Month: April 2022

Are you wondering if you are on track for a solid financial future? A financial plan will answer that question and more. After all, wouldn’t you want to secure your tomorrow while living well today?

Who is a candidate for a financial plan?

Success is getting what you want by having a clearly defined path to get there or lowering your expectations. In my experience, highly successful people have different needs for financial planning. Though they have the resources, they are often time-constrained and neglect the upfront commitment planning required to fix financial disorganization and properly identify goals (not to mention go through the process of finding a trusted professional to work with). However, the need for a trusted financial professional should be a top priority for highly successful individuals.

To be more specific, if you have a goal that sounds like some of the examples below, then you are a candidate for a financial plan.

• I want to maintain (or improve) my current lifestyle in retirement
• I want to retire early so I can travel
• I want to sell my primary home and move to a home (or condo) in a different state
• I want to fund my grandkids’ college education
• I want to donate significant assets each year to a specific charity
• I want to take my family on a week-long vacation every other year for the next ten years
• I want to make sure each of my kids ends up with no debt and $1mm in assets
• I want to protect against health care costs consuming my wealth

What is in a financial plan?

A basic financial plan consists of an inventory of assets and liabilities (net worth), clearly defined (short-term and long-term) goals, and the ability to track progress towards reaching those goals. 

With my clients, I use a financial plan to assist in making the best possible decisions with them (and their other trusted advisors) – on taxes, saving, spending, health care, debts, philanthropy, insurance, gifting, and inheritance. By addressing all aspects of your financial lifestyle, you’ll be better equipped to determine what needs to change and how to improve your financial situation.

Why have a financial plan?

In the simplest form, you need a financial plan to check your progress in reaching goals and objectives. Notice I didn’t say “financial goals.” Everyone wants to make and have more money, and while it certainly helps provide more options, it is not the goal. You need a financial plan to reach your life goals; money is just the tool, and your plan will connect the two. In addition, working with a financial planning professional will give you the ability to see how minor changes you make to your life can drastically influence your future. 

A plan can answer what happens if you retire earlier (or later), spend more (or less), and how different market/economic environments would impact your situation. It’s there to keep you focused on the important things when the road gets bumpy, which it most certainly will.

Living life without a plan is like trying to get to a destination without a map. For those of you who haven’t, I recommend making the commitment and seeking out a professional to get your financial plan started today. 

Many successful people share a few common interests, a couple of which are community and giving back to causes and/or organizations they are passionate about. In many cases, successful people are giving back, participating in, and contributing financially to multiple charities. Contrary to popular media, most successful higher income people are paying their fair share in income taxes, often much more with the limited tax deductions many individuals have today.

Donor Advised Funds, or DAF’s for short, are a simple but powerful tool that can enhance the charitable giving you may already be doing or are considering doing. The primary purpose of a DAF is to allow someone to donate assets to a charity today, receive a tax deduction NOW, even though the actual funds may not be granted to the actual charities until some point in the future. Put another way, the donor advised fund essentially functions as a conduit, where the donor receives a tax deduction when the money or asset goes into the DAF, but has discretion about when the assets will finally leave the DAF and actually go to the charity. In the meantime, the assets in the fund can be invested, managed, and grow tax free.

Given the separation of the timing of the contribution and tax deduction from the actual donation to the charity, an often used strategy is to make a contribution to the Donor Advised Fund in a high-income year and then use the DAF to make subsequent distributions to the charities themselves. Also consider tax law changes in 2018 limiting a $10,000 limit on state, local, and property tax deduction, along with a much higher standard deduction for federal income tax purposes. As a result, many people are now stuck with taking the standard deduction rather than itemizing and, therefore, have lost their ability to take a tax deduction for annual charitable contributions. A Donor Advised Fund may allow lumping together a few years of normal annual charitable contributions and that much higher single-year contribution can bring back the ability to itemize in the year the contribution is actually made. 

It’s also important to recognize another key benefit of a DAF is the ability to donate appreciated investments of many types (e.g., stocks, mutual funds, ETF’s, real estate or even company stock) that are eligible for a charitable deduction at fair market value. By doing so, the donor avoids paying any capital gain tax on the appreciation. With the potential for growth within the DAF, the donor not only avoids any capital gain tax on the appreciation of the asset contributed, but also on any future growth prior to distribution to the actual charities. It’s also important to note that contributions to a DAF are irrevocable. The important thing to remember in all donor advised fund strategies is that once funds go to the donor advised fund, they must go to a charity, and cannot be retracted for the donor!

There are certain limits to amounts that may be contributed. Depending on the circumstances, an individual donor’s charitable contributions may be deducted up to an aggregate cap of 60% of the donor’s adjusted gross income computed without any net operating loss carryback. Lower caps apply to certain non-cash assets and certain types of charitable recipients. For example, when appreciated securities are held for more than a year are donated, the donor avoids the capital gain tax but the contribution is then limited to 30% of the donor’s AGI. One way to avoid the lower contribution level is to deduct the appreciated asset at its cost basis rather than fair market value.

IRA Assets are treated differently where individual retirement account (IRA) allows individuals age 70-½ or older to transfer up to $100,000 annually from an IRA to eligible charities on a tax-free basis. The distribution is excluded from income, but it counts toward the account owner’s required minimum distribution. Because an IRA charitable rollover is not included in income, there is no charitable deduction, making this treatment especially appealing to the non-itemizer. Unfortunately, this treatment is not available if the IRA distribution is contributed to a donor-advised fund or a private non-operating foundation; instead, the donor will recognize the distribution in income and have to take a charitable deduction, assuming he or she itemizes.

Another benefit of a DAF is that you don’t have to keep track of every charitable contribution for every charity you support, which can be an issue at tax time each year. With a DAF, you only need the receipt from your initial donor advised fund contribution. When you’re ready to give money to the actual charitable organization(s), you can simply log into your account and make grants to any 501(c)(3) organization. In addition to making one time grants, you can also set up up recurring grants to any of your favorite causes or organizations

There are many other strategies that may be employed and each is really up to the personal objectives of our individual clients. It’s also important to remember that both during life and after a DAF, can be a powerful way to engage the next generation in charitable giving as a core value. Clients have used their DAF to create a teaching moment that reiterates wealth accumulation is not only about personal and family well-being, but in giving back to make a difference in our communities and the lives of others.

Please reach out to us with any questions about Donor Advised Funds.

For more information on charitable giving, check out our post about how to make charitable giving and required minimum distributions work for you.

SBC does not provide tax advice, so please be sure to consult with your CPA or tax professional.