S1, E1: Intro to using DAFs for planned giving

This is the first of five episodes in our Philanthropic Insights series that offers advisors an intro to planned giving and dives into how to leverage donor-advised funds for long-term impact.  

In our first episode, Kim Ledger brings on fellow planned giving expert Kyle Christopherson, MBA, CFP, head of Strategic Growth Services at Ren to discuss the basics of planned giving, why philanthropy is essential to every advisor’s practice and how to most effectively use giving vehicles such as donor-advised funds. 

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Until next time, keep giving wisely.

Transcript

Welcome to Ren's Philanthropic Insights video podcast series made to help financial advisors make the most of their clients charitable giving. I'm your host Kim Ledger, Ren's VP of Complex Assets and I brought in one of our experts from Ren, Kyle Christopherson, SVP of Client Growth, to dive into the topic of different ways advisors can leverage DAFs for long-term impact. Let me give you a little background on Kyle.

He has over 20 years of experience in every aspect of creating and administrating various charitable gift instruments. He's a frequent presenter at national and regional conferences educating financial professionals and planned giving officers on how to create effective charitable planning strategies. Welcome Kyle.

Thank you, Kim. It's great to be here. 

Yeah, thanks. We're going to have a series of five, so you and I are going to be together for a while. 

Oh, that's great. I'm looking forward to it.

Talking about some charitable giving. Today let's go over the basics and an introduction into charitable giving. – Sure, sure. I know there's a lot of discussion about charitable giving. So, why should advisors even use this in their practice?

 That's a great question. I've been working with financial advisors over the last 20 years and one of the common things that we see a lot is when financial advisors are working with their clients they're talking about estate planning. They're talking about retirement planning. They're talking about funding college for their children. All great things. But one of the things that has been missing in a majority of these conversations is charitable planning. When you look back at the data related to charitable planning, you can look back for decades and charitable planning. As of 2021, it was right around over 400 billion dollars of total charitable gifts, and it keeps increasing year over year. It's a significant opportunity in the marketplace to be a part of that trend.

Unfortunately, a lot of financial advisors don't have that conversation with their clients, talking to their clients about charitable giving. Do they have charitable giving goals? You know, what charities do they give to and why? Trying to understand a little bit more about their clients. And the first question is, well, is it even relevant? And so we’ve looked at some surveys that talk about that. There's a number of surveys out there, but 88% of affluent households give the charity from one survey. You're looking at millennials, the next generation coming up, three quarters of them identify as philanthropists, not just giving to charity, but they identify as a philanthropist. 

And that's important to advisors to work with that next generation.  

Exactly. That's very important. So when you’re talking about - look at your portfolio of clients and when you've got a majority of these clients that are charitably minded, that are focused on charity, and you're not having that conversation with them as a financial advisor, well, where do they go to get that charitable planning strategy? Where do they go to get that advice? 

Seems like if you're not having that conversation, they're having it with someone.

Someone else. 

Right? 

Right. So that could be the danger. 

It could be a friend. It could be somebody who's not versed in charitable planning tools. 

Exactly, It could be a friend. It could be a neighbor, right? Someone that can have read something online and they think they're now experts on it, maybe giving them improper information. But they could also be going to another financial advisor. Maybe they're looking for a charitable giving strategy in this financial advisor down the street, put on a webinar about charitable giving. So now they've got another resource they're going to. As a way to make sure that you're providing a comprehensive, holistic wealth management approach to your clients is to incorporate that charitable giving conversation into the client's overall discovery session to make sure that you understand the full picture of what your clients are trying to achieve.

And there's a lot of benefits to that too, right? 

Well, I was just going to ask that. Are there tax benefits, correct? 

There's tax benefits. There's benefits to the relationship, creating a deeper relationship, getting to know your clients better, and the tax benefits, you can't ignore that. Now, most of the clients are charitably minded, right, but the tax advantage part of that is just the icing on the cake. There's definitely some benefits there that we can talk about. Well, first of all, the charitable deduction. 

Yeah, I was going to ask you, how does that work? 

Yeah, so the charitable deduction, whenever you're making a gift to a charitable organization, you're going to get an income tax charitable deduction that you can use on your personal tax return to offset some of your taxable income. And, you know, that's a popular approach for a lot of clients. You know, at year end, they get with their CPA, they determine, hey, I'm going to have this amount of taxable income, I need a charitable deduction to offset some of that tax. And so that's where charitable planning kicks in, and this becomes really important. But in addition to the income tax charitable deduction, you also can avoid capital gains tax. So if you have an appreciated asset, and that's available to gift to charity, well, you get an income tax deduction on the value of that asset that's going to public charity. But in addition, you're able to avoid the capital gains tax. 

Wow, that's great. 

Yeah. Absolutely.  

So are there other instruments, I mean, what are the different types of charitable instruments that are out there and available to clients or to donors?  

Obviously, the most well-known is just going to be your simple outright gift, right? If you're - writing checks to the university - when the university’s calling you up at the end of the year or you've got an alumni campaign, and they want you to be part of it, you write them a check. Or maybe it's the local humane society. Maybe it's your church or whatever organization you're a part of. You just write them a check, provide cash, and that's what we refer to as like an outright gift. But there's beyond just the outright gifts, there's structures that you can put in place to accomplish your charitable giving goals that goes beyond just an outright gift.

Like what? 

Well, the first one is what I refer to as more of like the endowment style gift. That endowment style gift is where you make a completed a gift, but now there's some level of control over how those funds are paid out over time. So have you heard about endowments in the news at all?

I have, yes.

Endowments are really popular, especially with universities. 

That's exactly what I was going to say. You hear about chairs being endowed, you hear a lot of different things. Yeah, endowments seem to be very popular with the universities.

Absolutely, and, it's really designed for someone that says, you know what, I'm happy to give you this gift of say $20,000, but I want to make sure that only 5% or some certain amount is going to be allocated to, let's say, a scholarship fund that year. - Yeah. 

Or maybe it's upkeep on a dormitory, whatever it might be. - Sure

But you can put that purpose restriction in place to make sure that the charity is using a certain amount every year to make sure that gift is being used for an extended period.

Is that given directly to the university or are there other options? 

It's typically going to be given directly to the university or the charity, whoever's going to provide that endowment contract. But it's a contract entered into directly between the donor and the charitable organization. 

But it is a contract?

It is an agreement. It's typically about two pages, very simple. It basically is everyone coming together and agreeing on how those funds are to be used. But what if you don't know how you want those funds to be used in the future? 

Ya know? That's a possibility. And maybe there's multiple charitable organizations that you want to benefit. - Right. Well there’s where we have - over time - absolutely, over time, it could be years, could be generations, right? And that's where we can incorporate another type of endowment style gift, which is referred to as the donor-advised fund. 

Yes, we're very familiar with the donor-advised funds. 

Very familiar with donor-advised funds.  

Help others to know what a donor-advised fund is.

A donor-advised fund is kind of like setting up your very own private family foundation. So if you make a contribution to establish a donor-advised fund, you're going to get the upfront income tax deduction that you would get for any kind of an outright gift. But then over time, you get to determine how much is going to be granted out to a certain specific charitable organization. Could be a multitude of different charitable organizations. There's no minimum or maximum to the number of grant activity that you can make from your donor-advised fund.

So it's really a way to make that completed gift, but be able to have a say in where and when those funds are going to be distributed into the future through making those grant recommendations.

Got it, so the charitable deduction is given at the time, or you claim the charitable deduction at the time that the funds are given to the donor-advised fund. 

Absolutely. And it's a very popular strategy, especially as we talked about earlier on when you're at the end of the year, you're working with your CPA. – Exactly - You've got to get that charitable deduction. Well, if you don't know which charities that you want to support, you can go ahead and fund that donor-advised fund before the end of the year, get your charitable deduction, and then over the next several years, you can figure out which charities that you're going to support and be more focused on what your overall plan is and what you're trying to accomplish with your charitable giving.

And I know that they're very popular. So on our next series we'll be talking more – or I guess our next episode – we’ll be talking more about DAFs in depth. - Absolutely, absolutely - Are there other items out there as well? 

There are. You could be in a situation, you know, we talked about outright gifts, right? – yes - So we're talking about making charitable contributions. You get an upfront income tax share reduction. If it's appreciate assets, you avoid the capital gain tax. 

But what happens for that client that says, you know what, that's great. I would love to support my charity, but I really need this asset to support my retirement income. I really need this to live off of. And so for those clients that are looking for an income stream, we've got great options available for them as well.

You could look at doing a charitable gift annuity. That's the simplest and most straightforward route. 

That's a pretty popular option for a lot of people. 

It is. And a lot of charitable organizations have these as a tool to provide to their donors.- Right - And basically what it is, is you agree to give the charity a certain amount of money and in return, they're going to enter into a contract with you that says, thank you for this gift of $20,000. We agree to pay you 5% for the rest of your life. So that way you've turned that gift into an annuity contract that's going to provide a steady income stream for as long as you live.

Now there could be additional clients that maybe they have income needs that are a little bit different. Maybe they want to defer income for a period of time. Maybe they need a various distribution rate flexibility. Maybe their situation is just a little bit more complex. And so you could look at going into a charitable remainder trust, which is where you have to drop your own trust agreement. You have to get an attorney involved a little bit more complicated, but it provides more flexibility and better strategic results on that. 

Got it. And I think that there are a lot of, I'm certainly no expert on charitable trusts, but it seems like there are a lot of options as to when you can take income. 

There is. There's a lot of options. It's important to talk with someone that can be an expert and guide you through, okay, according to the client's goals, what they're trying to accomplish, you know, what makes the most sense, which charitable remainder trust format makes the most sense. 

We've talked about outright gifts, endowment style gifts, and then income producing gifts. I think that I had someone ask me what pooled income fund is. 

Yes, absolutely. A pooled income fund is another type of gift that can provide an income stream back to the donor. So that is definitely an option. It's a little bit easier to get established because you don't have to draw up a separate trust agreement like you do for a charitable remainder trust, kind of similar to the structure of a charitable gift annuity. The difference is - But it sounds a little like a mutual fund at the same time. - It is because it's kind of like having what you call a charitable mutual trust, if you will. So you've got multiple donors that are making a contribution to a single gift instrument and then they share pro-red according to what they contributed into the pooled income fund. They get that an income back. So whatever the net income is from that pooled income fund is what's distributed back out to the income beneficiary. 

Okay, got it. 

So you got three options for the income. You've got pooled income fund, charitable gift annuity, charitable remainder trust. 

Okay, so lots of great options out there. 

Absolutely, but like we discussed before, donor-advised funds is what we're going to be focusing on in additional episodes 

Yes - And just because of their popularity, their simplicity to be able to integrate that into a client conversation, have that look and feel of having your very own private family foundation. 

I know we've got some great sessions lined up, so thank you for the intro today. And then next time we'll be talking about donor-advised funds, specifically because they are so popular. And I know we have future episodes. We'll be covering, you know, how to have that charitable conversation and then how to collaborate with other professionals. So I'm looking forward to it. - Absolutely

Thanks for watching, or if you tuned in via podcast, thanks for listening. If you want to learn more about Ren and how we might be able to help with your philanthropic program needs, visit reninc.com or email us at consulting@reninc.com.

We'd also love to hear if you have questions or if there are topics about planned giving you want us to talk about. We'd be happy to do that. And of course, don't miss the great information we have in our Advisors Philanthropic Insights newsletter. Subscribe at reninc.com/advisorinsights. 

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Until next time, I'm Kim Ledger, keep giving wisely.