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  • Writer's pictureBridget Sullivan Mermel CFP(R) CPA

Maximizing Donor-Advised Funds: Advanced Techniques for Tax Planning and Charitable Giving

In this episode of FTFP, John and Bridget dive into the advanced strategies of using donor-advised funds for charitable giving and tax planning. They discuss the concept of "bunching" charitable contributions, controlling future investments, simplifying tax situations, and promoting the feeling of giving back. They also explore the benefits of involving family members in charitable decisions and the flexibility of donor-advised funds in supporting various causes. Join John and Bridget as they provide valuable insights on leveraging donor-advised funds for impactful and strategic charitable giving. Don't forget to subscribe for more financial planning tips and advice!

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Previous episode about the basics of a donor-advised fund:


John: On a recent episode of Friends Talk Financial Planning, we discussed how a donor-advised fund can supercharge your charitable giving. On today's episode, we'll dig deeper into some of the lesser-known advantages of a donor-advised fund and how it can really be a Swiss army knife in your charitable backpack. Hi, I'm John Scherer, and I run a fee-only financial planning practice in Middleton, Wisconsin.

Bridget: And I'm Bridget Sullivan Mermel. I've got a fee-only financial planning practice in Chicago, Illinois. Before we talk about more donor-advised funds, please subscribe. It helps us with YouTube. So, John, let's take out the Swiss army knife and start using it. I would say the more advanced donor-advised fund strategy is called bunching. So you do this because you want to itemize. So why don't you tell me about what you've seen with that?

John: Yeah, sounds good. But before we jump in, I just want to remind folks about the episode we did before. The core of having a donor-advised fund is first when you want to control the timing of my tax deductions. For example, I've got a high income this year, but I won't next year. And second, I want to give appreciated stock investments that have gone up. Those are sort of the two basics.

Then we get into some of the little more complicated things that still can provide a lot of value and sort of at its core, if I'm giving to charity already, but I usually end up taking the standard deduction because it is much higher these days than it had been in the past. And yeah, I give to charity. Technically it's tax deductible, but it never shows up in my tax return because the standard deduction right now is just so high.

I might take two or three years of charitable donations and put them all into one year, so I get above the standard deduction, then I get a higher deduction this year, and then I'll take the standard next year and the year after and the year after. This way I can kind of group my deductions into one year and sort of lump them together in one place. That's the place where we see it is we're giving, but either we're not getting any bang for the buck on the tax side of things or we're getting a very little bang for the buck because the standard deduction already gives us so much benefit. By bunching we can sort of plan around that.

Bridget: Right. And so, you could do this by just contributing cash to your donor-advice fund. So I had one client that they just saved it up, and they took it out of their emergency fund and then replenished their emergency fund as time went along with not making these donations part of the budget. And they donated a decent amount of money, so that was part of it. It wasn't like they were doing $1,000 donations. For most people, if you're not a big donor, I don't see bunching that much, but I'm not sure about that.

John: Probably you need to be doing several thousand dollars a year or more. I mean, again, your circumstances might differ. Grouping those deductions can make a big difference. The other place that I see a lot of folks using a donor-advised fund, separate from the timing and the appreciated investments thing, is having control over the investments into the future. I want to take a tax deduction today, and if I'm going to give $2,000 to my church every year for the next ten years, I don't need a donor-advised fund.

I could just give them $20,000 today and take the same tax deduction. But I don't know who the pastor’s going to be in five years or what the future of that charity is going to be. And so, I want to take the deduction today, but I want to control the timing on things. And we talked a little before we hit record about how Boy Scouts of America is an interesting case. That they've changed how they approach things. I think they call it just Scouting now.

And you might think that that's a terrible thing, and you don't want to support them anymore, or you might think it's an awesome thing, and now you want to start supporting them. But it's like the rest of our financial planning, Bridget. Life changes more than it stays the same. And, yep, it's great having that tax deduction when I want the tax deduction, but to be able to control when the money goes to charity is one of the big reasons or places we see people using the donor-advised fund.

Bridget: Yeah. And the other thing is that gets to one of the things that you've actually taught me about giving. And that’s thinking about it in terms of how much I like what the charity is doing now. Is the charity aligned with my values right now? That’s a good way to think about giving. Because I think that every time I donate, the radio station changes its format. And you think, no, just think about, have I enjoyed the format, not did they switch formats after I donated.  

John: Right.

Bridget: So, asking what have you done for me lately? is a better approach than saying I'm investing in the future of this organization, because they're always going to remain the same. I mean, they might change. And that's fine. What else do you have to say on this one?

John: Yeah, there’s another thing, and you actually mentioned it earlier. We talked on our previous episode about simplicity. For example, I want to give stock that's gone up or a mutual fund that's gone up, but I don't want to give it to 20 different places. But there's another way in which a donor-advised fund can add simplicity to somebody's tax situation.

Bridget: Yeah. For instance, if I have clients that have no idea what the basis is for their stock, they bought it and that's kind of what their basis is. And maybe they have paid some taxes on dividends over the years, but they bought it a long time ago, decades ago.

John: Or maybe they were gifted with that stock. We've had that. Dad gave me stock in 1978. What's the basis?

Bridget: Yeah. Companies weren't even required to help you keep the basis until a certain point in time, so it can be a big task to just figure out what did I buy this for? And that's what's called the basis. So when you're calculating capital gains, you take the fair market value minus the basis. And so, you have no idea what it is. That's a great candidate for a donor-advised fund.

You don't have to worry about figuring it out. You get the deduction of the fair market value and exactly what the capital gains were are relevant because the charity gets it. In this case, your donor-advised fund gets it. They sell it. But charities are tax exempt organizations, That's the beauty of that. They can just sell, because they don't care what the basis is. There's no tax deal. If I sell it, I've got to figure out the taxes on that stuff.

Bridget: Absolutely.

John: I love that one. We've had several folks recently who received stock over the years. For example, I got stock as a gift and, golly, what's my basis 30 years later? I can't remember where I left my car keys yesterday, much less what the basis of my stock is. And again, if it's a million dollars, well, jeez, I'm probably not giving that all to charity. I better figure out that basis. If it's a smaller number I might go, “I'm giving money to United Way anyway. Why don't I give it all in one year and I can avoid this basis issue.” That’s a really elegant solution to a complicated problem.

The other thing that we'll see is that for some folks using a donor-advised fund has nothing to do with tax timing, has nothing to do with giving investments that have gone up, but just from a record keeping standpoint this is the best option. If you're itemizing your deductions and you're giving money to charity every year, you've got to keep track of each of those charities that you gave money to. We've got a client, and they keep great records. And it can be two sides of a piece of paper, sometimes more of charities that they've given money to.

And their approach is not giving larger sums to one. Rather, it's $100 here and $200 there. And there might be 40 different charities that they gave to spread their money around. That's a ton of record keeping to deal with at tax time. By using a donor-advised fund, they just write a check to the donor-advised fund. And remember the tax deduction is when money goes into the donor-advised fund, That is technically the charity. So I've got one check for $10,000 or $5,000 that goes into my charitable donor-advised fund. That's the tax deduction.

That's the one record I need to keep. Now, the money is in there. I give out $100 here and $200 there. That money goes to those charities that they want it to go to, but there's no record keeping involved with that. We don't have to deal with all that stuff. So if somebody gives to a lot of different charities, a donor-advised fund can be a great way to control taxable donations. This can just be one thing to keep track of from a record keeping standpoint, rather than 30 things to keep track of.

Bridget: That makes total sense to me. Another thing I want to talk about is the ability to actually make ourselves feel better. So one of the things with charitable donations is that donating money, even if it's small, makes us feel good. So with a donor-advised fund—I don't have research to back this one up—but from your experience and from my experience with my clients, it seems like when people donate to the fund, they feel good, whether it's appreciated stock or whether it's cash. And then when they actually donate the money, they feel good again.

So it’s almost like double dipping on that. A third way you could do it is that when you have a donor-advised fund, it's as easy as checking a box to say you want to give anonymously. Giving anonymously, again, is associated with higher benefit, not getting credit, more “warm glow” is the technical term for it. So that's another thing that's easy with donor-advised funds whereas it's more difficult to give anonymously. I would say when you're writing a check, they know who you are.

John: I'll tell you a couple of other things before we wrap up here. One of the things that we do with our donor-advised fund is we include our kids in some of the decisions about who we should give money to, because charitable giving is important to us as a way to support our community. And so, my sons get a chance to do a little bit of research and make suggestions, and we're hoping to instill that sort of sense of value into them.

And when my wife and I are gone, the beneficiaries of this account, if you will, there's some other technical term for it, but basically, the kids get to continue to make donations and dictate where that money goes. So instilling values in them is one of the reasons why we use it. And then the other place, I just want to point out to folks that sometimes those people ask, “Well, what if my brother is in the MS race, and can I use my donor-advised fund to support that cause? How does that work?”

And I've got two answers to that. One is, jeez, if it's $20 or $50, what are we really talking about? Is it worth the time and effort? So, a lot of times, I'll just write a check and not worry about the deduction so much. But the other thing is, we've had some charities where, especially this time of the year, there's a donor that's going to match your donations. If you send us a check or click on the button or pay by credit card, we get this donation and I look at it and go, “I'd like to support that in a bigger fashion, but I want it to come from my donor-advised fund.”

I'll just get on the phone with the charity or send an email and say, “Listen, I'd like to give and be part of this package, but money is going to come from my donor-advised fund. Can I still get credit as part of the matching?” And I've never had anybody say no. I’m sure that people do, but most of the time it's they say, “We'll mark you down as one of the donors for this cause or for that race or for this sort of thing.” So sometimes just reaching out helps make a connection with the charities, too, which is pretty cool.

Bridget: Cool. That seems like that's a good place for us to wrap it up. I am Bridget Sullivan Mermel. I've got a fee-only financial planning practice in Chicago, Illinois.

John: And I'm John Scherer. I've got a fee-only financial planning practice in Middleton, Wisconsin. And both Bridget and I are taking on new clients. And so, we'd love to hear from you if you're interested in finding an advisor. But Bridget and I are also both members of the Alliance of Comprehensive Planners, a group of nationwide, fee-only, tax focused financial advisors that think like we do. If you like what you hear on our show and like to talk to an advisor in your local area, check out

Bridget: And don't forget to subscribe.

At Sullivan Mermel, Inc., we are fee-only financial planners located in Chicago, Illinois serving clients in Chicago and throughout the nation. We meet both in-person in our Chicago office and virtually through video conferencing and secure file transfer.


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