As the year draws to a close, the demand for information on charitable donations is on the rise.
In today’s episode of Retire in Texas, Darryl Lyons delves into the world of Donor Advised Funds, offering a comprehensive guide to this powerful tax strategy for the charitably inclined.
Some of the topics discussed include:
- The presentation of Donor Advised Funds as a simpler alternative to wealthy individuals setting up foundations for charitable giving.
- An explanation of the distinction between faith-based and secular donor advised funds.
- The importance of verifying charities and why you need to be wary of charities asking for immediate large payments, gift cards, or wire transfers.
- Why PAX believes that setting up a donor advised fund can be a strategic move in anticipation of potential tax increases in the future.
If you enjoyed today’s episode, make sure to share it with your friends and family!
Transcript:
Hey, this is Darryl Lyons, CEO and Co-Founder of PAX Financial Group. Thanks for tuning into Retire in Texas. I appreciate you listening today. This information is general in nature only. It’s not intended to provide specific investment, tax, or legal advice. Visit PAXFinancialGroup.com for more information. So as we get closer to the end of the year, we’re getting a lot of phone calls about charitable donations and so I’m going to cover donor advised funds in a little bit more detail today.
It has been covered on previous shows but hopefully I can give you a framework of how they work. We might by the time you listen to this, it might be too late to do anything but give us a shout or give you your advisor shout if you want to try to sneak one in before the end of the year. But sometimes administratively it gets tricky when we’re pressed for days, but you can at least think about it for future years because the donor advised fund is an excellent tax strategy for those who are charitably inclined.
We also want to make sure that you go to PAXFinancialGroup.com. We have an e-book that discusses this as well, but it’s very important that you get an idea of what a donor advised fund is. If you don’t need it today, you might really want it tomorrow. So what is a donor advised fund? It’s a giving account.
You know, you hear about rich people having foundations, very, very wealthy. I’m talking about like uber wealthy. They set up a foundation for their charitable giving. They typically hire their kids, they pay them a salary. And the kids are responsible for showing up to galas and, you know, spending money on auctions. That’s a foundation. I don’t have a foundation.
I didn’t inherit a foundation. That’s not the world I live in. That’s not the world most people live in. So a donor advised fund is like a foundation, but it’s easier. A donor advised fund is very similar to a foundation, but it’s not as complex. So I want to unpack it a little bit, and I’ll start with just the simple idea of a donor advised fund being an account.
It’s a giving account where you put the money in, transferred in from your checking account to the donor advised fund. As soon as you put it in, you get a tax deduction in that calendar year and then it sits in the account until you send it out to the charity. So the key element, donor advised fund is an immediate tax deduction, but you don’t have to make an immediate grant to a charity.
You can wait. There’s some people who need the immediate tax deduction. Maybe they sold a business or they won the lottery or they had a huge bonus. They need a tax deduction in a specific calendar year, but they are not ready to commit to any charity. They want to wait. They want to think about it. They need to talk some things over.
It’s overwhelming. Rather than rushing to the decision of giving it to a charity and regretting it. Honey, let’s just put in a donor advised fund. Get that tax deduction this year, and we’ll talk about it later. That’s exactly what a donor advised fund is for. Now, while your donor advised fund is in between the time that you make the contribution and the time that you give it away, it sits there and cooks.
So what do I mean by that? I mean, it gets invested and that’s part of PAXs responsibility is to help you invest that money while it’s just sitting there until you decide where you want those monies to go to, to which charities you want it to go to. Now it has to be a 501(c)(3). So that’s the IRS code that qualifies something as a charity.
I actually tried to make a grant from my donor advised fund to what I thought was a charity in Castroville. It was called the lions? It was the Lions Fund. I don’t remember what it’s called. Lions Club. Not with a Y with an I, Lions Club. I just in my heart felt, you know, I really want to give to them because when I was in high school, I remember I just don I mean, they gave me some money to help me go to Saint Mary’s.
And it dawned on me that they gave me money. And so I wanted to get back to them. So I sent money to them, but it got bounced back. It got rejected because they weren’t an official 501(c)(3) They were a different section of the tax code, so it has to be a 501(c)(3). But you’ll find that a lot of the a lot of the charities and the nonprofits in the ministries that you work with are in fact 501(c)(3)s.
So you shouldn’t have a problem with grants. So again, you get that immediate tax deduction and that can be pretty strategic because you may want to. And now I am going to go deep for just a second, but you may in one year want to make a ton of charitable deductions. And then the following year, not make any. Now, that doesn’t mean you’re giving to charities with a different frequency.
It just means that your tax deductions are spread out. And we call that and I refer to this in previous podcasts called bunching see my bunch. I’m going a little deep here. Sorry, you might, but your itemized deduction in one calendar year and then the next year do a standard deduction. You might have to do some more digging on the bunching strategy, but that is a way that the donor advised fund might be able to help you maximize your tax reductions.
So I went a little deep with let’s fly back up now. There we talked about the benefits of a donor advised fund. The real big benefit is the immediate tax deduction and the other is that you get to be patient and thoughtful of the timing of these distributions to charities. I’ve heard legislatively that there are concerns that a lot of the money in the donor advised funds across the country are cooking too long and not being sent out to charities.
And I’d suggest to you that that that should be a certain degree of concern. So I think in the spirit of owning a donor advised fund, you just don’t want to sit there forever. There’s ministries that are just that need the money today. And so I think it’s incumbent upon us to not let it just just sit there forever.
We have to start distributing it. So the distribution of money to charities is not a difficult task. It’s not as though you have to call your financial adviser up and say, Hey, I need to distribute. Although we can help facilitate some of those conversations. There’s a website that you go to and you put in your charity and you send the money out.
I mean, it’s about five clicks. It’s really, really simple. The one key element that I think is important is there’s one box. When you make this distribution and this grants to the charities, there’s one box that’s an interesting box that might scratch your head and it says, Do you want to make this gift anonymous? Or again, I mean, you want to use the word grant.
Do you want to make this grant anonymous? And so you ask yourself, do I want to make it anonymous or not? It’s a peculiar question. A lot of us might be private and a lot of us might say, I do. I don’t know. I might want them to know about it for whatever reason. There’s no judgment on my part.
I’m just going to tell you how I approach it. And I’ve wrestled with this idea of anonymous giving for a long time, and I can’t tell you that I necessarily have it pinned down, but I’ve settled to a place where my heart is comfortable with my approach. And I guess people can poke holes in it all they want.
But I still feel comfortable with the approach. I feel like my heart’s in the right place. So the majority of my giving personally is done to Christian organizations. So organizations that, at the very core of it, are fulfilling the Great Commission. And the Great Commission is making disciples of all nations. So when I give to a Christian organization, I follow a scripture in Matthew [5:16] that says, I’m sorry that I’m reversing it on you.
I follow the Scripture. Matthew 6:3, I follow Matthew 6:3. It says, When you give to the needy, do not let your right hand know what your left hand is doing. That’s Matthew 6:3. So whenever I give to a Christian organization, I always check the box Anonymous and they don’t know it’s for me. And I feel very comfortable with that.
I don’t need any praise, I don’t need any kudos, I don’t need any phone calls. I just want them to know. I just want them to get the money to support their mission. So I follow Matthew 6:3 when I give to Christian organizations. When you give to the needy, do not let them know. Do not let your right hand know what your left hand is doing.
Alternatively, I uncheck the box whenever I give to a more secular organization in Matthew [5:16] is the approach I take there, in which Jesus says Let your light shine before men, that they may see your good works and glorify your father, which is in heaven. And that’s Matthew [5:16]. So I follow that approach. So if I’m giving to maybe a university or some other social cause, I don’t want the glory, but I want to give the glory to God.
And I believe having my heart in the right place, I can do that by unshackling the anonymous box. Does that make sense? That’s my methodology. Now, when you study the scriptures and Jesus goes around, he actually says, Well, there’s a couple different contradicting messages here. You’ve got Matthew six three that actually contradicts Matthew [5:16] to a certain degree.
But if you study Jesus, He was always mostly concerned about the heart, the methodology he was giving you. He was giving the people information and guidance in the context of the region. Typically, you can look at different regions that he spoke to that were wealthy and other regions that weren’t wealthy, and some of the messaging was slightly different.
To really address the heart issues of that region at that time. So I don’t think they’re necessarily contradicting because Jesus always comes back to the heart. So if your heart’s in the right place, it doesn’t matter how you do it. But that’s the approach I take with my donor advised fund giving and my giving in general. Again, you know, I’m the type of guy that overthinks every single thing, so you just do whatever your heart tells you.
There’s no judgment here. That’s just the approach I’ve taken. The last thing I’m going to mention is when it comes to donor advised funds, let me say this. I’ve two more things. I’ll mention. There’s faith based donor advised funds, and then there’s secular donor advised funds. The faith based donor advised funds are unique in the fact that they’re going to respect in honor distributions to faith based organizations, whereas the secular ones in the environment where Christian organizations, it’s contentions, there’s a lot of contention.
I mean, I just read an article on Faith Wire that said a survey done with young British men and women said that 50% of them would ban the Bible if they found any hate speech in it. Okay. So that I don’t I can’t unpack that whole survey. All I can say is there is hostility towards people of faith.
So if you were taking money out of a donor advised fund to be sent as a grant to a Focus on the Family, that organization could be considered a hate group, which it is according to the Southern Poverty Law Association. And if you’re using a secular donor advised fund, maybe through Charles Schwab or Fidelity, and they see that money is going out to a with air quotes, a hate group, they could suspend, they could say that money can’t go and be granted to this hate group, even though Focus on the Family is far from a hate group.
Somebody has labeled them a hate group. So by using a Christian donor advised fund, you don’t run into that issue. So that’s the difference between the two that I think is important. We actually have clients that use both for various reasons, some that it’s just not important to them, the Christian one. And they’ll be fine using a normal custodian like Charles Schwab.
So it’s really a personal preference. But just to understand there’s two different types of donor advised funds. Now, the last thing I want to mention to you is when you’re identified buying a nonprofit or charity, I want you to make sure that you’re you’re you’re being careful. And if you have elderly parents, be hyper focused on them because the fake charities are targeting individuals who are seniors or who have very limited English proficiency.
It’s a target. And they’re getting good now, especially with artificial intelligence. Be careful of any charity asking for an immediate large payment or donation or gift card or wire transfer.
Be careful of charities that might use similar names or similar emails with one letter off. Be very careful. There’s caller IDs that can spoof you that look like that. Even the caller ID looks like a charity. So you’ve got to be very careful right now with the scams that are out there. I would just pause what’s wonderful about PAX Financial Group, I don’t think many people know this, but every outward facing role that we have, the advisors and the other people that we have, we have a 401k specialist, we have a group health specialist, all of them have to be on a nonprofit board.
They have to serve on a board. And what does that mean? That means that they’re in the weeds with these nonprofits that are doing great things in the community, and they’re there. They know these nonprofits that are serving and I want to tell you that because if you have an advisor with PAX and you don’t know what nonprofit that you want to give to ask your advisor at PAX or ask somebody in our PAX ecosystem, because chances are we know some great charities and great nonprofits that have immediate needs and that are doing really good work.
And so if you’re struggling with what you want to give and you have the money to give and maybe you need the deduction, you just don’t know where to say that grant to, then check with us. I think we can point you in the right direction. So that’s a lot of stuff on the donor advised fund, but very important.
Again, grab that e-book too, to unpack a little bit more impact at PAXFinancialGroup.com. I think you’re going to find it to be a very useful tool, especially here’s the kicker, we’re going to see some taxes go up probably in 2025. So getting this donor advised fund in place to prepare for some of those increases in taxes I think will be beneficial to you.
And then at the end of the day, I think there’s plenty of really amazing nonprofit organizations and ministries in and around the community that could use the financial support. So I appreciate you tuning in. And as always, I want to remind you, you think different when you think long term. Have a great day.
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