that we have in place, if anything, while they have not changed the rule around using that specific qualified charitable distribution component, it actually makes it even more beneficial for people to think about it as one of their strategies that they’re taking into account.
Talli Sperry: Yes, I think that’s really helpful because we can accomplish multiple goals at the same time and maybe make things a little bit more automated too, which is quite helpful.
Jacklin Youssef: Yes.
Rebecca Moffett: Can I just add on to Jackie?
Talli Sperry: Great, absolutely.
Rebecca Moffett: So we see a lot of questions from our donors as to whether they can use their required minimum distribution to give to Vanguard Charitable, which is a donor-advised fund. And that at this time is not allowed to happen, but we do have something called a field-of-interest fund, the Sustainable Disaster-Relief Fund, that could take distributions like that. So it is important to ask those questions about can a donor-advised fund and what options might they have for taking that type of gift.
Talli Sperry: That’s really helpful, Rebecca, and I’m just going to ask you to define donor-advised fund for our audience who might not be familiar with it.
Rebecca Moffett: Sure. So a donor-advised fund is a really flexible and easy-to-use giving tool. It allows somebody to be able to consolidate, accrue, and grant their assets to charity, both today and tomorrow.
Talli Sperry: And what do you mean by that?
Rebecca Moffett: So I mean that somebody can open up what we call a philanthropic account, and they can open that up with assets such as cash or appreciated securities. They receive an immediate tax deduction for that gift.
Talli Sperry: Always nice.
Rebecca Moffett: And it becomes an irrevocable gift, which means they lose some legal control over those dollars, but they get to retain some pretty important advisory privileges on those dollars. They can decide how those dollars should be invested in the account, which is important because, hopefully, those dollars will grow tax-free over time which allows somebody to be able to use those dollars to grant to charity. They become advisors on how those dollars should be granted, so what organizations do they want to grant to and for what purpose. And then they can also advise on the legacy for that account.
So there’s a lot of important roles that somebody can play in order to really have a charitable impact with their philanthropic account.
Talli Sperry: I think that’s helpful. And just to clarify that, legal control just means that once you give it away, you can’t bring it back. You can’t take it back.
Rebecca Moffett: That’s exactly right, which is important for the tax deduction.
Talli Sperry: Absolutely. Okay, that’s really helpful. So while we continue to wait for our poll results to come in, oh, actually, they just arrived, so we can jump right to them.
So when we look at this, we’ll see about 21% of you want to reduce your tax liability, we’ll see that 67% of you want to contribute to a cause you believe in, about 5% want to set precedence for your family to do the same thing, and about 5% of you haven’t started giving. This is about what I’d expect from Vanguard clients. Is this consistent with what you see when you’re out meeting?
Rebecca Moffett: Yes, absolutely.
Kevin Wick: I think with most clients, and I think most people in general, are giving for a purpose, and it starts with that. And I think some of the things we’ll talk about tonight are ways, starting with that and that desire to give money away for a purpose, are the things you can do to get a little more benefit from it, to think about it strategically, if you will, or purposeful in how you give it and what kind of avenues you’re going about to do so to get a little bigger bang for your buck, so to speak.
Talli Sperry: Yes, and that’s important. It’s important to give strategically. I think we don’t always recognize the value of that. So I look forward to hearing more from you tonight. That’s great.
So while we pause for a minute, let’s go to another poll question, so we can learn a little bit more about our viewers. And so we’re going to ask you, “What is your primary method of giving?” So is it direct to a nonprofit organization, to a donor-advised fund, to a private foundation, or to a charitable trust? Which of those is your primary method of giving? If you’d like to respond now, we’ll look at your response shortly.
So, meanwhile, we have another question, and this one is from George in Mountain Lake, New Jersey. Thank you, George. And he asks, “How does the higher standard deduction affect charitable giving?” So Jackie, this goes back to you.
Jacklin Youssef: Yes, and that’s pretty much what I alluded to earlier with the new tax rules that we have in place. There were two main components that really changed. The standard deduction that we have in place was expanded, and it is actually higher than it used to be. On the other hand, when it comes to the various itemized deductions, there were a number of areas that were either repealed or limited. For instance, state and local tax deductions, those were limited to $10,000. If we look at again some of the other areas, they were repealed. So it makes it more challenging for clients that used to itemize in the past to be able to itemize going forward. We have statistics that would show that rather than maybe 1 in 3 individual filers itemizing their deductions in the past, we’re actually looking at 1 in 10. So it makes it much more challenging, which means then in that situation the client will need to determine from a cash flow perspective does it make sense for me now to, rather than giving the same $10,000 that I used to give to my local church, my synagogue, perhaps I can actually maybe accelerate some of this and bunch them into every other year or every three years, for instance, and I’ll be able to itemize my deduction, use something like the donor-advised fund like we talked about earlier, to be able to still continue the charitable gift that I’m used to each and every year and now be able to do this in a tax-smart way like Kevin had mentioned earlier. So it is a way for us to be able to do a little bit more planning, given the new rules that we have in place.
Talli Sperry: That’s really helpful, Jackie. And you also wrote a blog that talked a lot about what taxpayers should ask. And that is in your green Resource List widget, so I’d encourage you to click on that and read that because I think it’s a nice expansion of the principles you’re talking about.
Jacklin Youssef: Exactly.
Talli Sperry: Great. So we’ll jump back to your poll responses, and what we see is that 80% of our clients are giving direct to a nonprofit organization, about 17% to a donor-advised fund, 1% to a private foundation, and less than 1% to a charitable trust.
So this is an interesting distribution, and I think we can certainly help our audience tonight start to think through some of the wise ways to give. So any comments from you guys as you take a look at those initial perspectives of our clients?
Kevin Wick: First thought is don’t stop giving.
Talli Sperry: Yes.
Kevin Wick: Keep giving. Whatever format you’re doing it, continue to do it. But, hopefully, our
clients want to learn a little bit from the discussion tonight, and maybe there’s a different way that I can do it, again, just being a bit more thoughtful, a bit more strategic, to use that word again.
Talli Sperry: That’s great. And, you know, I’d be really curious to our audience, what are the questions that you have about strategic giving? We do like to hear from you, and this webcast is entirely for you. So please submit your question so we can answer what’s most on your mind.
So we do have one live question right now, and I’m going to jump to that, and this is from Robert who is asking, “What happens when the Vanguard Charitable account, what happens at the passing of the donor?”
So we do have the link to Vanguard Charitable also in your green Resource List widget, but I’d like to turn to you, Rebecca, for this question.
Rebecca Moffett: Sure. So let me just take a moment and explain who Vanguard Charitable is, and then I can talk a little bit about the legacy options, as we call them.
So Vanguard Charitable is a separate organization from Vanguard. We are a public charity, but we were founded by Vanguard over 20 years ago, which is important, I think, for everybody watching to know because Vanguard Charitable shares all of the same values as Vanguard.
Talli Sperry: And we work with you daily, so we’re very connected.
Rebecca Moffett: Exactly. That’s right. We offer one, and only one product, which is the donor-advised fund, and it is our goal to offer the very best donor-advised fund.
But just getting back to the question, so the great thing about donor-advised funds, and especially at Vanguard Charitable, is that we have many different options for leaving the legacy of your account. You can do so by having successor advisors on your account. You can pass the whole account down to your successor advisors. You can decide that you want the account split up so that it’s separately managed by different family members upon your death. You can decide that you would like the account to be split up and distributed to your favorite charities, or you could do really a combination of all of those. If you wanted to leave the legacy of giving to your successor advisors, but ensure that your favorite charities had a portion of that account, you can structure that very flexibly.
Talli Sperry: And your website is so easy to navigate. I was on there just the other day setting up my own Vanguard Charitable account, and I was so impressed with how easy it is to designate donors like you talked about, someone to take it over, so really nice work there.
Rebecca Moffett: Thank you.
Kevin Wick: And those successor advisors can be anyone you choose. I think more often than not we see it being kids, grandkids, maybe it’s siblings. But you’ve got an unlimited spectrum of people you could choose to carry on that desire, that legacy that you’ve built.
Rebecca Moffett: That’s exactly right.
Talli Sperry: So it’s a great way to help your family find causes they’re interested in and to kind of keep that giving legacy throughout the generations. That’s awesome.
Rebecca Moffett: That’s right.
Talli Sperry: Great. So we have another live question. Thank you for sending them in. Please keep them coming. So this one is from Edward, and he’s asking, “How much of my contribution to a donor-advised fund is deductible in the year the account is funded?” So Jackie, this feels like a tax question.
Jacklin Youssef: Sure. So I mentioned earlier it depends on what it is that you’re giving. If you’re giving cash versus if you’re giving appreciated securities. I’d say from a tax perspective, it may actually be more advantageous to actually giving appreciate securities versus cash for two reasons. But to actually get to the question, there are limits as to how much could be deducted. The full amount could be deducted, the value of what is it that you’re giving up to a certain limit against your income. For instance, when I’m giving cash, I mentioned earlier, now it is up to 60% against my income. But if I’m giving appreciated securities that I’ve actually held for more than a year, and there’s a technical rule behind this, then I’m able to actually deduct up to 30% of my income in that specific year.
The reason why I generally speak to clients about why it may actually be advantageous to use appreciated securities is let’s say I gave $100,000 worth of appreciated securities, but those were shares that I’ve actually purchased maybe back when they were only worth $25,000. I paid $25,000. But that appreciation here is not actually taxable gain to me when I give those shares to the donor-advised fund. So it certainly gets another added level of benefit where you’re not paying the tax on that appreciation or capital gains.
Talli Sperry: That’s very helpful and very important too.
Jackie, we have a follow-up question from something you talked about earlier. You were speaking about bunching charitable giving, so when one would only give every other year but could give a larger amount. Could you elaborate on why someone would want to do that?
Jacklin Youssef: Sure, great question. And part of it is because now with the new higher standard deduction, the client will probably need to determine will I be able to itemize my deduction in light of the new higher standard deduction or, if in that situation, I may actually be giving to charity but not necessarily getting the charitable tax deduction.
So that certainly becomes a question, and if there is, of course, the charitable inclination, it’s a matter of if I give a specific amount each year, let’s say over the course of three years, and I use $10,000 as a figure, if I were to bunch that amount just to get me above the higher standard deduction, now I’m able to itemize my deduction. Now I get that full deduction in that one year. And in that situation in the next two years, I don’t have to go back and make the charitable contribution again because I would have not necessarily gotten the benefit there.
Talli Sperry: That’s really helpful. So you’re basically consolidating your giving to get more benefits for you and the charity.
Jacklin Youssef: Exactly, yes.
Talli Sperry: Super helpful.
Kevin Wick: And the bunching concept is directly tied to the increased standard deduction. And just to put some numbers behind it, essentially the standard deduction has been doubled in 2018 compared to what it was in 2017. If you’re a married couple, you can deduct or the standard deduction would be $24,000, meaning basically, essentially the first $24,000 of your income you don’t pay taxes on. It’s a good thing.
Talli Sperry: Yes.
Kevin Wick: But if you’re in a position of charitable giving or other things that you would typically itemize, things like your local taxes, your mortgage interest, things of that nature, if those all told together don’t exceed that $24,000 number in the case of a married couple, then you might feel like, “Oh, I’m not really getting the benefit, the tax benefit of my charitable giving.” Yes or no, depending on your own opinion; but the idea of bunching is if you’re running into that, then you could, yes, put a few years, a couple years, whatever the case might be, of charitable giving together in one year, get your itemized deductions above that $24,000 higher standard deduction, and now get more tax benefit out of putting those together in one year as opposed to smaller amounts year over year. And that’s kind of a new concept as a result of the changes in the tax laws, the idea of bunching.
Talli Sperry: And from a wealth and estate planning perspective, why might that be wise?
Kevin Wick: Well, you’ve got to think about strategically again, as we looked at before, in all of these concepts, honestly, about taxes, tax benefit, tax deductions are going to differ based on your individual circumstance—your income, your deductions, all kinds of different factors.
But you have the opportunity to use the tax laws to your benefit, to your greatest benefit by thinking through these options and looking at which might benefit you the most. Sometimes it’s looking in just one calendar year. What’s going to benefit me more this year? If I have more income this year, for whatever reason, maybe I do a little bit more charitable giving to offset some higher taxes. If you have less income, maybe you delay that charitable giving, bunch it to another year, and then plan for the next year. So there’s a lot of very personalized things that need to be looked at in your own individual situation. But, again, we come back to that just thinking strategically about what would be best for your individual situation.
Talli Sperry: I think that’s helpful. And for those of you who might want to refresh in some of the concepts we’re talking about, I think Jackie’s blog in that green Resource List widget is a great place to go. Whenever I reread that, I feel like I’m hearing this discussion again. So I think that’s a super helpful resource.
So it looks like our conversation is stimulating some discussions. We have a question for you, Rebecca. And so this one is, “Can you change the charities in the donor-advised fund once it’s established as your desires change?”
Rebecca Moffett: Oh, of course. So one of the really flexible options about a donor-advised fund is that you’re able to actually separate out the tax deduction from your granting decisions, which gives you some time to really think and plan and also then be able to react as your own circumstances change to different charitable passions that you might come into.
And so you can start by granting to a certain set of charities, and over time you can start to switch those, depending on really where your passions might lie. We hear some great examples of being able to involve family, and so maybe a family has set up a donor-advised fund. The parents start granting to one favorite set of charities. And as their children get older and they start to, as a family, determine different charities or purposes they’d like to give to, they actually start to switch that a little bit more. Then they can actually keep their original granting intent and then continue to grant to these new organizations as well.
Talli Sperry: That’s helpful and I’ve heard of some really neat things that clients do about helping children research charities to decide where the grant should go.
Rebecca Moffett: Certainly.
Talli Sperry: So you’ve got a lot of flexibility there to involve as many people as you’d like.
Rebecca Moffett: That’s right. Having a family meeting is a great way to do it. You know, and if your kids are young, you start it over pizza on a Friday night where it’s a casual atmosphere and just build it into the natural conversations of the week.
Talli Sperry: Great. So kind of along the lines of the Vanguard Charitable, we’re getting a question around, “Is there a minimum amount required to open a donor-advised fund?” So I’d love for you to answer that, but I also want to let you all know that in that green Resource List widget, we do have a link to Vanguard Charitable, and there’s also a really beautiful glossy paper that Rebecca will reference in a little bit talking about five best practices for philanthropic giving. So those pieces might be really helpful for setting context within this discussion.
But back to you on the minimum amount.
Rebecca Moffett: Sure. So the minimum amount to open up an account with Vanguard Charitable is $25,000. Additional gifts then into the account are $5,000. And usually the follow-up question that we get is, “What is the minimum to grant out of the account?” and that is $500.
Talli Sperry: Great. And, again, those refreshers are in that link. Kevin, were you going to add something?
Kevin Wick: Yes, just kind of to Rebecca’s comment before and this comment, one of the other big benefits that I see, and I think a lot of our clients see from the donor-advised fund, is not only can you separate the tax-planning decisions from the giving, but you can even delay your ultimate giving decisions.
Talli Sperry: Yes.
Kevin Wick: So you do have that minimum to set up your initial account. It doesn’t mean you need to turn around and give that money away to your ultimate charities immediately. You have the ability to do some of the tax planning, some of the strategic planning, and maybe they’re bigger numbers, and then sit on the money, invest that inside of your donor-advised fund, and make those ultimate charitable gifts at the right time for you and your family. It doesn’t force you to make a decision by year-end in order to get your tax deduction in. It’s a way to think longer term, both within sort of year-to-year planning and more long-term generational within your family as well.
Talli Sperry: Yes, let it grow and give bigger gifts, right?
Kevin Wick: Yes.
Rebecca Moffett: Exactly. And take the time to get to know the organizations, to do some research on the organizations. You know, that is something that we really stress is really understand who you’re giving to and why you’re giving to them and create that type of plan. So that was a great point, Kevin.
Talli Sperry: Yes, really helpful stuff.
All right, please keep those questions coming in. This is awesome. So we have another one that says, “Is there any expectation that rules will change to allow directing an RMD towards a charitable distribution account?” So I think you could all answer this, but who’d like to take it?
Kevin Wick: I think right now we’re not expecting any changes. I think we’ve gone through some stability with respect to that particular opportunity. And I don’t know if we used the term before, but that concept is known as a qualified charitable distribution, QCD. And it’s something I think that’s been found very valuable for the charities, very valuable for the taxpayer. Certainly our Vanguard clients who have been disciplined in their saving and their investing, maybe they’ve grown some large IRA balances. It’s a great way to utilize some of that money that you’ve set aside. Maybe you don’t need all of that minimum distribution, and now you’re able to give it to charity, which is just kind of a win-win across the board.
But I don’t know, Jackie, if you’ve heard anything differently, but for the most part I say no. No expectation.
Jacklin Youssef: Yes, I agree. The rule initially started I’d say maybe more than ten years ago. It started as a temporary rule. 2015 was really the first year when the rule was made permanent, and it truly gave a lot of our clients more of the peace of mind knowing that they don’t have to wait for Congress toward the latter part of the year to figure out whether it was extended for that year or not. We have many clients that have significant required minimum distributions from their IRAs that they don’t necessarily need for living expense purposes. And they also have the charitable inclination, so it makes a lot of sense for them to coordinate the two and use that qualified charitable distribution element.
Talli Sperry: That’s great. And while we’re talking about what can go in, I think we should look at one of our presubmitted questions. So this one is from Joe. Thank you, Joe. And he’s asking, “Should I be considering specialized assets such as private equity, S corps, or real estate as gifts to charity? So there’s a lot you can give away; but, Rebecca, what’s your perspective on that?
Rebecca Moffett: Sure, so certainly. You should really be looking at your overall financial portfolio. Oftentimes you look at what’s right in front of you. There’s cash, there’s more liquid noncash assets. But if you look at the whole financial portfolio, you can really be creative in how you’re going to be creating an impact with a charity. So certainly look at those.
You know, we have seen in the past several months a big increase in individuals calling us saying, “I have this S corp or I have a private equity, will you take it? Can you take it?” It is important to have those conversations to make sure the organization you’re looking to give it to can take it. But certainly have those conversations.
Talli Sperry: That’s helpful. And I think, correct me if I’m wrong, the Vanguard Charitable website notes the types of things you guys can take and how you’ll coordinate with charities. Is that correct?
Rebecca Moffett: It certainly does, and I would say always call. Always have the conversation because that’s always changing.
Kevin Wick: And I would just add try and have those conversations as early as you can. Those kinds of assets can be difficult to value. In order to get a tax deduction, you need to be able to establish a valuation of your asset. So that kind of thing is tough to do as you approach year-end. So have those conversations early on if you can.
Rebecca Moffett: That’s right.
Talli Sperry: That’s a super important point. Thanks, Kevin. Great.
Let’s go back to some of our live questions. And so we’re getting one who is asking, “What is the standard deduction for a single person over the age of 65?” Jackie?
Jacklin Youssef: So the standard deduction for someone below 65 is $12,000. The rules did allow for the additional deduction, and I believe that’s about maybe $1,500. So the total would be a little over $13,000 for a single individual, 65 and older. So that’s the one hurdle again for that individual to essentially get past to look at potentially whether there is value in itemizing or not.
Talli Sperry: Very helpful. So understanding kind of where we fall in the spectrum makes a huge difference.
Jacklin Youssef: Exactly. Yes, absolutely.
Talli Sperry: Great. So we’re getting a question from Michael who’s asking, “Can a gift from a donor-advised fund be made anonymously?” This is a really cool piece about donor-advised funds.
Rebecca Moffett: That’s right. It certainly gives you flexibility with your recognition. So you can, yes, decide that you would like that gift to be made anonymously. At Vanguard Charitable, you can also decide that you want that gift to be made with just your account name on it. And so the great thing about setting up an account at Vanguard Charitable is you can decide to have that account say whatever you would like.
Talli Sperry: And it’s an open field, so you really can put in anything.
Rebecca Moffett: Exactly. And so if you decide you want that account name to not necessarily be personally identifying, that is a way that you can be maybe semi-anonymous but still have some fun with how that gift is being sent or you can have full recognition. Most of our donors do full recognition, but we certainly see gifts going out that are anonymous.
Talli Sperry: That’s helpful. And you know what, I want to jump to one of our presubmitted questions from Terry from Texas; and, Kevin, she was asking, “How do donor-advised funds on private foundations complement each other or differ?” And I think this is one space, right?
Kevin Wick: Absolutely. Foundations, donor-advised funds, two very different ways of giving. There’s some similarities, and we could get into that in more detail. But the complement is something, again, a very opportunistic way to utilize two different tools. We have a lot of high-net-worth clients, a lot of high-net-worth families that have their own foundation, typically called the family foundation or private foundation, and that foundation is required, sort of has minimum distributions of its own, required to give 5% of its assets each and every year.
And sometimes deciding where to give that money to is difficult. Sometimes you get to year-end and you don’t know who we’re going to give it to. And a great solution, and this is where they work together, is you can give the 5% that you have to distribute from your foundation to your donor-advised fund. It then qualifies and satisfies the requirement of your foundation. And as we mentioned before, you put in the donor-advised fund and then you make your final charitable gifts at whatever point in time is convenient for you and your family. So it’s a great way to interplay.
I think another area where I see is foundations sometimes are difficult to manage, take time. Sometimes, well they are costly, not sometimes. And we’ve got clients also who have been managing and operating them for some period of time, and they decide, “I don’t really want to do this anymore.” And another interplay is you can fold up your foundation, distribute all the money to a donor-advised fund, and then go from there. And so there’s a lot of areas where they do have some interplay and work together, and you’ve got a lot of options in that respect.
Talli Sperry: And when you fold it into a donor-advised fund, you have as much control over the giving. You just have a lot less of the costs and the hassle of running a foundation, right?
Kevin Wick: Correct. The administration is very simple at that point.
Talli Sperry: Great.
Rebecca Moffett: And just playing back to the previous question about anonymity, we see a lot of donors who may have a private foundation and a donor-advised fund. And with a private foundation, you can’t be anonymous. But with a donor-advised fund, you can. And so if they have both, they’re able to do their anonymous gifts from their donor-advised fund and non-anonymous from their foundation. So it’s another way that they can work together.
Kevin Wick: Right.
Jacklin Youssef: And from a tax perspective, usually there are limits as to how much you can give into each one of those areas and deduct in the current year. And I actually find that clients also gravitate to the concept of, “I have my private foundation, I’d like to continue to give, but I can complement this with my giving to my donor-advised fund just to allow me to get maybe the better tax outcome at the end of the day.”
Kevin Wick: Yes, it doesn’t have to be one or the other, absolutely.
Talli Sperry: Yes, and as a bit of a segue in this discussion, we have a question that’s asking, “Is the tax deduction the same giving to a donor-advised fund as it would be if I gave to a charity?”
So the IRS considers all of these types of donations an equal tax deduction, right?
Jacklin Youssef: So a donor-advised fund is considered to be a public charity, so it’s treated as giving to my local church or synagogue. You essentially can get the same level of deduction against your income, which differs from giving to the private foundation because in that situation, the private foundation has slightly lower income limits that you can actually deduct in the current year. And that’s why I was mentioning that once you consider complementing these two giving more vehicles, you’re able to kind of leverage and get the benefit of both worlds.
Talli Sperry: Great. So lots of options for us, good.
So on those options, Kevin, I know we had a presubmitted question, and this one was from Tom, so thank you, Tom. And he was asking, “What kind of trust allows you to have income produced to go to charity and at the end the principle goes to your heirs?” Because I think we’re talking a lot about balancing types of giving with family legacies here, so can you elaborate there?
Kevin Wick: Yes, there’s definitely more options besides the few we’ve talked about already, and charitable trusts are another category of ways to do your charitable giving. Charitable trusts are generally referred to as split-interest trusts, and there’s two big categories of those.
Talli Sperry: And what do you mean by split-interest trusts?
Kevin Wick: Yes, split-interest means there’s an income interest and a residue or a principle interest. And the specific one that Tom’s referring to is a charitable lead trust. The second category is a charitable remainder trust. The difference between those two is just where does the interest go, where does the principle or the residue go?
In the case of a charitable lead trust, the interest, the income that’s produced for a period of time goes to charity. Charity first, charity lead. And then the residue, the balance goes on typically to your family after a period of time. And in the case of a charitable remainder trust, it works in the opposite way. The income interest goes maybe to the donor, the grantor or the person who creates it, most commonly. It can be family members as well, and then the remainder, after a period of time, goes on to charity.
And there are benefits to both of those concepts. Both include the opportunity to get a charitable deduction for a portion of what you put into that trust. Also receive an income interest, either yourself or your favorite charity. And then in the case of the charitable lead trust, passing assets onto your family at the end. Those assets can invest and grow, all kinds of opportunity there. But, yes, two kinds of trusts, charitable lead, charitable remainder.
Talli Sperry: Great, really helpful. So we have lots of options, and when we think through all of these options, Kevin, what are key questions our clients need to ask themselves to weigh these things?
Kevin Wick: Yes, I always start, and I work with a lot of our high-net-worth clients at Vanguard, I always start big picture. Think first and foremost about the wealth that you’ve built, the wealth that you’re building, and what is the purpose of what you’re doing there? What goals do you want to accomplish with what you’ve built, what you see building in the future, what you might inherit, both from a philanthropic standpoint and as it relates to your family, kids, grandkids, whatever the case might be, and establish some kind of high level goals in that respect.
And then with those goals in mind, a purposeful, strategic choice, then you can think about, okay, “I want to achieve this goal. I would like to give X percent of my wealth to my favorite causes.” And then you can start looking at which of these different kinds of tools and opportunities get you to where you want to be in the context of that goal.
And I approach broader estate planning this same way. Think about the goals and objectives you want to achieve; and then with that in mind, start thinking about, “What options, what tools, what kinds of trusts, what other things should I be using to achieve those goals?”
Talli Sperry: So it’s similar to investing. It’s all goals-based, right?
Rebecca Moffett: Yes, that’s right.
Kevin Wick: Correct.
Talli Sperry: Really helpful.
So as a bit of a follow-up, one of our presubmitted questions from Laura from Chicago. She was asking, “What are options for charitable giving through Vanguard?” So which of these options can we do through Vanguard?
Kevin Wick: Yes. So the most direct or maybe I’ll call it the service that’s offered by Vanguard is the donor-advised fund through Vanguard Charitable, and there’s a lot of interplay between what you can do in your individual account and if you happen to have or you’re considering opening a donor-advised fund with Vanguard Charitable.
But any of these other tools that we’re talking about can be done at Vanguard. If you set up a charitable trust, you can open an account at Vanguard to hold the funds that will be invested inside of that trust. If you set up a private foundation, you can open an account at Vanguard to hold those assets.
But the most direct, and the reason that we’re kind of talking about Vanguard Charitable, is it’s a great service that operates all here at Vanguard. And like I mentioned, a lot of interplay and a lot of ability to do work with your assets here at Vanguard and move them easily to Vanguard Charitable if that fits, again, with your long-term, big picture goals planning and the like.
Rebecca Moffett: That’s right. And even have a seamless service experience.
Kevin Wick: Yes.
Talli Sperry: Yes.
Rebecca Moffett: If you would like, you can have your Vanguard Charitable reps talk with your Vanguard reps and all have one discussion.
Talli Sperry: Yes, I think that’s a really helpful thing to point out, that even though they are two separate organizations, we try to make sure clients feel like it’s one fluid process. That’s really helpful, great.
So we do have a clarifying question, and this is from Sue who is just noting, “Just to confirm, the deadline for contributing to a donor-advised fund and receiving the benefit from either bunching or itemizing on 2018 tax returns is December 31, correct?” Is that correct, Jackie?
Rebecca Moffett: That is correct, yes.
Talli Sperry: Okay, great. Good job.
Jacklin Youssef: Yes, so it has to happen before the end of December. I would probably just caution her against waiting until the last possible day. Definitely make sure again that you’re having those conversations we’re talking about. Understand what your goals are, and try to do this sooner rather than the end of the year.
Rebecca Moffett: That’s right. Different types of assets have different deadlines. If you do go to Vanguard Charitable’s website, you will see our year-end deadlines up for the different types of assets and then the process for each of those assets. So to your point, yes, start early, but December 31.
Talli Sperry: That’s really helpful, so that green Resource List widget is probably your year-end planning tool. Between the tax blog by Jackie and the Vanguard Charitable link, those will answer a lot of our questions in this space. Okay, great.
So let’s go to some of our presubmitted questions while we wait for you to ask your questions that are burning on your mind. Again, we’d love to hear from you and make sure we’re targeting what’s most on your heart tonight.
But, Kevin, I’m going to leave this question to you, and this is from Ed from Lyons, Colorado, and he’s asking, “Is it wise to keep gifting if your heirs are already beneficiaries of a trust?” So when we think of broader estate planning, how do we consider this one?
Kevin Wick: Yes, I’m guessing Ed’s probably not talking so much about charitable giving with that question, and I’ll kind of address it that way. So if you’ve done some estate planning and you’ve set up a trust for your kids, other family members, perhaps you funded that trust with some assets already, perhaps it’s going to be funded when you pass away, I think the short answer is yes or maybe, again, given your own individual situation.
There are other aspects of the tax laws that deal with what I call lifetime gifts, again, set aside charitable gifting for the moment. And there are very advantageous ways to be able to give money to your family, whoever you choose to during your lifetime. The simplest of those is the annual exclusion amount. In 2018 you can give $15,000 over the course of calendar 2018 to anyone you want to and as many as you want to without any gift tax consequence, without having to report anything to the IRS.
So if you’re Ed and you’ve set up a trust, maybe you’ve put money in already, should you do something more? If you’re comfortable doing it, and it’s a great thing to be able to help out your family members while you’re here and sort of see the benefit of what you’re doing, I would say yes. But it’s absolutely dependent on your individual situation, what your needs are through the balance of your lifetime, and how much you’re comfortable giving away. But there’s very tax-advantaged ways to do something like that, regardless of what you’ve done in the course of your estate planning already.
Talli Sperry: So back to our strategic approaches it sounds like right? Yes.
Kevin Wick: Yes, correct.
Talli Sperry: So we are getting a lot of questions about fees, just from our discussion, and so I do want to refer you all to Vanguard Charitable, the link in our green Resource List widget. That website has a very comprehensive explanation of fees, and it should give you the answers to all of the questions that we’re getting in.
So we’d like to go back to some of our presubmitted questions, just so we make sure we get across all the dynamics our audience has been concerned about tonight. And, Jackie, I’m going to move this one to you, and this is from Lazar in Tucson, Arizona, so thank you, who’s asking, “Is it too late to make a charitable contribution from an IRA?”
Jacklin Youssef: Great question. So I’m assuming Lazar is looking at the IRA distributions that he’s probably required to take. And if he’s already 70½and has to take a minimum distribution, this has to be met before the end of December. So it’s not too late, as long as, of course, he has not already taken that distribution to leverage that qualified charitable distribution that we talked about earlier where the first dollar that comes out has to actually be transferred directly from this IRA to a qualified charitable organization, and that’s a public charity; and we said it’s probably not going to be a donor-advised fund. And that would actually satisfy the minimum distribution, so it’s not too late. It’s just a matter of making sure that this actually makes the most sense for Lazar to consider pursuing.
Talli Sperry: Great. And can you clarify some of the benefits versus gifting from securities or from cash?
Jacklin Youssef: So very good question. So if we’re comparing the IRA and using that qualified charitable distribution versus giving cash or appreciated securities, I’d say these are two more distinct areas. The one area that I would say think about, “Does it make sense for me to actually use the IRA minimum distribution to satisfy the charitable inclination?”
I’d say from a tax perspective alone, it probably makes a lot of sense for us to do that because it’s not considered to be taxable income, so it’s not really going to push me potentially in a higher tax bracket. It’s not going to maybe bump up my Medicare premiums into some of those higher Medicare premiums and so forth.
And keep in mind, in that situation, I don’t even have to worry about maybe bunching some of the strategies and trying to figure out how to get above the new higher standard deduction. Chances are I could satisfy the charitable giving using that qualified charitable distribution, and I’m also taking the benefit of the higher standard deduction. So from a tax perspective and dollars and cents, it may certainly check off all those different boxes. But I have clients that actually combine all these different strategies and say, “I want to use my IRA, do some qualified charitable distribution, but I also want to actually just continue to fund my donor-advised fund using appreciated securities or even supplementing that with cash.” So it’s not necessarily a one-answer-fits-all. It’s really what works ultimately for Lazar and other clients, of course.
Talli Sperry: Great. Anything to add, Kevin?
Kevin Wick: I was going to go back to we’ve talked a few different times about the qualified charitable distribution, and, Jackie, you probably get this too. We’ve thrown out that 70½ age marker. I always get clients asking, “What’s that all about, why?” I don’t have a good answer for that, honestly. It’s the time frame the IRS has picked. But maybe just to clarify, it’s the year that you turn 70½; and that’s the magic time when you are required to start taking distributions out of your traditional IRAs.
And maybe a good clarification is our clients who have Roth IRAs, you don’t have that same requirement. There’s no requirement to take money out of a Roth IRA. It’s just your traditional IRA.
But, yes, that 70½ always comes up. Where in the world does that come from?
Jacklin Youssef: It’s the magic age, exactly. So, certainly, something again for Lazar to think about.
Talli Sperry: Great. Really helpful clarification.
So we have a live question that’s come in, and this one is asking, “Is there any reason to establish a private foundation or a donor-advised fund instead of giving directly to individual charities?” Really good clarifying question. Who’d like to take it?
Rebecca Moffett: I can certainly start.
Talli Sperry: Great.
Rebecca Moffett: So the one reason you would open up either a private foundation or a donor-advised fund is because you’re looking to fulfill your commitment today to charity while also planning for your charitable commitment later on. We see a lot of individuals who are looking to fund their donor-advised fund during their income-bearing years so that then they can continue to give in retirement. Because, like we’ve said, you’ve separated out the tax deduction or the funding event from those granting decisions. So that’s a little bit as to why you would use a donor-advised fund. You then set those assets aside for charity to be able to use them at different points during your life.
If you do have a set budget for charitable giving, and that budget is allocated to one or two organizations, and you’re not necessarily thinking about that longer-term giving yet, direct giving may actually work just fine for you.
And, Kevin, I don’t know if you’ve seen anything.
Jacklin Youssef: I was going to ask something.
Kevin Wick: Yes. Go ahead, Jackie.
Jacklin Youssef: Given, of course, the fact that the markets have done tremendously well over the past number of years, we have clients that have large gains, need to probably rebalance their portfolios, and that’s where part of it is—wealth planning, tax planning, and maybe it is a matter of “I want to put my planning in place, but I want to still think about, again, who’s ultimately going to be the charitable organization that’s going to get some of those dollars or equities that I’m actually looking at donating?”
So it’s a little different in terms of the order of how some of these things sometimes work where as a client I want to rebalance my portfolio. I want to actually just make sure, again, that it’s done in a tax-efficient way. But I want to be thoughtful as to who ultimately is going to get those securities again that I’m actually donating.
Talli Sperry: Great.
Kevin Wick: I would just go back to kind of the big picture thought process that I mentioned before. If your giving is year over year, that’s terrific. Like I said earlier, continue doing that. Nothing wrong with that at all. If you have longer-term goals, and especially if you want to get your family involved, you want to get your children involved, or even generations beyond, both the donor-advised fund and the private foundation can provide a context and a way to do that.
Take that even further, families with private foundations and this maybe applies to some of our biggest clients and biggest families, provide an opportunity to involve from generation to generation, and you can even have family members work for the foundation, and it can be a full-time job if it gets big enough, absolutely. So it starts with what goals, again, are you looking to accomplish and finding the right tool to meet that goal.
Talli Sperry: And, again, when we go back to Laura’s presubmitted question about could we do these things through Vanguard, we can do everything you guys are talking about through Vanguard, right? Really helpful. Nice to have a one-stop shop, I think.
So let’s go back to one of our live questions, and so Jackie, this one is for you. And this is, “Can an RMD from an inherited IRA also be directly donated if I’m younger than 70½?”
Jacklin Youssef: Oh, unfortunately, the answer is no. In that situation, the individual who inherited the IRA has to also be 70½ as well to be able to do that qualified charitable distribution.
Talli Sperry: Unfortunately not.
Jacklin Youssef: So, consider other alternatives in this situation.
Talli Sperry: Great. So let’s get to Patricia’s question. So this is another live one, and she’s asking, “Is it possible to give multiple small donations to charity and have it satisfy RMD requirements?”
Jacklin Youssef: Yes, so there’s no minimum amount, and so this is, for instance, I mentioned that the maximum amount and the limit is $100,000 or the actual required minimum distribution, but there’s no minimum. So as long as this can actually be facilitated by the process with the IRA custodian, I would say absolutely. You know, find the qualified organization that would accept the distribution, and make those small contributions.
Talli Sperry: Great. So I’d like to go to one last question. Rebecca, I might ask you to answer this quickly based on time. But this was one of our presubmitted questions, and this is from Kathleen in Bellevue, Washington, so thank you, Kathleen, if you’re watching tonight. And she’s asking, “Are there rules of thumb for someone to follow who is newly able to consider a larger charitable gift?”
Rebecca Moffett: Oh, that’s a great question. And that question we hear all the time from our really first-year donors I would say. And it’s one where you decided you want to give, but now you’re trying to figure out, “How do I give well?” right? And so if you take nothing else away, we suggest just be planful. Right, be thoughtful with how you’re giving those dollars.
But Vanguard Charitable does have some guidance. You know, we’ve put it in the form of this, “5 Best Practices for Philanthropists.”
Talli Sperry: And that’s in our widget tonight, isn’t it?
Rebecca Moffett: Exactly. It’s in our widget. There’s some great information in there. But let me go through those five best practices quickly. We put them in the form of some reflective questions.
So the first is, how do you define charitable success? And that you might think about creating a charitable mission statement, some charitable goals. In the paper that you see in the widget, you’ll see there’s a great example about increasing access to an alma mater, educational access to an alma mater and some pretty tangible goals as to how to do that—about finding extra scholarships, having a commitment of giving. So that’s a really great way in order to define your charitable success.
The second is looking at how philanthropy fits into your overall financial plans, and we’ve talked a lot about that today, so hopefully we’ve given some guidance around that.
The third is, who do you involve in your philanthropy? And we think about that really in three ways. So who are you going to involve today, either in the form of a partner, a spouse, or a financial advisor to really talk about those plans? But who do you want to continue to involve in terms of your heirs? What’s your strategy for getting your family involved? I have two very young kids, so how do you start small and then build up those conversations over time? And then who do you want to involve in your charitable legacy? So that’s really the third best practice that we say.
The fourth is, which giving tool is best? We’ve talked a lot about the different giving tools. In the Resource widget, there is another paper called, “Compare Giving Options,” which does lay out different giving options and different considerations for those, so I would suggest take a look at that as well.
And then lastly is, how are you going to evaluate and monitor the nonprofits that you give to? What is your plan for giving to them? How do you want to support them? Should it be unrestricted? Is it for a specific purpose? How are you going to get to know the organization, read their tax documents, get to know their financials, but really get to know the people who are running it as well?
Talli Sperry: Okay, great. I think that’s a nice summary of our discussion tonight. That’s really helpful, and I’ll just add that in the Vanguard Charitable website, we have the “GuideStar” tool, and that can help you evaluate charities, correct?
Rebecca Moffett: That’s right. And if you’re a donor, you get access to all of this information about Charitable’s goals, how they’re trying to measure them. It really gives you so much information to decide how to give well.
Talli Sperry: Great, so thanks so much for covering our final thoughts tonight, Rebecca. I think we’ve probably said it best for all of us.
So we’ve covered a lot of important material tonight, and thank you for being with us and for sharing all of your expertise this evening.
I’d like to add one additional thought as we close our discussion. So year-end giving can be an important time for family. We talked about that. And as you gather with your family during the holidays, I invite you to think about your family’s legacy and the purpose of your wealth.
Flagship’s Family Legacy Services are available to help guide you and your family in legacy journeys, so please do speak to your Relationship Consultant to learn more.
And before we sign off tonight, I do want to share an update with our audience. We’ve heard your feedback, and we’re very excited to launch a new streamlined service in the very near future that will make your charitable giving process much easier. So please do keep an eye out for a communication from Vanguard about this new service that will be coming very soon.
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And be sure to check out our new podcast series, The Planner and the Geek featuring Vanguard’s own Maria Bruno and Joel Dickson. I think you know I love this one. It’s so much fun. So go to the first link on the green Resource List widget to listen to our most recent episode, which came out very recently, I think.
So we’re so glad you spent your evening with us, and we sincerely hope you benefited from the program. We’d encourage you to continue the conversation with Vanguard community on our social channels, Facebook.com/vanguard, and on Twitter by going to @vanguard_group.
On behalf of our panelists and all of us here at Vanguard, thank you and goodnight.
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