Download the Schwab app from iTunes®Get the AppClose

Financial Decoder: Season 3 Episode 6

use_simplecast_player

Listen on Apple Podcasts, Google PodcastsSpotify or copy to your RSS reader.

Decisions about what you do with your financial assets are just as important as the decisions you make while you’re accumulating them. Most of us want to help others, but is there a smarter way to give to charity?

Throughout the holiday season, you might encounter dozens of appeals for charity. If you decide to give, or if you donate throughout the year, how can you maximize the impact of your gift? In this episode, Mark talks with Kim Laughton, president of Schwab Charitable, a nonprofit organization established with the support of Charles Schwab & Co. to make charitable giving simpler and more tax-efficient.

They discuss direct cash gifts, donor-advised funds, private foundations, and other ways of giving—and which types of investors can benefit from each approach.

You can learn more about the science behind why helping others makes us feel good on the “Happiness” episode of Choiceology with Katy Milkman.

Subscribe to Financial Decoder for free on Apple Podcasts or wherever you listen.

Financial Decoder is an original podcast from Charles Schwab.

If you enjoy the show, please leave us a rating or review on Apple Podcasts.

Click to show the transcript

MARK RIEPE: A few years ago our family spent spring break in Washington, D.C., and on one particular day we must have stopped at every memorial and monument between the Ulysses S. Grant Memorial at the base of the Capitol building and the Jefferson Memorial.

One that stands out in my mind is the Franklin Roosevelt Memorial. Unlike most of the others, it isn’t built around a single piece of art, but instead is a series of vignettes that try to capture each phase of his presidency.

And right at the entrance, there’s a statue of Roosevelt. The statue’s unique, because he’s neither standing nor sitting on a horse. Instead he’s in a wheelchair—an acknowledgment of his battle with polio.

It’s easy to forget the grip that polio once had on the country.

The rush to develop a polio vaccine intensified due to a spike in deaths in 1949. Then in 1952, a massive outbreak infected over 57,000 people, mostly children, and public concern soared.[1]

Finally, in 1955, a vaccine was approved. Developed by Jonas Salk, the vaccine used a killed, or inactivated, virus.[2]

This story intrigues me for a few reasons that connect to today’s episode.

First, Salk refused to patent his vaccine. It was a selfless act that is justly celebrated.

Second, the vaccine worked—and polio cases dropped dramatically.

But the vaccine wasn’t perfect. Some children reported paralysis in the area where they were injected, and others died from complications. Public confidence in the polio vaccine suffered, and vaccination rates dropped.

Years later, Albert Sabin developed a version of the vaccine using a live virus that patients took orally instead of by injection. Once it was approved in 1961, the Sabin vaccine quickly supplanted Salk’s, which had lost public confidence.

Giving back to society is a good thing, but we want our efforts to be effective. And so even when we are trying to do good for others, we need to keep striving for improvements in the process.

Few of us will ever be world-class scientists like Salk or Sabin, who were able to solve seemingly intractable public health problems.

But we can all give back to society, and a common method is by giving to charity. In today’s episode we’ll explore strategies for improving the process of your charitable giving.

I’m Mark Riepe, and this is Financial Decoder—an original podcast from Charles Schwab.

It’s a show about financial decision-making and the cognitive and emotional biases that can cloud our judgment.

Financial decision-making isn’t just about accumulating wealth. Few people accumulate wealth just for the heck of it. Instead, wealth is a means to an end, not an end unto itself.

That means decisions about what you do with your financial assets are just as important as the decisions you make while you’re accumulating them.

Indeed, academic research on the relationship between how we spend our money and our general sense of well-being suggests that our spending decisions matter greatly.

Spending on experiences, spending on things that save us time, and spending on others seem to create the most happiness.[3]

The focus for today is on spending for the benefit of others. In one study, participants were given money early in the day and told to spend it on themselves or others by the end of the day.[4] Compared to the baseline level of happiness of each participant, those who spent the money on others reported feeling significantly happier than those who spent it on themselves.

Variations of this study have been done in multiple countries, both rich and poor, as well as with different age groups. The results are always the same. On average, spending money for the benefit of others will boost your spirits more than spending it on yourself.

But a couple of decision-making biases come into play when it comes to charitable giving.

The first stems from affective forecasting. That’s affective with an a. It refers to our ability to predict how we’ll feel in the future if some event happens. It’s a decision-making bias because we tend to do a poor job of forecasting how we’ll feel in the future.

Spending for the benefit of others is a great example of this. It turns out that people tend to underestimate how much better they feel when they give to others.

The second bias is choice overload. Think of this as the paralysis that ensues when we have too many options available for a given decision. This is especially relevant right now if you think about charitable giving.

This time of year we’re all deluged with requests to contribute to charities. One approach is to give a little to lots of charities. At the other end of the spectrum is to concentrate our giving to just a few causes that are important to us.

Unfortunately, choice overload can create a situation where we get overwhelmed—we put off the decision and we end up doing nothing.

Joining me now to discuss some of the decisions you need to consider when giving is Kim Laughton. Kim is the president of Schwab Charitable, a nonprofit organization established with the support of Charles Schwab & Company, to make charitable giving simpler and more tax-efficient for clients. Kim, thanks for being here.

KIM LAUGHTON: Thanks for having me, Mark.

MARK: Let’s start with the basics. Let’s start at the beginning. What are the different ways to give to charity?

KIM: Well, in our experience, our clients’ most fulfilling experiences with charitable giving involve more than just money. Usually, it’s a combination of what we call the three Ts—time, talent, and treasure, another word for money. So before we dive in to the financial aspects of giving, it’s important to acknowledge the importance of volunteering one’s time and talents to charity and the fulfillment that people get by doing so.

For financial support, donors have two basic options, to give cash usually by writing a check or using a credit card, or to give appreciated assets. Appreciated assets that make good charitable gifts include investments that have been held for a year or more and have gone up in value since they were purchased. The most commonly gifted appreciated assets include securities like stocks, ETFs, mutual funds, restricted stock, shares of privately held businesses, real estate, collectibles, even cryptocurrency. Donors can choose to make donations directly to charities or they can choose a charitable vehicle, the most popular being a donor-advised fund. A charitable trust can make sense for donors with more significant resources who want to earn some income and also give to charity. And a private foundation is also an option for a small percentage of really high-capacity donors.

MARK: Kim, let’s go through each of those options. Maybe we’ll start with cash. One of the findings of behavioral economics is that people, when they’re making a decision, most of the time, they’re going to default to the easy choice. When it comes to charitable giving, the easy choice, it seems to me is just to write a check or use your credit card. What do people need to think about when giving cash?

KIM: Well, there’s nothing wrong with giving cash. In fact, the new tax rules that came into effect in 2018 raise the charitable deduction for taxpayers donating only cash and who itemize their deductions to 60% of adjusted gross income.[5] But while cash may be a good option, it’s often not the best. And why is this? Because the tax code provides an extra benefit for those who give appreciated assets. This is because charities, because they’re nonprofits, don’t have to pay capital gains taxes when they sell the assets. So an investor is able to avoid paying capital gains taxes on selling such assets if they instead just donate them to charity. This is in addition to enjoying a current year tax deduction, which is 30% of adjusted gross income.

MARK: So this is especially important right now. As we’re recording this, U.S. stocks are at all-time highs. So many investors, they’re going to have gains if they sell, and they’re going to owe taxes on those gains. What could investors be doing right now to maximize their tax advantages?

KIM: Yep, you’re right. The markets are at an all-time high and have more than tripled in the past 10 years and doubled in the past six years. So a lot of people out there have appreciated investments that they’ve held for more than a year. At this time of year, also, people are rebalancing their investment portfolios, wanting to sell some of those shares of appreciated stock, or ETFs, or mutual funds that have run up in value more than others. If they instead donated some or all of these shares to charity or a charitable vehicle, they could both avoid paying capital gains taxes on the sale of the shares and also receive that fair market value charitable tax deduction. So if you do the math and compare the outcome of doing that versus selling the shares first, paying the capital gains taxes and donating the cash proceeds, investors can end up paying less in taxes and then give up to 20% more to charity if they donate appreciated assets.

In addition, as we approach year end, many investors work with their advisors to estimate what their current year tax bill may be and look for ways to reduce their taxes. With so many other deductions either eliminated or capped as a result of tax reform, like the mortgage interest deduction, for example, or state and local tax deductions in places that have state and local taxes, the charitable deduction now carries relatively more weight and it’s completely in the investor’s control.

MARK: So people kind of reconstitute their portfolios in a lot of different ways. You mentioned rebalancing. Are there other examples of people maybe wanting to kind of rework their portfolios that ties into charitable giving?

KIM: Yeah, there really are. But another trend we’re seeing more and more is investors who want to transition their portfolios to what’s called values-driven strategies. Usually, that means they’re selling certain stocks that don’t align with their values, be they, you know, gambling, gun stocks, tobacco stocks, or even companies with poor records on specific areas of interest to them.

So it sounds great to execute such a strategy, but particularly given the strong markets we’ve had over the past decade, when you do that, you can generate significant capital gains taxes as a lot of the stocks that need to be sold have run up in value. So rather than take this tax hit, we see some investors, instead, donating these shares or at least some of these shares to charity or to a charitable vehicle, avoiding… again, avoiding that capital gains tax and unlocking the value of these assets for charitable good. They can then give away those assets to charities and causes of their choice over time.

MARK: Great. Kim, I talked about choice overload in the introduction. There are a lot of good causes out there and people can sometimes get paralyzed when it comes to making a decision. And when they’re doing that sometimes, and actually another bias comes in, and that’s recency bias. That’s the tendency to be overly influenced by what’s happening either right now or in the recent past. How do these kind of come together and have an influence over charitable giving?

KIM: Well, first of all, Mark, you’re right. According to the World Giving Index Report[6], Americans are the most generous in the world. We respond to appeals from many sources—charities, colleagues, family and friends. In fact, a comparative study of giving research by two Dutch scholars concluded that 85% of the charitable donations that we make occur because someone asks for them. We also respond to current events. The donors we see are generous supporters of disaster relief, which is usually driven by the news. And this type of reactive giving is important, but for many people it becomes the primary reason they give. And if they reflect on their giving history, they often find that it’s not totally aligned with their values.

MARK: Many of our episodes talk about the importance of creating some sort of a plan of, you know … for example, a plan for how you will invest, a plan for how to arrange your overall financial affairs to help make sure you’re on track to achieve your life goals. How do you go about planning when it comes to charitable giving?

KIM: Well, we encourage our clients and all investors to take the same thoughtful approach with giving as they do with the rest of their finances.

So investors can start by defining their charitable missions and setting goals, both how much to give and when to give, whether they want to give during their lives and/or after their deaths, and to what mix of causes. They can do this by themselves. They can do as this as couples or as a family. And holidays are actually a great time for families to do this together.

So when making the decision, the first decision, which is how much to give and when to give, it can be a good opportunity also to consult with your tax or investment advisors and consider any specific tax investment or legal considerations. Some of the best practices we’ve seen with our Schwab Charitable clients include families that commit to setting aside a specific percent of their income or wealth or others who decide to donate a certain portion of their portfolio gains to charity each year. And over the past 10 years, there have been a lot of gains and so that’s unlocked a lot of value for charity. Some already have a great sense of where they want to give, while others need and can benefit from values exercises to help better define where they want to give. We’ve recently partnered with Stanford University to develop a philanthropic toolkit to make this process a little bit easier because it can be a difficult process to move through without a little bit of help.

MARK: So it’s a more of a structured process to kind of walk through to figure out, hey, what are your values, and how can you express that through charitable giving. Is that right?

KIM: Absolutely. And just to help you to prioritize. It’s something that we don’t necessarily think about in our daily life, but there’s some structured ways where you can really, in a very short period of time, become clear about what those are, and work with others in your family who may or may not share those values to just sort of see where they’re similar or where they’re different.

So once you’ve sort of gone through that process of figuring out your values, then figuring out the mix of causes that you want to give to, the best charitable plans often include a category for those less predictable needs that may arise, be it disaster relief, you know, memorial or honorary gifts, supporting the ask of friends and family, as well as saving, you know, some level of support for deeper, longer-term relationships you might want to have with charities so that you can support them.

So just as having a thoughtful investment strategy and asset allocation for your investment portfolio can help investors stay on course and meet financial objectives, having that same type of purposeful charitable strategy can empower you to do the same for your giving. And it can also give peace of mind to know that you’re supporting causes that are consistent with your values in the most tax-effective way and give you an excuse to say no to those solicitations that come in that aren’t consistent with your values if you haven’t earmarked money for those.

MARK: It makes a lot of sense. We both live in the San Francisco Bay Area. This fall and actually the last couple of years, we’ve seen the impact of natural disasters. Maybe using natural disasters as an example, go through and kind of highlight the differences between planned giving and reactive giving?

KIM: Sure. Well, disaster relief is actually a great example of the difference between reactive and planned giving. Emergency management experts tend to think of disasters in four stages. The media blitz that drives reactive giving tends to occur in the response phase in the 90 days after a disaster. And actually we find with many of our donors that it’s the first 36 hours after it hits the news when most of the donations come in.

MARK: Wow, 36 hours. That’s amazing.

KIM: It’s very quick with online giving, you see it much more quickly than you used to. But as we know, after these disasters, recovery can take years, and many people don’t realize that the best thing they can do for disasters is to help to prevent them in the first place. So the mitigation and preparedness before and the long recovery afterwards don’t receive a lot of attention or reactive giving. And as a result, they’re great candidates for the more planned giving that can achieve the greater impact often than you can get from supporting that immediate response stage.

MARK: It’s sort of that in that immediate response stage, you’re kind of treating the symptoms, but with a little bit of planning you can really go after the root causes.

KIM: Absolutely.

MARK: Let’s talk a little bit about wills, bequeathing assets. That’s a popular method of giving, especially for those who have more wealth. We’ve done an episode on estate planning and it’s striking about how few people actually get around to creating a will or updating it when they should. You know, procrastination is driving a lot of this. What impact does procrastination with estate planning … how does that tie into charitable giving?

KIM: Well, I’m also amazed at the stories I hear of wealthy people who die without an estate plan, including Prince, a number of years ago. I believe. I always wonder when I hear these things, if these people realize how much of a burden they’re creating for the loved ones they leave behind, who have to guess at their wishes, and how much more their estate will potentially pay in probate and legal fees and estate taxes just because they didn’t bother to establish a will or an estate plan. My father recently passed away unexpectedly and among the many things I admire about him is how thoughtfully he considered his estate plan. So during a really difficult time, it’s made things so much easier for all of this because he took the time to do so. It’s very much part of his legacy.

So the good news about estate planning and charitable is that there is a charitable exclusion, which is an important part of our Tax Code that allows people to remove any assets that are given to charity upon their death from their taxable estate. And bequeaths remain an important source of support for our nation’s nonprofits. They represent about 9% of total giving last year. It’s important for wealthy investors to consult with an estate planning attorney and be sure they’re asking about the charitable exclusion as a way of avoiding estate taxes, or, better yet, start incorporating charitable planning and giving into their life now so that they can also enjoy the fruits of their involvement and engagement with nonprofits while they’re living, and also set a really wonderful example for their families.

MARK: Yeah, I think part of it enjoying the fruits is just seeing the impact that they have.

KIM: Absolutely. And going to the events and volunteering your time, that’s another example that my father set. He was very involved with philanthropy in his life and it is also part of his estate plan to… and my mom’s estate plan, to give away money after both of them have passed.

MARK: Let’s talk a little bit about private foundations. What’s your … what’s your assessment of that approach?

KIM: So private foundations are an endowed-style giving vehicle, which means that you can contribute upfront, get your tax benefits, and give over time. They’re most appropriate for the select group of people who want to give a large amount to charity over time and enjoy the benefits that only that structure can provide. And these include employing staff, including family members if people wish, making grants outside of a traditional list of IRS-eligible charities, making grants to named individuals, for example, for scholarship travel study, or other similar purposes provided IRS requirements are met, and also making program-related investments, including loans to various charities.

But these benefits of private foundations do come at a price. First, they carry legal setup costs, and annual administrative and tax-filing costs. They’re also less tax-advantaged than giving directly to charity or to other charitable vehicles like donor-advised funds. And they’re anything but private, in fact, because their annual tax filings are publicly available online, so that people’s giving can be viewed and scrutinized by anybody just by getting on Google and doing a quick search. So they’re often used by ultra-high net worth families and sometimes they can be used with other charitable vehicles, including donor-advised funds.

MARK: I guess the big point there is a lot of overhead.

KIM: Yes, and complexity to manage. They were popular in the late 90s, at a time, pre-Internet, when the privacy issues weren’t as big, but as other vehicles that are a little bit lower-cost have emerged on the scene, fewer and fewer. It really is limited to those people who want those benefits that I articulated earlier.

MARK: Let’s talk about donor-advised funds. You mentioned those a couple of times. I’m guessing those are probably the least well-known among the general public, but their influence is actually a pretty massive.

KIM: Yeah, many people outside of philanthropy still don’t really understand how popular donor-advised funds have become. Actually, all giving from donor-advised funds just last year reached over 23 billion, grew 20% from the year before, and Schwab Charitable, alone, contributed … or donated out $3 billion to charity in the past year.

MARK: I think 3 billion, actually, one of the larger charitable donors, 3 billion has got to be pretty … pretty high up there in terms of … in terms of size.

KIM: Yeah, it’s amazing. If you compare that with private foundations that are… you know, make the press and have lots of headlines in the news, only the Bill and Melinda Gates Foundation gives out more than Schwab Charitable donors do, in total. So donor-advised funds have become a large force in philanthropy.

MARK: How does a donor-advised fund work? What are the mechanics of it?

KIM: Well, donor-advised funds are just a specialized charitable account. Much like an IRA is for retirement or a 529 plan is for college savings. You can open an account by contributing cash or appreciated assets and investments. These are irrevocable gifts because you’re giving the assets to a charity, you can’t take it back. And that allows you to receive a current year tax deduction. You can then re-contribute at any time and grant out, as well, at your convenience.

The donor-advised fund provider handles all of the due diligence and sends a charity a check, along with a personalized grant letter. They are... they can be opened for as little as $5,000. Our largest account is now over a billion, so a wide range of types of clients take advantage of donor-advised funds. The contributions, when they’re made, if they’re in cash, they’re very simple, they come straight into the account. They can be invested and then granted out over time. If they’re in the form of appreciated securities, and we talked about the benefits of that a little bit earlier, the donor-advised fund will liquidate them and does not have to pay capital gains tax, so you forego that capital gains tax.

Any balance that you have in your account after you’ve contributed and then granted out, can be invested for potential tax-free growth, again, much like a 401(k) is. And over time that can grow and potentially lead ... allow you to have more money to give to charity over time. Various providers offer different investment choices. At Schwab Charitable, we offer low-cost index, as well as actively managed and socially responsible investing options, and larger accounts can also be professionally managed by an independent investment advisor.

MARK: So if I’ve got an, appreciated stock that I’m interested in selling, I can just move that stock right into the donor-advised fund, the donor-advised fund will sell that, and if I want to make a grant, the donor-advised fund will make the grant, or if I haven’t made up my mind I can just leave it there, have it reinvested, and all that growth, you know, continues to accrue and ultimately can be dispersed.

KIM: Absolutely. And it helps to separate the tax decision from the granting decisions. So you know, really common use case, and I’ll be doing it myself in the next few weeks, is at the end of each year, to contribute a substantial amount to fund your granting for the next year or two in one fell swoop with a few different, you know, highly-appreciated shares. And then, you know, not worry over the holidays when you’ve got many other things to be doing, and then grant out over time in the following year or two when it’s more convenient. But you get that current year tax deduction, and, again, avoid the capital gains tax when you’re rebalancing or doing whatever you’re doing at the end of the year with your portfolio.

MARK: So maybe summarize some of the advantages of this approach.

KIM: So there are a number of different advantages. They sort of fall into three categories. The first is that they are simple to open and operate. They integrate charitable giving into your everyday financial management routine at Schwab. For Schwab clients, when they logon to schwab.com they see their charitable account, along with all of their other Schwab investment and bank accounts. And so with just a few clicks online or via the mobile app, donors can move assets or funds from investment in bank accounts to charitable accounts and then grant to charities and track their giving. And then rather than keep all their receipts, which was the old way of doing things, they’ve got all of their giving online and there’s a personalized annual report that is done every year so that you can use that for your taxes.

So the second advantage is that they’re tax-smart. We’ve talked about how donor-advised funds… how important it is to donate appreciated assets to charity and why it’s tax advantaged. It can be difficult to sort of donate … if you’re supporting, let’s say, a dozen charities, donating a share or two here or there, that’s a very cumbersome process for you to figure out, for your financial services firm to figure out, and for the charity to accept.

They can also … you know, a more recent use case from a tax perspective is for those donors with the new tax law who find themselves on the cusp of making sense to take the standard deduction or to itemize deductions, donor-advised funds can be a great way to help to get the full benefit of your charitable giving by what we call bunching or concentrating your gifts every few years so that you are giving enough to be able to itemize in those years. Then you can use your donor-advised funds to make grants out in the off years during which times you might take the standard deduction. So, again, when you do the math you find that you end up reducing your taxes and giving more using that strategy.

And then I think the last advantage of donor-advised funds is that they’re really helpful to charities because they help to reduce costs associated with accepting complex assets for charities and encourage a greater level of giving. Many charities find it difficult and expensive to accept non-cash assets, particularly the more complicated ones like real estate, restricted stock, and privately held shares. So donor-advised funds provide that service, especially those that are affiliated with financial services firms are good at that. It encourages people to be able to give more. And then, again, for those who do invest their account balances and they grow over time, that leads to more giving. Since inception, over our past 20 years, we’ve generated an additional $3 billion in money available to be granted just from the investment growth in the accounts alone.

MARK: So how does the donor-advised fund structure, how does that help mitigate some of the decision-making biases that we’ve discussed?

KIM: Well, donor-advised funds make it much easier to donate more tax-advantaged appreciated assets and unlock their value for charitable good. So that helps to mitigate the bias of defaulting to that easy choice of just giving cash by writing checks or pulling out your credit card. I’d say they also help to combat both sort of procrastination and recency bias because it gives people a simple tool to incorporate charitable planning into everyday financial planning and management, and it helps you to be more proactive and thoughtful about where you’re giving and your causes. You know, whenever I log into my account and I see the pie chart that sort of reflects where I’ve given, and I can change it for the past year, or the past two years, past five years, or even past 10 or 20 years, and I see that pie chart, if it really doesn’t reflect my values, I think my values … it causes you to really think about, you know, not just responding to people who solicit you, but to really be proactive about making sure you’re supporting the causes that are consistent with what your values are.

MARK: Yeah, it’s one thing to make a plan, but you’ve got to a certain extent monitor to see whether you’re sticking to the plan, and it’s much easier if you’ve kind of consolidated everything into one, you know, kind of cohesive digital experience.

KIM: Absolutely. And I would say that pie chart is so simple and elegant, but so impactful in terms of how it changes people’s behavior. When we introduced that a number of years ago, it’s been one of the highlights I think of people’s, client’s experience online is just to make sure that they’re able to keep track of their giving and it’s reflected back at them so they can adjust as they need to, again, much as one does with their investment accounts and their asset allocation.

And then I think the last interesting benefit that donor-advised funds help to compensate, or a bias that they help to compensate for is loss aversion bias, which we haven’t really talked about today. But one of our donors kind of put it this way: You know, in the old method of writing individual checks from her bank account, she focused more on how much she was giving because it was causing her bank account balance to go down. And so that created some friction because she felt like she was losing money every time she wrote a check out of her bank account to a charity. Now, she makes a strategic decision every year to fund a certain amount of giving, and, again, irrevocably transfers the funds over to her Schwab Charitable account. And she can just focus then on the fact that that money is going to charity, that she’s not losing anymore. So she’s sort of got rid of that loss aversion bias and can focus on giving it out on a scheduled way, and then volunteering her time and knowing that she’s staying true to her goals.

MARK: We’ve got a variety of people who listen to the podcast. What’s the profile of the type of individual who benefits from a donor-advised fund?

KIM: Well, anybody who gives regularly to charity, and most of us do. We’ve heard people say, ‘Oh I’m not charitably inclined.’ And then you say,

‘Well, do you have children?’ ‘Yes.’ ‘Do they go to schools? Do you support those schools?’ ‘Yes.’ ‘Are they in sports leagues? Do you support those sports league?’ ‘Yes.’ Most of those are nonprofits, so almost everybody is charitably inclined.

MARK: Especially with a $5,000 minimum.

KIM: Right. So as long as they’ve got $5,000 in either appreciated investments or cash that they foresee giving to charity over time, they’re a candidate for a donor-advised fund.

Again, we appeal to… the donor-advised fund appeals to people across, you know, all sorts of age ranges, individuals, couples. And, again, wealth ranges from people with as little as 5,000 all the way up to over $1 billion. I think our youngest clients are in their 20s, our oldest clients, which we always enjoy, are in their 90s. Many of them, actually, and retirees are embracing online, but we also have many that call us, who want some help and it’s very fun to talk to them because we’re meeting them at their best, doing what they really enjoy doing, which is giving money back.

MARK: Kim, what are some of the mistakes that people make when giving to charity? In general, what are some of the mistakes that people do?

KIM: Good question. You know, I think, overall, probably the biggest mistake is not getting the full tax advantage of their giving by not saving their receipts and taking the time to itemize on their taxes. Now, with the new tax law and the higher standard deduction, people need to be thoughtful about the timing of their gifts, as well so they can itemize versus take the standard deduction. So I think that would be probably the first mistake, is you can get be getting more for your money and be making smarter, tax-smart decisions.

Sometimes, especially after disaster relief and even at other times, people don’t realize that they’re not giving to real charities, someone is absconding away with their money. So people should always do the research, make sure to go online, make sure the charity really exists. If you’ve got a donor-advised fund that’s done by the donor-advised fund providers. So you don’t have to worry if you recommend a grant and it’s not a real charity, they won’t approve it.

And I think maybe the last mistake we see sometime are smaller donors wanting to earmark their funds for specific use, and they may not realize that charities have, you know, thousands of donors, and if everyone wants to earmark for a specific use, it’s very difficult to manage the charity. So we always encourage smaller donors, unless they have a real specific need, to allow charities to use the money wherever it’s needed most.

MARK: What are some of the mistakes that people make with donor-advised funds?

KIM: You know, I think the one … we don’t see it very often, but when we see it, it is painful … are people need to realize that when you give to charity, and a donor-advised fund is a charity, it’s an irrevocable gift. So just because it’s going into another account and you can see that balance, you can’t get the money back. And the reason is because you’ve already gotten the tax break. So if people see the money in their charitable account and then they come on hard times and they want to get the money back out, they can’t have it out. So it’s very important to realize that much like giving to a charity, when you give to a charity and you need money, you don’t go call the charity and ask for it back, you can’t get the money back from your donor-advised fund account.

MARK: Yeah. Usually there’s a big box, you know, right near the end of the process that says, I acknowledge this as an irrevocable gift. You should pay attention to that box.

KIM: Yes. And that’s why we don’t see it very often, and when we do see it, you know, it’s often by people who didn’t … you know, didn’t read that carefully enough.

The other thing I would say, and, again, we don’t see this often because we make sure during the process, but you want to, if you’re donating appreciated investments … and, again, this is for donor-advised funds or directly to charity … you want to donate those shares before you sell them. Once you sell them, you’re subject to capital gains taxes. But if you donate the shares and let the charity sell them or the donor-advised fund provider sell them, you avoid the capital gains tax. But don’t sell the shares and then donate them and wonder why you’re subject to capital gains tax. You did it in the wrong order. So you got to be very careful about what order you do things in.

MARK: The details matter.

KIM: Yes.

MARK: Well, thanks for being here, Kim. A lot of great information. Appreciate you coming by.

KIM: Thanks for having me.

One thing we haven’t mentioned yet is the type of giving that generates the most happiness for the giver.

It turns out that the level of emotional benefits are driven by three factors.

  1. The amount of connection that the giver has with the cause or individual who’s being helped.
  2. The extent to which the giver is able to see or at least imagine the impact of the gift.
  3. And finally, whether the gift being given is viewed by the giver as being truly voluntary.

That list provides a good guide to how you should evaluate your charitable acts throughout the year.

Think about the causes you care most about and match your giving to those causes.

Giving is, of course, a great activity, but take the extra step to think about how your money will be used and where it will have the most impact. If you do this, it will help alleviate some of the choice overload that we discussed at the beginning of the show.

Finally, don’t forget about affective forecasting. People tend to underestimate the size of that warm glow from giving generously. By helping others this holiday season you can also help yourself. A true win-win.

If you’d like to learn more about donor-advised funds and the other types of giving we’ve discussed today, check out SchwabCharitable.org.

If you’re new to the show, you can go back and listen to previous episodes at schwab.com/FinancialDecoder.

One more suggestion: listen to the episode entitled “Happiness” of the Choiceology podcast. Many of the studies on the impact of helping others are discussed there. You can find the episode at schwab.com/podcast.

Thanks for listening. And let us know how we’re doing by leaving a review on Apple Podcasts or your favorite listening app.

For important disclosures, see the show notes and schwab.com/FinancialDecoder.

 

[3] Elizabeth W. Dunn, Ashley V. Whillans, Michael I. Norton, and Lara B. Aknin, “Prosocial Spending and Buying Time: Money as a Tool for Increasing Subjective Well Being,” Advances in Experimental Social Psychology.

[4] Elizabeth W. Dunn, Lara B. Aknin, and Michael I. Norton, “Spending Money on Others Promotes Happiness,” Science, 2008.

 

Important Disclosures

The information provided here is for general informational purposes only and should not be considered an individualized recommendation or personalized investment advice. The investment strategies mentioned here may not be suitable for everyone. Each investor needs to review an investment strategy for his or her own particular situation before making any investment decision.

All expressions of opinion are subject to change without notice in reaction to shifting market conditions. Data contained herein from third-party providers is obtained from what are considered reliable sources. However, its accuracy, completeness or reliability cannot be guaranteed.

Examples provided are for illustrative purposes only and not intended to be reflective of results you can expect to achieve.

Schwab Charitable is the name used for the combined programs and services of Schwab Charitable Fund, an independent nonprofit organization. Schwab Charitable Fund has entered into service agreements with certain affiliates of The Charles Schwab Corporation.

A donor's ability to claim itemized deductions is subject to a variety of limitations depending on the donor's specific tax situation. Consult your tax advisor for more information.

This information does not constitute and is not intended to be a substitute for specific individualized tax, legal or investment planning advice. Where specific advice is necessary or appropriate, Schwab Charitable recommends consultation with a qualified tax advisor, CPA, Financial Planner or Investment Manager.

The Schwab Center for Financial Research is a division of Charles Schwab & Co., Inc.

Apple Podcasts and the Apple logo are trademarks of Apple Inc., registered in the U.S. and other countries.

Google Podcasts and the Google Podcasts logo are trademarks of Google LLC.

Spotify and the Spotify logo are registered trademarks of Spotify AB.

(1119-98G9)

Thumbs up / down votes are submitted voluntarily by readers and are not meant to suggest the future performance or suitability of any account type, product or service for any particular reader and may not be representative of the experience of other readers. When displayed, thumbs up / down vote counts represent whether people found the content helpful or not helpful and are not intended as a testimonial. Any written feedback or comments collected on this page will not be published. Charles Schwab & Co., Inc. may in its sole discretion re-set the vote count to zero, remove votes appearing to be generated by robots or scripts, or remove the modules used to collect feedback and votes.