Two years ago, I wrote about creating my own charitable giving strategy, which I then documented in spreadsheet-y glory. I’m back to tell you how I’ve changed and improved it since then.
Seeing our clients give money to people and causes they care about is one of the best parts of the job at Flow, for the whole team. Let’s face it, our clients (and many other people in tech; maybe you, too!) are financially privileged and lucky, and it’s just so…satisfying to see them not only recognize that but act on it, too.
Many of our clients have, over the years, expressed their desire to give more to charity…but an even stronger desire to create a plan for their charitable giving so that it doesn’t feel so arbitrary.
In response to that, we developed a structure for a conversation to lead clients through the thought process of building their charitable strategy. And a couple years ago, I finally took my own medicine and created my own plan.
I’ve learned to embrace-ish the idea of “progress, not perfection.” (It’s one of our core values after all…just look at our website, it’s right. there.) So, my husband’s and my plan wasn’t perfect, but it was A Plan, and I knew I could simply iterate on it in future years.
(Just as editing an existing paper is easier than writing one from scratch (usually; let’s face it, sometimes writing is just so atrocious there’s no saving it), iterating on a plan is easier than writing the plan in the first place.)
I’ve made two notable changes since then.
I Created a DAF. And Oh My Goooooodness, This Is Nice.
I have historically been a bit cranky about Donor Advised Funds (DAFs) (although I think I was fairly even-handed in this article). Mostly because I saw people slavering over that particular product (“I can save so much in taxes! It’s sexy! That’s what rich people in tech do, right?”) but not necessarily slavering over the charitable intention that it is supposed to enable.
Well, last year, after my colleague Mike Zung more or less persuaded me to try it out, I did. I created a DAF with my husband in 2022. And it made my charitable contribution process So. Much. Easier.
I reserve the right to still be somewhat cranky about DAFs, but man, it really made a big difference.
Here’s how it worked:
- I opened a DAF at Fidelity.
We looked (ha ha ha, I looked; my husband knows more or less what our financial situation is, but he has little interest in it beyond “Money in account? Good.”) at several DAFs. Fidelity’s really seemed best: no minimums, no account-management fee, and an interface that didn’t make me want to claw my eyes out. - We calculated our charitable giving amount as described in my earlier post: 10% of our income. Let’s say that was $10,000 (not the real number).
- I donated $10k worth of investments to the DAF.
The biggest administrative burden of this entire process was moving our “appreciated securities” (i.e., investments that had grown in value) from where they live (Vanguard) to where the DAF lives (Fidelity). We’ve had our investments at Vanguard for 20+ years, and despite their atrocious interface, it’s not enough of a burden for me to move away from it.
We needed to fill out a physical form and mail it in. Yes, really. Ugh. Then we waited for Vanguard to receive it, process it, and move the securities to Fidelity. IIRC, it took almost 3 weeks from the day we mailed the form. THREE WEEKS.
But we do this only once a year, so it’s a price I’m willing to pay. - Over those three weeks, obviously, investment prices changed, not by a tremendous amount, but we did end up donating slightly less in dollar terms than I’d intended.
In three weeks, the value of a stock or fund could change a lot. If that happened, you’d end up donating far more or far less than you’d intended (in terms of sheer dollars).
This is not really an issue if your investment account and DAF are at the same custodian (Fidelity, TD Ameritrade, Schwab, etc.) - As soon as the donated stock hit our DAF, I sold it to cash.
My goal is to donate all the money every year so keeping it invested to give it the chance to grow is moot. Now I have this pretty pile of $10kish cash to grant to our favorite charities (hello, Bellingham Food Bank, where evidently they’ve seen demand double in the last year).
Benefits of the DAF
I mentioned some of the annoyances of this DAF process above. Please behold the many benefits we experienced, which convinced me this was a great iteration on our giving plan.
The biggest benefit for me was that I only had to process one charitable donation from an administrative- and tax-paperwork perspective.
- We had to collect one document for tax purposes: Fidelity’s statement of our charitable donation and the value of it. If we’d given money (or appreciated securities) to multiple charities, we would have (let’s face it, I would have) had to fill out the paperwork separately for each charity, and then get and maintain the tax documentation from each charity.
- (Okay, technically, we also had to gather information from Vanguard about the cost basis of the investment we donated. But again, we only had to do that once. And I get the sense this is more of a just in case/CYA as opposed to needing it in order to fill out your tax return. My CPA would know best.)
- We only had to fill out Vanguard’s (maddening) paperwork once.
Other, more minor benefits were:
A dedicated “charity bucket” made it easy to engage my kids.
At year’s end, there was our “charity bucket” (aka, DAF), sitting there with about $2k left over. It was so easy to sit down with my daughters, point it out to them and ask “What causes are important to you? Who or what do you want to support?”
It was an easy way to start the conversation about giving…and then do the giving right then and there in front of them!
In case you’re curious: We gave more money to our local food bank, to a charity that helps fund people’s medical bills, and to whales (hello, we live in the PNW, it was gonna happen; we then visited the associated Whale Museum on San Juan Island…it was great!).
I can donate anonymously.
It would have been really easy to donate anonymously, which is helpful if you’re giving to one of those charities that you just know is going to use your entire donation amount to send you mail asking for more donations.
I could grant the money to the charity so quickly and easily. As in, within minutes.
The Fidelity DAF interface made it so easy to and fast to get the money to the actual charities. We found the charities in their interface, typed in a dollar amount, and clicked a button (maybe two?). DONE.
We didn’t have to go hunting for those charities’ DTC #s or custodians or any of the other information you need in order to donate appreciated securities directly to a charity.
I Am Now Explicitly Replacing The Donated Securities with New Cash Savings.
This might seem like a “duh” or “hunh?” point to make, but it was important for me to make explicit:
One of the important things to know about your finances is: How much are your saving? What is your saving rate?
You’d think it’s a simple calculation:
Savings rate = How much $ did I save into investment and retirement accounts / Total Household Income
Except if we’re also taking money out of an investment account in order to fund our charitable giving, then that “cancels out” part of the savings we’ve done. And for the two years of my formal charitable giving strategy, I wasn’t paying specific attention to this, meanwhile applauding myself for all that cash I was shoving into my long-term financial independence portfolio.
So, this year, we are explicitly replacing the donated money in our taxable investment account. We have to first put $10k into our investment account to get back to savings neutral. Only any contributions in excess of that $10k count as actual savings.
To do this, we have since instituted a regular transfer from our bank account to our taxable investment account to replace the donated money over the course of the year: twice a month (with each paycheck), we push $417 into our investment account.
One thing I really like about this tactic is that it turns the charitable donation, even though it’s technically being funded by our investment account, into a monthly expense, as I think it should be.
A More Tax-Efficient Portfolio
Replacing the donated shares with new cash investments has a second—and less important, IMO—benefit: it improves the tax efficiency of my remaining investment portfolio.
How?
I donated shares with a low cost basis (basically, the price at which I bought them). A low cost basis means that, if I sold them, I’d have a lot of gain to pay taxes on.
But I donate those low-basis shares and use new cash to buy shares of the exact same investment, but now with a much higher purchase price (aka, cost basis), when I go to sell these new shares, the gain will be smaller and so will my tax bill when I sell them.
For example:
- I donate $10,000 of VTI (Vanguard Total Stock Market fund). I bought it years ago, at a price of $100/share.
- It’s currently worth $205/share. By donating these shares, I avoid ever paying tax on that ($205-$100=) $105 in gain.
- I put $10,000 of new cash into my portfolio and simply repurchase VTI, now at a price of $205/share.
- In 10 years, say, I sell those shares when they’re worth $300/share.
- If I still had the old shares, I’d have to pay capital gains taxes on $300-$100 = $200 of gain per share.
- But because I donated those and bought new shares, I have to pay capital gains taxes on only $300-$205 = $95 of gain per share.
Mind BLOWN.
I hope I’ve inspired you to make just one change, for the better, to your own charitable giving plan.
And remember, getting money into the hands of people and causes who need it is the goal here. Tactics and strategies don’t matter if that doesn’t happen.
Do you want to work with a financial planner who wants to encourage your charitable spirit, and can help set up straightforward and actionable steps to give? Reach out and schedule a free consultation or send us an email.
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Disclaimer: This article is provided for educational, general information, and illustration purposes only. Nothing contained in the material constitutes tax advice, a recommendation for purchase or sale of any security, or investment advisory services. We encourage you to consult a financial planner, accountant, and/or legal counsel for advice specific to your situation. Reproduction of this material is prohibited without written permission from Flow Financial Planning, LLC, and all rights are reserved. Read the full Disclaimer.
