Smart Gifting: Charitable Donations and Donor-Advised Funds (DAFs)

Episode Transcript

Speaker 1 (00:00):
And our phone lines are open and available to you
right now. If you've got a question for our retirement
planning professionals from Class Financial love to hear from you
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oh eight three two one thirteen ten. That's six oh
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number six oh eight three two one thirteen ten. That's

(00:22):
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That's Closs Klaas financial dot com. You can schedule complimentary
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(00:43):
get busy in the morning, or maybe you don't want
to actually be on the air. I understand sometimes people say,
you know what, I'd rather just send it a question
in via email. You can do that at Cossfinancial dot com.
That's Coss Klaas Financial dot Com telephone number for the
office right here in Madison six oh eight four four
two five six three seven. No charge for that initial
gets to know your appointment ACHLSS Financial. It will be

(01:05):
complementary to you again. They're number six O eight four
four two five six three seven and joining us this
morning from Class Financial our CJ Class and Eric Schwartz CJ.
How you doing this morning.

Speaker 2 (01:15):
I'm doing great, Sean. How are you doing?

Speaker 1 (01:17):
Absolutely fantastic? Eric, how have you been.

Speaker 3 (01:21):
I've been doing great, Sean, Glad to be back.

Speaker 1 (01:23):
It's great to have you both along. And we're going
to talk about a really cool topic. And of course,
as we start looking towards the end of the year,
I know a lot of folks start thinking about opportunities
to be charitable and gifting. We're going to talk about
some smart gifting strategies with our retirement planning professionals from
Class Financial. We'll get to that in just a moment.
A couple of other features of the program I mentioned
the opportunity to have that complimentary chat online or that

(01:46):
free consultation in person with Class Financial. Another really cool
thing that we do on this program is the Class
Quiz question the week, and our friends from Class Financial
provided a fantastic prize again this week for that a
twenty five dollars gift card to Darden restaurants that's like
Olive Garden, Longhorn Steakhouse. Also speaking of steakhouse roots Chris
Steakhouse as well as a Darden restaurant as well. Chance

(02:08):
to win a twenty five dollars gift card to those restaurants.
Tell you a little bit later on the program more
specifically how you can win that little tip, though it
is a little thing that you want to keep in mind.
Just pay close attention because it's just about every show
the question and answer to the Class Quiz question we
comes up during that program, and before we get rolling
on this morning's conversation about gifting strategies, let's actually take

(02:29):
a look back at last week's program and get the
question and answer there as well.

Speaker 3 (02:32):
Eric, Yes, thank you to everybody for listening as always,
and congratulations goes out to our winner from last week,
and that was Brenda from New Claris. Last week's question
was in twenty twenty five, how many Americans will be
reaching age sixty five and the choice was either two
million or four million. People, and Brenda knew that just

(02:53):
over four million Americans will reach the age of sixty
five this year. So congratulations and thank you for listening.

Speaker 1 (02:59):
Great Brenda and you two could be like Branda, just
pay close attention. I'll tell you a little bit later
on how you can win. Speaking of last week's program,
if you want to listen back, if you head on
over to Class financial dot com. That's Class k l
aas financial dot com of course, listen back to the podcast.
Also available on all the popular podcasting platforms as well.
Just type in money in motion with Class Financially you

(03:19):
will find it right there. As Mitch, we talked this
week about gift giving strategy, smart gift giving strategies and CJ.
As we think about that stuff, there's obviously a difference
between gifts to individuals and then gifts to charities. What
if folks need to know about the differentiation there and
kind of clarify some of those some of those different nuances.

Speaker 2 (03:39):
Yeah, that's right, Sean. When when we talk about gifts,
most people immediately think about presence for birthdays or the holidays,
But in the world of financial planning, gifting is a
strategic tool with potentially significant tax implications. However, before we
get two deep into the weeds on today's show, we
should define the word gift. So I defines the word

(04:01):
gift as any transfer of property or money to an individual,
either directly or indirectly, where full consideration, which is measured
in money or money's worth, is not received in return.
Now that sounds very complicated, but just think of it.
I give something to somebody of value, and they don't

(04:22):
give me money or something to barter with you, something
to kind of return that value. That is more or
less a gift. Beyond that, there are significant exclusions and
exemptions that make most gifts non taxable for the vast
majority of people. So let's break it down a little
bit further. First thing to know is that the donor

(04:43):
typically pays the gift tax, again the donor. So if
there is ever a tax to be paid on a gift,
known as again a gift tax, it is generally the
responsibility the person giving the gift aka the donor, and
not the person receiving the gift aka the done. The
recipient of a gift generally does not owe income tax

(05:06):
on gifts received. Now, notice we're saying generally we don't
want to get too deep into the weeds. There can
be exceptions on this that we'll talk about a little
bit later. But again, if there is a tax to
be paid on a gift, it is typically the donor,
not the done. Furthermore, it's generally unlikely that a gift
tax will be due by the giver or the donor
because of the significant exclusions that I mentioned earlier. So again,

(05:30):
are there taxes on gifts? Generally know and if if
there are taxes to be paid, it's going to be
for the giver or the donor. The donor, however, because
of these these exclusions, it's unlikely that even the donor
will pay a tax. And here's some of those exclusions
we're talking about. The annual gifting exclusion is the most

(05:52):
important exclusion. For everyday gifting. For twenty twenty five, you
can give up to nineteen thousand dollars to as many
people as you want without having to report it to
the IRS or pay any gift tax. This is per recipient,
per year. So for example, in twenty twenty five, you
can give nineteen thousand dollars to your child, nineteen thousand

(06:13):
dollars to your grandchild, and nineteen thousand dollars to a friend,
and none of those gifts would be subject to the
gift tax. And then, of course a married couple can
effectively double this, giving up to thirty eight thousand dollars
per recipient with something called gift splitting. And then here's
the second exclusion. So think of that as exclusion number one,

(06:34):
nineteen thousand dollars per year to as many people as
you want without any really IRS reporting or any sort
of gift tax. Here's exclusion number two that, as a
matter of fact, is even bigger. So beyond the annual
gifting exclusion, there's another significant exclusion known as the lifetime exclusion.
The gift tax is meant to be a backstop to

(06:56):
the federal estate tax if you give a gift that
exceeds the annual exclusion amount, which again is nineteen thousand
dollars in twenty twenty five. Like we talked about previously,
if you exclude or if you exceed that amount, it
does not automatically mean you owe a gift tax. Instead,
the excess amount simply reduces your lifetime gift and a

(07:17):
state tax exclusion. So for twenty twenty five, this lifetime
exclusion amount is very high. It's almost fourteen million dollars
for an individual. So you would only start to owe
a gift tax once your lifetime gifts are above and
beyond that annual exclusion amount. And this is that multimillion
dollar amount that we were just thinking about, So again,

(07:38):
think of it this way. I've got a certificate in
my back pocket that as of twenty twenty five, it
has a number of we're just going to round to
fourteen million dollars. I can give up to nineteen thousand
dollars a year to do as many people as I
want and not reduce my fourteen million dollars. But if
I go over nineteen thousand dollars in any one year
to any one individual, then only the money over that

(07:59):
nineteen thouds and starts to reduce my fourteen million dollars
that I can give during and afterlife. And only once
I'm over fourteen million dollars what a gift tax apply? Gosh,
I'm exhausted, But you get the idea here, right, So
it's like, Okay, well, gifts are taxable, but there's so
many exclusions that very few people end up paying that gift.

Speaker 1 (08:21):
I feel like we need a camera on UCJ and
a dry erase boards. It is really good information, really
helpful stuff there too. As we talked this morning with
CJ Closs and Eric Schwartz, our retirement planning professionals from
Class Financial, learn more online classfinancial dot com. That's Class
k l a A s Financial dot com. Speaking of

(08:42):
some videos and small stuff. I know you guys put
some stuff up on the website from time to time
as well, so you definitely want to check that out.
Classfinancial dot Com. Talking this week about gift giving and Erica.
You know, how how do we kind of interact with
gifts when it comes to charities.

Speaker 3 (08:58):
That's a great question, Shoan. And this is where more
of the exemptions come into play that make it really
really unlikely that most givers or donors will ever pay
a gift tax. CJ is just talking about this and
outlining some of those some of those exemptions. But in
addition to the annual exclusion and the lifetime exclusion, there
are other types of gifts that are completely exempt from

(09:20):
the gift tax and they don't count towards your annual
or your lifetime limits either. So any gifts that you
give to your spouse. You can give an unlimited amount
to your US citizen's spouse without incurring any gift tax. Okay.
Another example would be direct payments for tuition. So if
you pay tuition directly to an educational institution for your

(09:41):
child or grandchild, niece, nephew, whoever it might be, that
is going to be that is going to be exempt
from any sort of gift consideration. Direct payments for medical expenses,
so you can pay any amount of money directly to
a medical provider. So that's really important, directly to a
medical provider for someone's medical care without being concerned about

(10:03):
a gift tax. And I suppose I'm surprisingly if you
gift to political organizations, you are not subject to the
gift tax. So give to your heart's content to the
political leaders in your.

Speaker 1 (10:16):
Life translated those who write the laws.

Speaker 2 (10:18):
But struggling.

Speaker 3 (10:23):
Yeah, yeah, And finally to get to your question here
sean charitable donations. So gifts to a qualified charity are
not subject to the gift tax, and they're often tax
deductible to the donor, so that the exemptions that I
previously mentioned here, those are those are not often tax

(10:45):
deductible for the donor. But giving to charities generally is
in this last category gifting to charitable organizations. This is
where we're gonna spend the remainder of today's show kind
of talking about and digging into a little bit.

Speaker 1 (10:59):
More talking this morning with CJ. Closs and Eric Schwartz,
our retirement planning professionals from Class Financial online Class Financial
dot com. That's class k l a A S Financial
dot com. They're tough number six oh eight four four
two five six three seven. No charge for that initial
get to know you appoinment dech loss Financial. It will
be complementary to you again their number six O eight
four four two five six three seven. We're going to

(11:21):
continue our conversation with Eric and CJ. We'll talk about
some of those charitable gifts and the exemptions. We'll get
some of the details from CJ and Eric. We will
do that next as Money in Motion with Class Financial
continues right here on thirteen ten do wleu ib A
talking with our retirement planning professionals, CJ. Closs and Eric Schwartz.
Of course they come to us from Class Financial, the

(11:43):
website Class Financial dot com. That's Coss k l a
A S Financial dot com. Great website and resource and
they're telephone number six oh eight four four two five
six three seven. Don't forget no charge for that initial
get to know you appointment dech loss Financial. It will
be complementary g again, they're number six so eight four
four two five six three seven. Talking this week about

(12:05):
smart gifting strategies and really making the most of those opportunities.
Just before the break, Eric was talking about about charities
and gifting to charities and CJ. We'll bring in on
this one as well, so as we kind of focus
in on those charitable gifts that are exempt from any
tax consequences. Folks think about things like writing checks and

(12:25):
other things. Are there other and maybe more advantageous ways
to give and maybe some pros and cons about giving
cash versus something like appreciated stock for example.

Speaker 2 (12:37):
Yeah, good question, Sean, and you're right. Most people think
about giving gifts to charities in terms of writing a
check to their church, a food bank, center for the arts,
or a high school foundation. However, when you start thinking
more strategically about giving to charities, you could potentially enhance
the overall net tax benefit to yourself and to the

(12:57):
charitable entity you want to support. Here's what I mean.
A cash gift is simple and direct. You get a
deduction for the amount you give, up to sixty percent
of your adjusted gross income if you itemize. But for
many people, especially those with investment portfolios, giving highly appreciated

(13:18):
stock that's outside of a retirement account or an annuity
is a far more tax efficient move. The reason is twofold. First,
you get the same tax deduction for the full fair
market value of the stock, just as you would with cash. Second,
and this is the big one, you completely bypass the
capital gains tax you would have to pay if you

(13:41):
sold the stock yourself and then donated the cash proceeds.
This is a huge win for the charity. The charity
receives a larger gift because it gets the full value
of the shares, and you avoid potentially a significant capital
gains tax bill. So let me give you an example.
If you're holding a stock you bought for ten dollars
more than a year ago that's now worth one hundred dollars,

(14:05):
you can give that one hundred dollars worth of stock,
get a deduction for the full one hundred dollars, and
never have to pay tax on the ninety dollars of game,
and for anyone thinking I don't want to get rid
of that stock, you can always donate the appreciated shares
and then use the cash you would have otherwise donated
to the charity to just buy new shares of the

(14:25):
same stock. You're out of pocket. Cost is the same,
but you've sidestepped or stepped up your cost basis on
the new shares, which means less capital gains tax down
the road if they continue to appreciate. However, before we
move beyond the simple concept of using kind of appreciated

(14:45):
stock for your charitable gifts instead of cash, it is
important to highlight two important caveats to what I'm saying here,
because I know our CPA friends out there and enrolled
agents are saying, but, but, but so. Unlike gifts to
a public charity of cash, where you can have a
deduction for up to sixty percent of your adjusted gross
income and an a tax year, gifts of appreciated stock

(15:07):
that you have held for more than a year have
a lower limitation of only thirty percent of your adjusted
gross income. So said another way, it's possible to reduce
your annual tax taxable income by a larger magnitude using
cash donations than by using appreciated stock donations. Now talk
to your accountant or your financial advisor for more details

(15:27):
about this. I mean, there's a lot of things, right.
You have to have appreciated stock, you have to have
it outside of a retirement account. You have to have
enough income to justify. You have to be above the
standard deduction amount. You get the idea. The list goes
on and on here, but you are generally only able
to deduct gifts of cash or appreciated stock to a
public charity if you're itemizing your deductions on Schedule A

(15:51):
that exceed your standard deductions. There is a small exception
to this for something called first dollar above the line
deductions to charities and starts in tax your twenty twenty
six so next year, whereby an individual can immediately deduct
one thousand dollars for an individual or two thousand dollars
for a couple of gifts to charities, assuming they don't itemize.

(16:13):
So this would just be we call them like immediate
dollar deduction or first dollar deductions to charities. But once
you go above that one thousand or two thousand, if
you're a couple then it has to exceed the standard
deduction in order to be a benefit on your taxes.
So some of you know what I'm referencing here. Some
of you kind of either deal with taxes or have

(16:34):
seen your own income tax return enough to understand it.
Others of you are going, what is this lunatic saying? Listen,
if you're the one saying, what is this lunatic saying,
talk to your accountant, talk to your financial advisor. What
we are referencing here, if you are charitably inclined can
be a huge win for you and for the charity.

(16:54):
You just have to work with somebody who understands the rules.

Speaker 1 (16:56):
As I talk this morning with CJ Claus and Eric
Schwartz our retirement planning for offcials from COSS Financial, some
great opportunities out there to really help out and really
maximize those those gifting strategies. It's really important as we
talk with c J and Eric about having that plan,
putting it in place. Of course, you can learn more
about making a plan. You can learn more about Colass
Financial as well online their website Coss financial dot com.

(17:18):
That's Coss k l a A S Financial dot com
and they're telephon number six O eight four four two
five six three seven. No charge for that initial gets doy.
Appointments at Coss Financial be complementary to you again, they're
telephone number six O eight four four two five six
three seven. H Dorner Advised Funds. We'll get some details
on those from Eric next. As Money in Motion with

(17:39):
Coss Financial continues here on thirteen ten, wu ib A
talking with our retirement planning professionals from Coss Financial, Eric
Schwartz and CJ. Closs. Of course, you can learn more
online about Class Financial. We've got a great website. It's
Cossfinancial dot com. That's Coss k l a A S
Financial dot com. Telphl number six O eight four four
two five six three seven. Mentioned before the break, DAFs

(18:03):
donor advised funds, Eric, how does this kind of fit
into this? What are they and how do they fit
into this conversation?

Speaker 3 (18:11):
Yes, we love donor advised funds or dafts when they
are when they're used appropriately, and these have really gained
popularity since the tax a lot of changes we saw
back in twenty seventeen. They've really become a great tool
for folks to use to not only give to charities
but also get a tax benefit for it. So a

(18:31):
DAF is like a charitable investment account. You make a
contribution that is an irrevocable contribution of either cash or
shares of stocks or even other assets to a DAFT sponsor,
which is in itself a public charity. So let me
give you an example of a DAFT sponsor that people
might recognize. Fidelity is a huge asset manager and custodian.

(18:57):
They have a Fidelity Charitable as an example of a
a DAFT sponsor. Charles Schwab is another investment company folks
have heard of. Schwab Charitable is also a public charity
a DAFT sponsor. So not suggesting these, just giving examples
for folks to recommend or I'm sorry to recognize what
we're talking about here. So when you make this contribution

(19:19):
to your charitable investment account with the DAFT sponsor, you
get an immediate tax deduction for the full contribution in
the year that you make it. Okay, So if you
put this large chunk of money in there, you get
a full tax deduction right away. The funds are then
invested and they can grow tax free over time, and
then you can give them away as you like. So

(19:42):
the advised part of the name here is key, So
you who who are the donor. You can recommend grants
from your DAFT to other qualified charities whenever you like.
So this gives you a ton of flexibility. You can
make a large single contribution to your DAFT in a
year when you you have, say a high income event

(20:02):
like you're selling a business or whatever it might be,
and then you distribute the funds to your favorite charities
over many years. So it simplifies your record keeping and
it allows for a more thoughtful kind of long term
approach to giving. Beyond that, if you understand how large
your schedule A itemized deductions have to be in order
to exceed your standard deduction, it makes you realize why

(20:25):
as of twenty twenty two, only about ten percent of
American taxpayers actually were itemizing their deductions. CJ was just
talking about this, Right, if post twenty seventeen, the standard
deduction is so high that you need to be giving
a lot, well, you need to have a lot of
schedule A itemized deductions in order to deduct your charitable giving.

(20:47):
So said another way, while it's estimated that only about
sixty percent of American households give to charity in a
calendar year. Only about ten percent of American households actually
obtain a financial benefit from these charitable gifts by itemized
and the reason for that is the level of their
charitable giving is not actually exceeding their standard deduction. So

(21:09):
a DAPH is often used for something that we call
tax punching, whereby you give multiple years, say like five
years worth of charitable donations into a DAPH in order
to exceed your standard deduction for that year and get
and obtain a tax deduction and benefit the organization. Then

(21:30):
you take the standard deduction for the following five years
while you're actually giving the money to your charities from
your DAF account through the grant process. We realize this
sounds pretty complicated, but it's really not once you kind
of understand it. It's one of those things you have
to wrap your brain around and then you kind of
get to the point where you're like, oh, okay, okay,
this makes sense, and suddenly all the foreign language we've

(21:53):
been speaking makes a lot of sense, and it can
be really powerful in maximizing your charitable impact. And basically,
he allows you to give more to the charities and
less to the government in the form of taxes.

Speaker 2 (22:04):
It is.

Speaker 1 (22:05):
It's really interesting stuff. As we talked this morning with
Eric and CJ, our retirement planning professionals from Coss Financial.
If you've been interested, you want to start that conversation,
maybe you're thinking about these very things as we kind
of get towards the end of the year, you want
to start that conversation at Class Financial. They make it
real easy to do. If you head on over to
classfinancial dot com. You can schedule a chat right from
the website or pick up phone Gemmi call six soh

(22:26):
eight four four to two five six three seven. No
charge for the initial gets to know you appointment at
Colss Financial. It will be complementary to you again their
number six oh eight four four two five six three seven.
We'll continue our conversation with CJ and Eric. We will
do that next as Money in Motion with Coss Financial
continues right here on thirteen ten, Wuiba talking with CJ.

(22:47):
Closs and Eric Schwartz, our retirement planning professionals from COSS Financial.
Talking this week about smart gift giving strategies, making the
most of those opportunities and as we're talking this morning.
I know there's some people saying, what about qcds. Yeah,
what about qcds? Only ask CJ all about them, CJ.
For folks that are familiar, I know a lot of
folks really love qualified charitable distributions. What's kind of the

(23:09):
deal and how do they differ from some of the
other methods that we've talked about this morning.

Speaker 2 (23:15):
Yeah, good point, Sean. So for our listeners, we have
been trying to go about talking about gifting and what
is a gift and why are most of them not taxable?
Down to then focusing today's show on charitable gifting. So
one of those kind of exemptions that Eric defined earlier
in the show where it doesn't even qualify as part
of an annual exemption amount or even a lifetime exemption amount.

(23:38):
But there's still more creative or strategic ways to give
to charities to make sure you're maximizing the benefit to
those charities. We talked about highly appreciated stock. Eric just
talked about a donor advised fund and then yes, many
people go, but wait a minute, what are the you
haven't talked about. Don't kind of like qcds or qualified

(23:58):
charitable distribution for the benefit of our listeners. Think of
donor advised funds or dafts what Eric was just talking
about earlier, as an optimal strategy to consider for those
giving a fair amount of money to charities each year
who are interested in maximizing the charitable gifting through tax bunching.
But here's the key. Prior to age seventy and a half. Okay,

(24:22):
so donor advised funds, your brain should be going optimal
for people giving a fair amount of money wanting to
benefit from that prior to age seventy and a half. However,
once you reach age seventy and a half, dafts become
much less popular or even necessary, due to the availability
of something called qualified charitable distributions known as qcds for short.

(24:44):
A QCD is a specific type of gift that comes
directly from a traditional I ray. The rules are very specific.
You must be at least seventy and literally a half
years old to do this, yes, literally over that exact day,
and the distribution must go directly from your IRA custodian

(25:04):
to a qualified charity. It can't go to you and
then do the qualified charity. The main benefit here is
that the amount of the QCD is not included in
your taxable income. For retirees who don't itemize their deductions,
this is a huge advantage because they get a tax
benefit they wouldn't have otherwise received. It's also a great
way to satisfy your required minimum distribution or RMD once

(25:28):
you turn seventy three or seventy five, depending upon the
agent which you have to first start performing rm ds.
So instead of being forced to take a taxable distribution,
you can send that money directly to a charity as
a QCD and it never flexible income. So the key
difference is that a QCD doesn't give you a tax deduction,

(25:50):
but rather an exclusion from your taxable income. And important notes,
because this is something that people get tricky on. A
QCD must be a direct gift to the charity itself.
You can't use it. You can't use the QCD to
fund a donor advised fund, So that's an important distinction here.
But there you go, everybody, there's there's kind of all
the way down the list we talked about giving highly

(26:12):
appreciated stock, we shifted to using donor advice funds for
those underage seventy and a half who want to use
tax punching strategies. And then finally, for those over seventy
and a half who want to maximize their gift to charities,
qcds can be a great way to do it.

Speaker 1 (26:25):
It's really amazing. As I said while there, so you
were kind of reviewing what all we talked about. There's
a lot of great opportunities out there and real strategic
ways to do gifting. Just make sure that you're doing
it right. And it's also a great reminder of you know,
if you are in that position to be thinking about
about setting something up, really making sure that you're following
following the guidelines and exactly how they work to really

(26:47):
maximize things. So we talk each week with our friends
from Class Financial. Don't forget I'd love to hear your feedback,
love to get your questions as well. You can call
any time during the program. You can also, of course
call the Class Financial office six so eight four four
two five six three seven that first appointment at COSS Financial.
It will be complementary to you their number six oh
eight four four two five six three seven. Go on
hold on that telephone number now as well, because it's

(27:09):
time for the Coss Quiz Question the week. It works
like this. In just a moment, I'll ask you the
Coss Quiz question of the week. You will then have
thirty minutes from the today's program to call the Coss
Financial office right here in Madison at six oh eight
four four two five, six three seven. If you are
the first caller with correct answer, he will win this
week's prize, which is a twenty five dollars gift card
to Darden Restaurants. This week's Class Quiz question the week?

(27:30):
Is this true or false? As of twenty twenty, only
about ten percent of American tax pipayers itemize their deductions.
Is that true or is that false? Telephone number six
oh eight four four two five, six three seven. It's
Class Financial's office right here in Madison online Coss Financial
dot com. That's Coss k LaaS Financial dot com. CJ.

Speaker 3 (27:52):
Eric.

Speaker 1 (27:53):
It's always great chatting with both of you. You guys, enjoy
this beautiful day.

Speaker 3 (27:56):
Thanks Sean, Thanks Son.

Speaker 1 (27:57):
News comes your way next year. On thirteen ten, w
I be eight