Alternatives to reactionary allyship: planning your sustainable charitable strategy

So many of us were called to action last week. There are multiple forms of allyship, and this week we’ll be writing about how individuals, families and organizations are mobilizing their monetary resources to affect change.

In their book Happy Money: The Science of Happier Spending (2013), Professors Elizabeth Dunn & Michael Norton found that how people spend money matters more than how much they spend. In one study, individuals that spent $5 on someone else reported being more happy than those that spent up to $20 on themselves. Giving can have a huge impact on you, the giver. Many Americans felt called to take part in this practice over the past two weeks. Organizations like the Minnesota Freedom Fund were flooded with unprecedented amounts of one-time donations, which quickly surpassed their maximum need. This level of responsive action is inspiring, but many organizations are now calling on individuals to find ways to be long-term allies, and to be wary of reactionary performative expression. At Mana, we want to support this critical effort by helping our readers understand and plan for successful - sustainable - charitable giving.

Taxes, generally.

Before we dive into specific strategies & opportunities, we want to give you a little background on how charitable contributions impact your tax return. 

Charitable contributions are normally only a tax deduction if you itemize taxes on your tax return. The current standard deduction is $12,400 for individuals and $24,800 for married couples - so in most cases, itemizing is limited to homeowners, because the mortgage interest you pay on your primary residence can most easily set you over that threshold. However for 2020, even if you do take the standard deduction, the CARES Act has provided a $300 tax deduction allowable for charitable contributions. 

Your deduction for charitable contributions generally can't be more than 60% of your adjusted gross income (AGI), but in some cases 20%, 30%, or 50% limits may apply. The CARES Act expanded the limit from 60% to 100% of adjusted gross income. 

Most people donate via cash or paypal, and this is absolutely a great strategy for ongoing contributions. If this is something that is important to you, we recommend including charitable contributions in your Mindful Spending Plan and setting it up as an automatic contribution 1-2 days following when your paycheck hits your bank account. However when there is a desire to contribute a large lump sum, there are a number of strategies that can be used in order to maximize the contribution by minimizing your taxes.  

Donating Appreciated Stock

Since March 16, 2009 - the depths of the Global Financial Crisis - the S&P 500 has returned over 400%. If you were invested in publicly traded stocks during this time period, it is likely that you have appreciated stock in your portfolio. This can also be a great strategy if you are receiving your employer’s publicly traded stock as part of your compensation package.  In many cases, we see individuals hesitant to make changes to their portfolio because of the tax consequences. This provides a way to diversify your portfolio against being too concentrated in a single position (especially if it’s the company you work for!) while maximizing your impact. 

Anytime you sell stock, you incur taxes. For stocks sold within a year, this is at your ordinary income tax rate. For stocks sold that have been held for at least one year, this is at long-term capital gains rates, which range from 0-20%. However in some states, like California, there isn’t any state tax benefit to holding long-term. This means that for top earners, you’ll likely pay 34% taxes on any stock you sell. So let’s say you want to donate $10k to charity - in order to do this with cash, you will need to sell almost $14k in order to make this happen. But, there’s an alternative. You could donate $10k of appreciated stock. 

Why does this work? 501(c)3 charities are non-profit organizations, which means that they do not pay taxes. When you donate stock, the charity can receive the stock (more on this later) and then sell the stock without any tax implications. In the meantime, if you were willing to donate $10k of cash, which required $14k of capital - now, you could donate $14k directly to the charity, creating a bigger impact. 

What’s the tax impact? If you are itemizing deductions on your tax return and the stock was held for at least one year, you will be able to deduct the fair market value of the stock you donated on your tax return. 

Creating a Donor Advised Fund

Think of a donor-advised fund as a charitable investment account that you can use to donate to the charities you care most about. 

Our favorite strategy: 

1. Contribute to a Donor-Advised Fund, 

2. Take the full allowable deduction that year, 

3. Give to charities over time.

Once the money is transferred to your donor-advised fund, it is considered an irrevocable gift, which is why you can claim it that year for a tax deduction. If your income has increased significantly in a given year and you’d like some of it to go towards a charity or charities of your choice, giving a larger amount (up to 100% of your income for tax year 2020!) to a donor-advised fund will again allow you to itemize and claim a much larger deduction.

Qualified Charitable Deduction

If you’ve already reached retirement, this strategy may be great for you. If you are at least 70 ½ years old and are taking required minimum distributions (RMD) from your Traditional IRA, Inherited IRA, or inactive SEP IRAs or Simple IRAs, normally these distributions are taxed as ordinary income. However you can actually redirect your distributions to a charity, up to $100k per year ($200k for married couples), and these will not only cover your RMD requirements for the year, but also will not be included in your taxable income. This can be a great strategy for tax payers using the standard deduction, because you receive a larger benefit by excluding income rather than contributing to charity with after-tax income. In order to do this, you must reach out to your custodian and have them transfer the funds directly to the charity. 

Taking advantage of employer matches

As part of the employee benefit offerings, many companies offer to match employee contributions to charities of their choice. We’ve seen in the past few months that companies have increased the amount of money they are willing to give, either by matching 2:1 for any employee contributions OR by expanding the upper limit of what the company will match.  One of our favorite small businesses, The Studio Marin, used this benefit in a powerful way. For one week, the owners agreed to personally match any charitable contributions to local charities; and because the owner’s husband works for a large corporation that has expanded their charitable benefit to 2:1, this meant that any contribution made was actually matched 3:1. We love this creative way to increase impact. 

Making your impact count

In our financial planning process, we know it’s important to normalize our clients’ income each month. Coming up with a base monthly income number allows us to plan for both regular and one-time expenses with much more accuracy. Just like an individual or family, nonprofits rely on predictable revenue to plan for the future. If you want to make sure your dollars go as far as they can, we recommend considering donating to a charity or charities on a monthly basis. According to Charity Navigator, recurring donations provide organizations with a reliable revenue stream throughout the year. The stability afforded through predictable income allows them to spend more time on innovating their programs and raising more awareness and funds.

How can charities participate in the funds from these strategies? 

In order for charities to be able to receive appreciated stock as a form of donation and/or most efficiently receive funds from a Donor Advised Fund, the charity needs to have an official Depository Trust Company (DTC) number and account number. DTC is part of the Federal Reserve system and is the world’s largest securities depository. Most brokers and banks are registered with the DTC - so if you have ever bought or sold a stock, you are likely indirectly working with the DTC to facilitate that execution. With a DTC (think - routing #) and account number, this enables you as a charity to receive ACAT transfers (think - wire transfers) of stock. 

Setting up this type of account is very straightforward. It’s essentially a business brokerage account. The name of the account will be in the name of the charity and you will need to select the option that indicates you are a Tax Exempt Non Profit Organization to ensure tax treatment is handled appropriately. The brokerage firm will confirm your status with a 501(c)3 letter or IRS Government Information Letter. 

When you receive donations, you will need to send a similar letter of confirmation to the donor so they receive the tax benefit of donating appreciated stock. This letter of confirmation will include the amount, which is equal to the fair market value of the stock, provided it is publicly listed and has been held for at least one year by the donor. The cost basis and date of purchase should be reflected when you receive it in the brokerage account. 

Upon receiving stock, you have three investment options: 1) sell the shares for cash; 2) hold the shares until cash is needed; or our recommendation, 3) sell the shares for cash and invest the cash according to an investment policy statement. An investment policy statement is a document that guides the investment strategy of a portfolio. As an organization grows, it may make sense to take a longer term approach to deploying the donated capital. An investment policy statement would be set up to create an investment portfolio that matches the longer term needs of funding. 

For examples for how some charitable organizations advise individuals to contribute stock:

• From ACLU's FAQ page about gifts of stock:

Q. Do I need to notify the ACLU about my stock transfer?

A. Yes, when your stock is transferred to our account, we do not receive any information that identifies you as the donor. Please notify us at stock@aclu.org or (212) 549-2550 when you transfer stock and provide the following information:

Name of the stock

Number of shares

Your name and address

• From SPLC's stock donation page:

Either you or your broker must contact us online or call 1-888-414-7752 with the name of the stock and the number of shares being transferred. This ensures the gift is properly credited and acknowledged.

Other Resources:

• XY Planning Network: We recommend working with a fiduciary financial planner or advisor to execute a comprehensive strategy. Mana is part of a network of over 1000 fee-only advisors who take the fiduciary oath. The fiduciary oath means that these financial advisors are required by law to put their clients’ best interests ahead of anything else and fee-only means that they are prohibited from selling you products on commission. We wrote a blog on why we love the XY Planning Network and recommend looking here to find an advisor to help. 

• DAF Direct: By applying for DAF Direct, this connects your organization directly to individuals and families who have donor advised funds with Fidelity, Schwab and BNY Mellon. 

Even beyond donations, individuals, families and charities can magnify their impact through investing.

Impact investing is a thoughtful way to make sure your financial success gets tied to ethical progress. We wrote about this in more detail in a separate post, but it's also relevant here because of its close ties - sometimes directly - to charitable giving and activism. At a high level, impact investing is the practice of investing in companies whose business activities and/or products benefit society and the environment. 

The new landscape of impact investing is still young and rapidly evolving; its primary challenges are competing with the maturity of more traditional investments. Younger and less tested impact investments are inherently riskier, but the tradeoffs are worth taking seriously. Progressive impact investments do a rigorous job of only including companies that are really moving the ball forward on social and environmental justice. Take for example the exciting new NAACP Minority Empowerment ETF (Ticker: NACP). This fund is the only financial product that explicitly addresses issues of racial inequality. NACP is a nonprofit ETF: a novel investment type that inspires us of what’s to come.  Being a nonprofit ETF means it donates all net advisory profits from its management fees to the NAACP. It also supports and reflects the values of the NAACP through its stock holdings - exclusively investing in companies that empower minorities through promotion, pay, hiring policies, products, services and supply chains. This should not be perceived as investment advice and we recommend consulting with a financial advisor prior to investing in securities. 

The niche of impact investing is growing and has recently become mature enough to offer a wider variety of investment options. Building a comprehensive investment strategy that factors in major socially responsible themes is now possible without sacrificing on risk, returns or fees, which is an opportunity we’ve started to take advantage of in Mana’s own impact portfolios.  Research continues to show that investment funds with a focus on ESG (environmental, social and governance factors) are standing up to the best of older mainstays. Competition in the impact investing space continues to drive down fees, offer more liquidity, and fuel creative innovation, which will give us even stronger opportunities to be agents of change. These are powerful advancements in the structure of traditional finance, and we encourage readers to consult advisors about which options they can pursue to start making their long term ethical commitments a reality.  

Stephanie Bucko is a fee-only financial planner based in Los Angeles, California and is the Chief Investment Officer of Mana Financial Life Design. Mana Financial Life Design provides comprehensive financial planning and investment management services to help clients organize, grow and protect their wealth throughout life’s journey. Mana specializes in advising professionals in the tech industry, as well as women who work in institutional investing, through financial planning and investment management. As a fee-only fiduciary and independent financial advisor, Stephanie never receives commission of any kind. She is legally bound by her certification to provide unbiased and trustworthy financial advice.