The Investment Scientist

Put Money in Your Pocket with Smart Charitable Planning

Posted on: August 1, 2016

charity-1940x1259.jpgI visited a physician client in Wisconsin while on vacation in Chicago this week. He has been my client for several years now and his personal finance is in very good order. As I was driving the four hour stretch of highway, I thought: What idea I could bring to him that could make his situation tens or even hundreds of thousands of dollars better?

This physician client of mine is easily in the top income tax bracket, meaning marginal tax rate for him is nearly 50% combining federal and state. He also gives away about $10k to various charities a year. He plans to retire in about 10 years.

When he retires, he will continue to give away $10k a year. In fact, there is a good chance he will give away more since people become more charitable inclined when they get older and having a meaningful impact becomes much more important to them.

If he lives another 30 years after retirement, he will give away a minimum of $300k. Here is the problem, he will have little income to write off, thereby wasting up to $150k worth of tax savings.

Alas, but there is a way to recapture these tax savings, it’s called Donor Advised Fund or DAF.

A DAF is a charitable fund that the donor has complete control. To test out this idea, I opened one for myself two years ago. I named it The Investment Scientist Charitable Fund. Every year, I put about $10k of most appreciated assets into this fund. Every year I also give away about $3000 to various charities that I care about, the rest will be invested in an index fund and grow with the market.

Here are the benefits of a DAF:

  • I get to write off the whole $10k against my incomes now, resulting in a saving of $5k in income taxes.
  • Since I donate appreciated assets, this will save me another few thousands in capital gain taxes.
  • When I retire, I will have a large sum in my DAF for whatever my charitable interests then.
  • I don’t have to collect donation receipts and worry about missing receipts any more
  • If I invest the money in the fund well, I will have a charitable legacy that outlasts me.

What works for me will also works for him, so I advise my physician client to

  1. Open a DAF
  2. Fund it with $20k to $30k contribution of appreciated assets every year.
  3. Give away $10k to charities and the rest will be invested.

Over his lifetime, he could save hundreds of thousands in taxes since now his givings align with his peak earning years.

Schedule a Discovery review with me, or get my white paper for free: The Informed Investor: 5 Key Concepts for Financial Success.

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Michael Zhuang is principal of MZ Capital, a fee-only independent advisory firm based in Washington, DC.


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