2021 Year End Philanthropy & Tax Strategies

Hey everyone, welcome to We're Talking Money. I'm Phil Clark with OmniStar Financial Group. Welcome, we're glad you're here. Got a special guest in the house tonight, Mitzi Kincaid. Mitzi, welcome. She's a great attorney here in Wilmington. We've worked together for a long, long time, so got an expert here as we talk through philanthropy and tax strategies tonight. It's that time of year. You don't want to miss this episode, so stay tuned. We'll be right back.

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Okay, it's time for philanthropy and tax strategies. At the end of the year, Mitzi, everybody has giving on their mind. A lot of times it's gifts, it's ribbons and bows, but there's also philanthropy, and there's giving to charities and people that really need it. And this time of year, I think it's synonymous with Christmas: charities, Christmas, people getting that giving spirit, they want to do more. So I'm excited about this time of year. It's perfect time to have this show.

So we're going to talk through, as you know, philanthropy, talk a little bit about that, but then there's a secondary benefit, which is all about tax strategies. It's Christmas time in a few more weeks. Right now we've got Thanksgiving in a few more days, so the very least, hopefully everyone's ready for that. They have a great Thanksgiving. How about you?

Yeah, I'm excited. The holidays always get me so excited, and clients always come to me and ask those same questions, Phil: I want to give money to my favorite charity, how do I do it, and do I get any benefits for that? And I always tell them I like a good deal, and two for one. Who doesn't like two for one, right? You're not only given to charity, but you get a discount in the form of some sort of tax strategy planning, which is awesome.

It's so awesome. And a lot of people, we've been doing this a long time, and I still run into people, and you run into people all the time, that say, well, I'm not really sure how to do this, and here's how I did it. And we immediately realized what they did didn't necessarily give them the benefits that they could have received.

So tonight we're going to talk through year-end traditions, Christmas, Thanksgiving. Those are rituals that they'd go as far back as we can imagine, back to the beginning. People have been celebrating these holidays. But we're also going to talk about people in their giving, and so that brings us to our 10 Elements of wealth management, and one of our elements is philanthropy. Part of the show, in fact, it's the key part to the show. And then we're not going to stop there. We're going to take it a step further, use one more of our elements, tax strategies, because you already said it, the two go hand in hand. People give because they really want to, but there is a secondary reason for it. They want the tax benefit, and really, why not?

Why not, right? If you can get the tax benefit, you should. It's in the law.

Exactly. So if you're going to make gifts, you're going to do some great things for charities, why not get the benefit?

Right, exactly. And charities depend on this, Phil. They're looking at this time of the year because they know that this is kind of where the windfall is, right? And then those of us who are practitioners try to navigate the laws and the rules, and that's why we're here, which is a perfect time to give folks enough runway and enough time, right, to maybe make that happen this year, and if not, certainly make a plan for next year.

Yeah, what a great point that is. Last year, probably people lost a year.

I did, yeah.

I think a lot of people did. 2021 now is almost in the rear view mirror, hard to believe, but last year a lot of people didn't get around to donating the way they normally would, and frankly speaking, charities were really, really feeling it last year. So I talked to them on a regular basis. I know you're very involved with charities. So many of them in 2020 did not get what they needed. 2021's a little better, but it's still not back where it needs to be. So you're exactly right, charities depend on it. They need it.

And then I guess the other thing is, coming down from Washington, the funding is always in question. How much will be taken away? Will they have enough from the federal level and then the state level? The rest of it comes from donors, people that you and I serve every day. Those are the ones that can make the difference. So we're going to talk about how they get to do that, the best ways to do it. Can't talk about all of it in 20 minutes, but we're going to hit a couple of really good points.

Great.

Let's start with philanthropy and talk through what that really means. I think people get confused with philanthropy. Every time I mention that word, people say, oh yeah, yeah, I love to give money, I give every year. And philanthropy at its core is really not about the money. It's really about, it's being a humanitarian. It's trying to improve human welfare.

Exactly. I wonder if enough people out there recognize that you don't need any money to be a philanthropist. You can just donate your time, your talents, and that's philanthropy, right? But we always associate that with Bill Gates, Melinda Gates, right? I associate philanthropy with rich people, Phil.

Right, I think that's what... We haven't given as much as Bill Gates. I'm probably close. I think I've given a couple thousand. He's given what, 20 or 30 billion?

Right, it's close. So you have that in your couch.

It's good. It's all money, right?

Yeah, it's all good. But you're right, Bill and Melinda, that's a different level of philanthropy. That's altruism, and it's... But that's what most people hear about, right? The local news doesn't call out you as a local philanthropist donating your time or building houses. They like to report on the high value targets. They want to know about Bill and Melinda Gates, right? And so the small donors, but all of our clients, still me, it's the 80 20 rule, I believe, Phil, and correct me if I'm wrong. I think 80 of that comes from those small people, the little people like us, right, that don't have the billions of dollars.

Huge part of it. But you're exactly right. The news talks about the big ones because those big fish, as we'll call them, they're easy to see. Everybody recognizes their name, and so it's easy for the news to talk about that. Most people are not in that category, but that doesn't mean that you can't be a philanthropist because you don't have Bill and Melinda Gates money, or anybody else at that level.

Exactly.

So I think philanthropy, just to clear the record, it's not just money. It's giving of your time and your talents. It's all the things that you can do to make the lives of other people who really need it, to improve their life. That's really what it's all about.

So agree.

Now, secondarily, is money, absolutely. So let's dive into talking about philanthropy at that level. Everyone has some time, everybody has talent, but now let's talk about the money. We're going to go through a number of ways to give. Let's start with what I'll say is the simplest one, is just direct or present gifts. So right now we want to make a donation, and you can do that, right, anytime you want.

Yeah, you can just make a simple donation, give it to your favorite charity, or an approved 501c3, if you will. So you can do that, right? Exactly. Just remember, try to keep it under 15 grand, right, so that you don't have to file a gift tax return, right, for those tax nerds out there. What I'm saying is an easy, simple way is if you've got to call a couple, right, or whatever, each of them can give fifteen thousand dollars to that charity, right?

It's a great point.

And make that plan. So that's an easy... that's the easiest gift possible. It's just, right, opening your checkbook, or credit cards. Nowadays you just have PayPal and Venmos, right? They make it so easy.

People can pay, there's a thousand ways now. And it used to be you wrote a check. Today it has nothing to do with a check. You can send money electronically, and now we got cryptocurrency out there that's going to donate.

You can donate your miles, you can get your points.

That's right, you can donate your stock. But there's some rules about that, though. Let's talk about those rules for a minute, because to your point, you can just give to a charity, just write a check. That may or may not be the right way to do it.

There's limitations, by the way, on how much they can deduct, right? Right. So if they're given cash, they can deduct 60 of their adjusted gross income. If they're giving appreciated stock, only 30. So now we're talking about income tax, right? I just said something about gift tax, but now you're saying income tax, right? So now we're just, all kinds of taxes are laying in here.

Yeah, okay, there's so much tax, and that's the part that a lot of people never get. So there's income tax potentially that will or won't be affected depending on how much you give, and then there's the tax as it relates to what you were talking about, which is gift tax. We got a lot of taxes in this country. People say we need to be charging more tax. I don't know if everybody realizes how many layers we have.

Nevertheless, if we take highly appreciated stock, this might be one of the best ways to make a gift and to make a gift go further. So we've got an example that we'll share with you, and it should be on your screen now. So let's just say, for example, that we paid twenty thousand dollars for a stock. Actually, let's take that up a little bit. Okay, let's say that we paid fifty thousand dollars for a stock, and today that stock has appreciated to, say, a hundred and fifty thousand. Okay, and in the last several years of the market, that could easily happen.

So let's say that you've got 150 000 of appreciated stock and you want to give that to the charity. Well, here's the beautiful part. Not only do they get to avoid all those capital gains, so when they give it to the charity, that 150 had a basis of 50, so there's a hundred thousand there that would ordinarily be taxed at capital gains. That's 25 000 of savings. And the stock is appreciated, so they get to give the charity 150 versus what they started with was 50. They don't pay the tax on it, and they get to tax deducted 150 000.

that's double dipping in a good way. That's a win-win.

It is. And it's not included in their estate tax either, right? There are states for estate tax.

So it sounds like these kind of gifts really tick off those taxation boxes, and you're proving it right here.

They really do. You save the capital gains, that's first exposure. The charity gets more, that's the proverbial no-brainer, right? And you are able to get it out of the estate, so no estate tax exposure. And no lawyer, don't need any. They didn't have to pay anything to get that.

That's right. This is so simple, but here's what happens: instead of doing that, people will sell their stock and write a check to the charity. Don't do that.

No, don't do that. If you're listening tonight, you're thinking about making a donation with your appreciated stock, don't sell it while it's in your account and then make a cash donation, unless your CPA or your wealth advisor team or your attorneys have told you that makes more sense. What you generally would want to do is just move the stock to the charity, let them sell it. You avoid the capital gains tax, you give them a much better gift, much larger gift, and Uncle Sam gets left out of the equation. That's the right way.

My kind of giving.

Yeah, heck yeah. Think about it, the charity in some cases gets 25 more at a minimum. But then if you think about your ordinary income tax, so now I get to deduct that 150, that just saved me 50 000 in ordinary income tax because I get to write that off on my tax return. It's huge. So big deal, don't forget about appreciated assets.

Let's go now to that ever popular donor advised fund or funds. They've become so popular. What was vogue 10 or 20 years ago, it's really a big part of planning today, and maybe rightfully so, because they do have some tremendous benefits. You get immediate deduction on it, you get to direct the money. You get the deduction now, but you can take 5-10 years to get that money out to where it is that you intended it to go. So I know you work with a lot of clients that enjoy that kind of giving, or they become acclimated to that, so speak to that a little bit.

Yeah, so a lot of my clients that wanted to do direct gifts, but the laws changed and limited their ability, right, and set kind of a maximum for them. But what it didn't do is set a maximum for the donor advised funds. So I just said, put 250 000 in your donor advised fund. Again, not much legal advice, right? Not much legal involvement, doesn't cost a lot to set up, but the benefits, like you just said.

And if I heard you correctly, you said that you get the deduction in the year that you make the gift to the donor advised fund, even if it takes five years to get out.

You can leave it in there for years. You can donate to the DAF, or the donor advised fund, today, get the deduction, take it right to your tax return, save yourself the tax dollars now, but you don't have to get in a rush to start giving it.

Yeah, right.

You can make the recommendation to the donor advised fund and say where you want the money to go next year and the year after, the year after. And you can continue making gifts to those donor advised funds, so it's not a one-time thing. You can add to that donor advice, and you can change your beneficiaries, right? You can change the charities when you want to, which is huge, because you can't do that necessarily with an irrevocable trust or a charitable remainder trust sometimes. Sometimes those things are set in stone, so this is a very flexible one.

Yet this is irrevocable. It's an irrevocable thing; once you put the money in, you can't get it back. But to menses point, in an irrevocable trust, a true irrevocable trust, when you put things in that, you really lose a lot of your ability to dictate what happens. In fact you lose all of it, with a few, very few exceptions. So the donor advised fund puts an added layer of flexibility where a donor sort of gets their cake and they can eat it too. So it's a really, really...

Yeah, it's a really great way to go.

So keep in mind just two things I want to mention on the donor advised fund. One of the... it's not a weakness, because it's such a great tool, but when it comes to qualified charitable distributions, or a QCD as it's called, years ago a rule was put in place where you could just give a hundred thousand dollars from your IRA as long as it went directly to a charity, so institution to institution, and it never hits your tax return. With a donor advised fund you can't do that. You can only do it if it's going direct to the charity. You can't put it in a deferred vehicle like a donor advised fund. That's the only negative that I see. But we were talking before the show, if you got a big IRA that's going to be heavily taxed on your death, you could leave that to a donor-advised fund. And so while the QCD may not be available, you can certainly leave the IRA, right?

Exactly, absolutely. And/or if you don't want to leave it to a donor advised fund, any 501(c)(3) that inherits from an IRA or 401(k) doesn't pay the taxes. So that's another benefit. You're saving 20 to 25, 30, maybe more, Phil, depending on what happens with taxes, we don't know. And remember with beneficiary designations, if you don't want to give the whole 2 million to the charity or the donor advised fund, you could split it and do 50 to your kids, 50 to your church.

Sure.

There's so many flexible things that you can do with all of these types of charitable giving.

Yeah, really, sky's the limit, right?

It really is.

If you can think of it... Mitzi told me years and years ago, it's probably 10 years ago, Mitzi said to me, "Look, I've got the tool chest, got almost any tool you can imagine in there. If you can think it, I can probably write it." And that's true. So if you can think it and she can write it, then virtually anything that we talk about or plan for, it can be turned into reality.

Absolutely.

So important. One more thing about that donor advised fund to keep in mind, or those big IRAs: if you don't want to leave it to a donor-advised fund outright, you could think about a charitable remainder trust. We don't have stretch provisions anymore on those IRAs, but you could certainly go to a charitable remainder trust, leave it there, have that pay to your heirs, your beneficiaries, for up to 20 years. That's the max, but beats the heck out of 10 years now in the IRAs for stretch. So 20 years, and then whatever's left goes to your favorite charity. Not a bad way to do it.

Not at all, because if you think about it, when these things are getting funded and the folks that set them up pass away, they're going to hit their children or their beneficiaries probably at their highest income earning years, and that could be a gift and a curse at the same time, Phil. And so that's one of those things that we say, but it takes time. All of these things, even a cash gift, takes some time, and you need to work with your team, because you need to make sure that you can live without that money, right? That you don't need that money, and that that's where you want to put that money and effort.

For sure, for sure. I think Mitzi brings great points there. That brings to mind a case that we worked on recently, the very thing that you said. There's five children, and they're all doing very well, and they're in their highest earning years. Mom and dad are trying to develop what's going to be their legacy. They're trying to decide how that legacy is going to play out, and there's so much money that will change hands. Without the right kind of planning it's going to be heavily taxed. Potentially you could see half of it go away. So I think Mitzi brings a great point.

Mitzi, as we round the corner and start heading into home plate here: planned giving. It's a giving time of year. Planned giving, though, is often miss...

It's on my calendar, Phil, every Sunday.

That's exactly what I mean. People think it means that you're planning to give.

Thank you.

Well, it's not. But as you and I know, planned giving gets confused all the time. It's really about after you're gone. It's legal documents, things that you prepare that create what that person is going to do with those dollars long after they're gone. So planned giving, I think, is a tremendous way to take a little bit and create a lot, whether you're using life insurance or an IRA or anything else. But you see a lot of that. What are the things that we ought to think about and know about when it comes to planned giving?

Yeah, so it's important to go see an attorney. Of the things that we've talked about so far, this is one that definitely requires local counsel, and especially if you're working with a university or college, because a lot of those places want to review those documents, for sure. Now there's some downsides, though, right? You might get that favored seat at the football stadium, right? It may say Phil Clark or OmniStar up there. But the problem, and sometimes it gets a little dicey, is what happens if you change your mind, and the university already knows that you're a planned giver? And sometimes people don't want to share that information, and a lot of times... And so my number one thing and tip to tell you guys out there is make sure that, can you keep your planned giving private, if that's possible. Because if you change your mind, it could create bad feelings, it could create hurt feelings, maybe kick you off the booster club.

And you were in the booster club.

Exactly. You might lose the seats. And so I love planned giving, but it could create a really untenable situation of kind of extricating yourself from that, getting involved with that. But planned giving, if you know you're going to do it... And this is also a place for a great charitable remainder trust. There's a lot of tools. Again, it's about the cost, it's about the cost of administration, it's about really the client's objectives.

So much to think about this time of year, and I think this time of year motivates people to think about it, whether it's direct giving, or what we call the more simple way to do it, whether it's appreciated assets, which I think is a tremendous way to give. It's what most people right now should be thinking about, particularly with the stock market having really... it's really just done remarkably well over the last few years. So surely you have lots of gains there, and if you're thinking about making a donation, boy, appreciated assets are the right thing to look at. But whether it's that, whether it's donor advised funds, maybe you want to do something that has a little more, maybe a more long-term approach to it, the donor advice fund could be great. Planned giving, irrevocable trust, maybe all of them, maybe it's a little bit of all of them, depending on the situation. I think no matter what you do, know that there's a way to plan for it so that you get the intended result, and maybe a result that you didn't know existed that benefits you in a much greater way, and the charity.

Now how do you decide who you're going to give to? We're going to round out the show with a little bit of evaluation. So this is your way to decide if that charity is worthy of your hard-earned money, what you want to give to them. Mitzi, we have to do this for clients a lot. A client will say, "Hey, do you think this is a good charity?" I hate to make that decision for a client, but a lot of times they come to us and they'll say, "Mitzi, what should we do? Phil, what should we do?"

Absolutely. I like to point him in the direction of things like GuideStar, which is now Candid, or Charity Navigator. There's a host of them out there where you can go get the 990, you can understand what they're doing.

But a lot of times, Mitzi, I say to clients, the charity ought to offer that to you. If there's a charity you're looking at, just say to them, "I'm considering a gift. I'd like the collateral that you provide a potential donor or a benefactor. I want to learn."

And even better if it's publicly available on their website.

Absolutely.

That's even the best one for me, when there's nothing hidden.

Absolutely. And you don't have to ask for anything, postage, it's right there. A lot of great charities put it on the website. You don't have to go ask, to Mitzi's point, you don't have to worry about being uncomfortable. So I think that's great. But a lot of people don't put it out there, so you can always go to these places like a GuideStar. They might charge you a little something, but the information that you get's invaluable. You really want to be sure that where you're leaving your money, or who is going to get your money, is good people, that they're run the right way, they're operated with not just the right motivation but with the

right level of prudence with the right financial acumen. You want that charity to be around a long time, particularly if you're leaving, like you said early in the show, a quarter million dollars or a million dollars. That money could be used very well, and if used judiciously it could last for decades.

Well, especially if it's a small charity. And a lot of my clients will ask, "What, Mitzi, if I do a local small charity, what happens if I leave money in my will and they're not there anymore?" For sure. Do you know that the law resolves that question? The law has anticipated that a small or any charity might not be there. And so what the law says is if you leave money to a charity in your will and that charity is not there when we probate your will, we are to find a similarly situated charity in the same area of the same size and give the money there. So there's a backup plan, there's a contingency plan built in.

But what you really should do to avoid that is do your homework on the front end, whether you have Mitzi do it, or our firm's doing it, or you're doing it, and you're perfectly capable of doing it because all the data's out there. You just have to go do the research.

Now, here's what you should look for when you do that research. Are they sitting on too much cash? Look at that charity. If they're sitting on a lot of cash, why is it on the sidelines? Why is that the case? Sometimes too much cash means that your donation, while you think it might be used immediately to really make a difference, it might be sidelined for some kind of a, maybe a building they want to construct, or maybe there's something that they have that you have no idea they're going to use the money for that thing. And so your money may not be used at all. You may not really get the feel good that you were hoping for.

The second thing is, do they use joint cost allocation? This one, most people have no idea what it means, right? I was about to ask you, what is joint cost allocation? Phil, help me out with this.

I think Mitzi does this to me all the time, she'll test me. But joint allocation, joint cost allocation essentially means everything, basically, think about all money coming in just simply goes to the general account and they'll use it for anything they want. Now, some people might say, "Oh no, well, I do restricted gifts." Well, some charities don't allow that, right? Some don't allow restricted. But if they use joint cost allocation, there's no way for you to know how much is really going towards good operations or how much is going towards, say, research and development, which might not be the best way to spend money at this level. But know whether they do joint cost allocation or not. Ask that question, and if they can't answer it, then you might have another red flag to be thinking about.

How does the charity raise money? So how much do they have to spend to raise—

You mean all those mailers that we get and all the calendars? And do you know that somebody sent us, oh, because we do fiduciary services for our clients, and so we're doing one of our clients, and they sent us a dollar to give us, they sent us a dollar hoping our client would give them money. How does that work?

So that's an attention grabber, and the problem is they're hoping that that dollar will guilt you into sending a gift. I think that's a huge chance they're taking. It also tells me he's sending money to a lawyer.

We kept that dollar.

You just keep the dollar, that's what I do, particularly if it's not a charity that I'm used to giving to or supporting. But here's what's really interesting to me, Mitzi, too, when you bring up something like that, it immediately makes me think, are they really being prudent with their money to just send dollar bills out like that? I don't know that that really makes a lot of sense.

Here's what I do know. When a charity is spending a dollar to raise roughly three dollars, and that's a ratio that I've used for a long, long time to gauge the performance of a charity or a non-profit or a not-for-profit, got to get that right, if they can spend a dollar and make three, they're running pretty darn efficient. I know charities, Mitzi, right here in Wilmington, but all over the country, I know charities that are doing three and four times that. They can spend a dollar and they can make 12.

Now that is a charity that you want to get behind. Those are people that understand efficiency, because charities are companies. People don't realize that, Phil.

That's right. When people come to me to start a non-profit, we start with forming a corporation in the state of North Carolina or the state of Tennessee. So they are a corporation, they're a business. So you have to look at that, right? You got to run it that way.

But there's efficient businesses. You came from the corporate world early in your career. There's efficient businesses and then there's the inefficient ones. There's efficient charities and there's inefficient charities. There's some 990s out there, if you look at them you'll find CEOs of a charity making millions of dollars. Well, you might want to rethink whether that's the right, your hard-earned money is going to buy their yachts. They're enjoying their yacht, their Mercedes and all the other things.

Exactly.

The good news is you have people at your disposal. You have a team of people: Mitzi the attorney, OmniStar of the wealth management firm, your CPA. That's really the three-pronged stool, much like all these tripods that are sitting out in front of us right now. But you need three legs for a stable platform of planning, and it really starts with the attorneys and the wealth advisors and the CPAs, and you want a team that can work well together.

Exactly.

You get that, you can really make progress. So Mitzi, first, tremendous pleasure to have you on the show.

Always, Phil. Thanks.

We're doing this again.

Let's do it.

And secondly, to all of our listeners, go to our website, check us out. You can find Mitzi Kincaid at Kincaid Law. She's easy to spot out there. She's been doing this how many of you are doing this?

So next year is our 15th year anniversary.

Yeah.

And the law firm is Kincaid and Associates. So google mincy lawyer, Mitzi the lawyer. If you just google Mitzi in Wilmington, North Carolina, I bet you'll find her.

Yeah. But there's no better way to create someone's legacy. I think in closing, that's the way we run our lives and our businesses, and every day when people come to meet with us we always think about what's their legacy. And they don't really know that, but we do, and when we see an opportunity to help you guys make your legacy, that really excites us. And the clients don't see that, but we talk about it behind the closed doors of how excited we are that people are given to charity and they're philanthropic, and they don't have to be wealthy millionaires to be philanthropic.

We love plans like that. As much as it makes you feel good, Mitzi's exactly right, we get a great sense of satisfaction just knowing that we were part of that and we were able to show you the right ways to do it and help you turn vision into reality. So very important. We wish you the best for Thanksgiving holiday. Christmas is just around the corner. Have a great time with your family, stay safe. Thanks for watching. Mitzi, we'll do it again soon.

Let's.

Take care.

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