Episode 78: Year-end Giving Strategies w. Daniel Wrenne

This is the final episode of 2020, I want to thank you all for your continued support throughout this year. This week, I’m going to be wrapping up the year by cross posting an episode, which I recently did with my friend, Daniel Wrenne. Daniel is a financial advisor and works with many physicians. He recently launched a podcast called Finance For Physicians.

Justin (01:09):
My wife’s been working really hard. I’ve been working hard on the business. This has been a year of just, yeah, there’s been a, it’s been very, very full. I’m grateful now to be looking back and that my family is healthy and we’ve, we’ve come through it in one piece. And I’m really looking forward to what is to come in this new year. I’m ready to hit the reset button. I know a lot of people out there are as well. And think about what is 2021 going to hold. I spent some time talking with my wife about this this weekend. About next year. It’s going to be also a crazy year for us as we’re getting ready to move across the country. She’s about to become an attending physician and we’re dealing right now with many of the challenges that I regularly talk about on this show.

Justin (01:54):
It’s a really exciting time. And one with a lot of moving parts personally, professionally, financially, that we’re, we’re navigating in real time. I also really love new year’s because it’s a time to set goals and I am an unabashed goal-setter, I’ve tried many different strategies when it comes to goal setting, especially around new year’s and new year’s resolutions. Sometimes in the past, I’ve picked like 10 or 15 goals or more, including some really easy ones to just guarantee that I didn’t come up empty handed when it comes to goal setting, to make sure that I accomplish something in 2020 this past year, I literally set only one goal because I want it to be laser-focused. And that goal was to release one podcast episode per week on the podcast that started as anesthesia success and has evolved into APM success. I did skip one week in June, but other than that I’ve hit every single week.

Justin (02:49):
And when COVID was ramping up, I was doing two to three a week for a little while. So by my count, I I’m more than happy to check that box and am really just and pleased at how things have been going. We recently also rolled over 50,000 total downloads on the podcast, which in podcast land, we know we call this a vanity metric, something that doesn’t actually have any inherent meaning other than to feel good about yourself, which I do. And I only bring it up to say thank you to you listeners out there for devoting your time and attention right here each week I, as life gets more and more hectic. I, I really mean it when I say I don’t take it for granted that you take some of your valuable finite time and attention. And listen to me ramble on about some random topic in 2021, looking ahead, I’ve got some really exciting ambitious projects underway as my team, and I want to continue to create really impactful content to help accelerate financial progress for physicians to help relieve stress, to get you valuable information, et cetera.

Justin (03:49):
I see this podcast. I see APM success as a physician advocacy platform where we’re working to identify and solve problems for anesthesiologist and pain management docs in real time. And right now I’m lining up my content calendar for 2021. I would love any feedback that you have, any thoughts, anything that you’re working through that you think, man, it would be really valuable if you talk to someone about this topic, or I talked to an expert about this, you should interview them. I would love those recommendations. Email me right now. My emails are in flux. You can just send it to justin@apm-wealthlikeanesthesiapainmanagement-wealth.com. I would love to hear from you finally, I’ll be sharing next week about a few of those exciting projects specifically, but this week I’m going to be wrapping up the year by cross posting an episode, which I recently did with my friend, Daniel Wrenne Daniel is a CFP.

Justin (04:41):
He’s a financial advisor. He works with many, many physicians. He recently launched a podcast called finance for physicians. I heard about this and I was like, Oh man, is this really what the world needs is another physician money podcast? Do we really need that? But I’ve actually been really, really impressed with Dan’s work. He has an intellectual curiosity and a great flow to his conversation. His discussions are really fresh and relevant and he’s just incredibly intelligent. So if you have room in your your podcast lineup, I know you’ll really benefit checking out finance for physicians today’s episode. I recently recorded in an interview with him on his show. We talk about charitable giving and ways to strategize for year end and some of the considerations for this tax year, for next tax year and some of the specific strategies to really get the best bang for your buck. So in conclusion, happy new year, I hope everybody is staying safe out there. Hope everyone’s getting vaccinated as soon as possible. I’m ready to close the books. Thank you for listening. And I look forward to 2021 and stepping into it with you.

Daniel Wrenne (05:47):
Yeah. So this is, this is kind of the time of the year. Typically, you know, giving is a, is a hotter topic. And I think, you know, everybody also wants to reduce taxation, at least most people I talk to. And so what I wanted to do today was to have Justin on the chat with us and talk about some of the cool strategies that are available for you to help maximize that effectiveness of your giving. So Justin, you ready to do this?

Justin (06:10):
Absolutely. Awesome.

Daniel Wrenne (06:13):
So just maybe let’s just start big picture. What, how would you describe just your thoughts in general on giving we’re both financial planners and you know, we help people, you know, in our day jobs navigate their, their money, but how does this work into your practice or what are your thoughts?

Justin (06:29):
Yeah, so it’s interesting. Uncle Sam obviously helps out people who are charitably inclined. It’s very kind of uncle Sam to say, Hey, if you give enough money above a certain amount, then you can you can deduct it from your taxes, meaning your taxable income goes from a high number to a somewhat lower number in the amount of your charitable contributions. Now there’s a sort of minimum hurdle you need to clear in order to get that benefit called the standard deduction, which we’ll get to in a minute. But I am always a, I’m kind of intrigued by this in some ways that the idea of itemizing itemizing your contributions. And I see this standard deduction as at least a starting point, you know, for generosity. I, whenever I am talking to people who are charitably inclined or who want to be generous or give sacrificially or give in ways that are going to make their community a better place or to people in need or charitable organizations, I think a nice little baby step, especially if you’re very high income.

Justin (07:28):
I mean, this is, this is merely a baby step, but to say like, let’s look at the standard deduction and let’s say, can we get you to a point where you’re going to itemize because of your charitable contributions? And then you get a little bit of that taste of what is it like whenever you’re generous with what you’ve got and then look out because you might find that it becomes this really awesome experience. You become less attached to your stuff into your money and it could set you on this whole new trajectory. So one of the things that I love about this topic in particular with my clients, when I have these conversations is to take the people who are charitably inclined and to help them cultivate not only the desire, but the mechanics of giving in a way that is optimized for their financial situation.

Justin (08:17):
So we get the best tax deal. We can think strategically about the strategies we want to use. And we’ll talk about some of those in a minute and it’s, I I’m totally energized by it. I love it. And seeing people it’s, it’s a deep privilege. As you know, Dan, like working with people in this sacred space, really talking about money. I mean, people talk about everything before they talk about how much I made per year and how much I gave to charity. Last year. A lot of people are actually ashamed to talk about the latter of those. And so being able to be in that space with people and help them think constructively about it is it’s just a deep privilege that love. So yeah,

Daniel Wrenne (08:56):
No, I’m in the same boat. I would say one thing I would point out is with, with giving. I think where it works well is you have to really think of it as giving first. That has to be the priority, not saving on taxes. Although saving on taxes is nice. I don’t, it’s not effective. If you say, I need to save on taxes. Therefore I give a, it has to be giving is important to me. So let’s try to make the most of our giving.

Justin (09:19):
Yes, there’s seldom a case. At least I can’t think of a case off the top of my head where I had an option to either what we’re giving resulted in you having more money in your bank account. It’s basically saying, well, I’m going to give a little less Tunkel Sam, if I give a bigger check to a charity and that’s a trade that I’m willing to make. And I think, you know, again, this is a first step and a good step, but it is nearly that. And I’m curious in your thoughts on this day. And I think one of the things, this is part of the way I see the world and the philosophy that I have with financial planning. So as a, someone who believes in generosity, it’s my faith that shapes my conviction about these things. And I believe that, you know, we have a creator who made us and who hardwired certain things into sort of a physics of the universe. And I think that this conversation about generosity is true across nationality, across different religious sect, across all swaths of socioeconomic strata, that when we give it has a really constructive function in the human brain and in the human heart. And it helps to uncurl our fingers from around our own stuff. And it helps to reorient our value system.

Daniel Wrenne (10:34):
Yeah. That’s pretty deep stuff, man. That’s, that’s like, and I think it depends on, so I would in terms of the you know, the faith aspect, I’m sure there, there would be lots of people that would argue with you on that. I agree with you on that, but I’m sure that there would be lots of people that would want to kind of take a different stance, but in terms of the giving and the physical effects on you, I don’t think that’s up for debate. At least if we go talk to the scientists, you know, cause there’s a lot of research on the science of giving and how it affects your happiness.

Justin (11:08):
Yeah. And I think that’s what I’m saying is that giving makes you happy, whether or not you believe whatever you want,

Daniel Wrenne (11:14):
But it is interesting that it’s kind of hardwired into humans, that they get a kind of you know, happiness kick. It’s a good ROI on your happiness to, you know, give,

Justin (11:26):
And I think, you know, people in our position, Dan, and the position of our clients, like we have the luxury to solve for our happiness. So say what is the life that makes me the most happy and then work backwards from there? And I just think that giving is an important part of that. Yeah.

Daniel Wrenne (11:40):
Well, before we get into the mechanics and the strategies and that sort of thing, I’m just curious on your end, you get to see a lot of people’s money kind of like I do. And so have you seen like where in your experience, what do you think is the most effective form of giving and what I mean by that is like, you know, you can just write checks. You can be in involved in the organization, you can go find the people that have the need and then go give, and there’s all kinds of different ways to give there’s more active giving. And in your experience though, what has been, seems to be the most rewarding form of giving

Justin (12:17):
Great question. Two things I would say, and this is totally stolen from this guy named Andy crouch with whom I spoke one time company I used to work for, had him into speak about a book that he had just written. And he said he was sharing about some of the things that he’s given us. A lot of thought, he’s a guy who is intentionally generous. And what he said is he tries to give generously in ways that make a dent in his own life so that it costs him a little something because that gives him some emotional investment in the car. And he also does it to an organization or to a cause that he’s also giving time to, and he does it in a way that moves the needle on that organization’s efforts. So for somebody like him in this context, and I think about my own sort of generosity paradigm in the same way, like, is it gonna make a difference?

Justin (13:09):
Not nothing against like the American cancer society, but if I stroke them a $5,000 check at the end of the year, is that just going to get sucked up into the mothership and no one’s going to know or care, and I’m not going to be able to connect my gift with some specific way in which the universe has a better place. So I’m less inclined to do that than to say. I have a friend who runs a local nonprofit, and I know the work that they’re doing. Maybe I’m on the board. Maybe I just participate meaningfully in some way with my time. And I, I can see under the hood and I know what they’re doing. And I know the people who were being served and I, I can see what their budget is. And I know that if I gave some big gift, it would further their mission in a tangible way. And I would even have some ability to observe it with my own eyeballs. So I think that for me, as I think about constructing generosity intentionally into my life, those are the things that I think about. I want it to cost me something. I want it to move the needle with the organization that I’m serving. And I also, I don’t want to spread it so thin. I’m not a guy who wants to write a hundred, $100 checks. I’d rather write a $10,000 check and make it, have this impact that I’m describing.

Daniel Wrenne (14:16):
Yeah. Now that you gotta be careful with the finding, I agree that finding an organization and being involved in the time aspect and you get to see the impacts of your giving and that’s ideal, however, especially like in the world we’re in right now, like you don’t, people aren’t getting out much. So you kind of also have to balance that with like, is giving important. And if so, do it and don’t let the, you haven’t found the perfect organization cause you to procrastinate, giving,

Justin (14:46):
Giving imperfectly is way better than not giving in. Like right now. I mean, I’m at like the New York food bank and Philadelphia and like homelessness, like all the whole swath of humanity whose jobs have been obliterated by what we’ve seen in the last nine months, there’s desperate need all around. So if you can’t find a worthy, cause you’re just either lazing around, read the newspaper and you know, again, that’s a good step and you iterate like over time when you start to give to a thing and you’re like, huh, I care about this. I wonder if this is the best way to address an issue. And then you, you get better over time. It’s like a muscle,

Daniel Wrenne (15:21):
Right? Yeah. We, we give mostly through our church. And like for example, during COVID we have asked to, they have created a fund that’s like a kind of directly community-based relief for COVID related things. And so we’ve kind of been able to do that, but still though, you don’t sometimes get the, as good of a direct feeling of the impact. Sometimes you do, but you have, that takes a little more effort. That’s kind of like phase two, probably. And like you said, it’s a muscle and you know, at the end of the day, the first thing is if it is important to you, you know, you can start and, and, and grow with it. Yeah.

Justin (16:04):
And let me say two more things before we move on, I have learned an immense amount from the people whom I’ve worked for as a financial advisor, in many cases, actually in almost every case I can think of most readily. It’s not the people, the biggest network that have taught me lessons in generosity. It’s, there’s some sort of like inverse relationship, not like poor people, you have more or whatever, but I’m saying I’ve seen people give very generously sacrificially. Like I’m thinking about this little old lady at a prior firm who got a big windfall when her sister passed away and she was a woman of modest means and she gave either the lion’s share or the entire big six-figure windfall that would have been, it would have given her a lot of security. It would have probably reduced her anxiety. It would have allowed her to increase her license. She gave the whole amount

Daniel Wrenne (16:54):
That sacrificial giving that’s.

Justin (16:55):
Right. And man, when you’re in that meeting with that lady, I imagine sitting across from this person as their financial advisor, it’s like, Oh, like this is Smith. Are you sure you want to take this three quarters of a million dollars that we could like buy you a nice annuity with, or like a long-term care policy so that we can make sure your needs are met and, and do that. And she is insistent like, this is, this is what I want to do. That’s how it is. You just, it’s, it’s intense. It’s challenging. It, it makes me examine my own life and say like, geez, I’m not even scratching the needle. There can be a danger, you know, in this conversation to like, hold ourselves up as people who are generous. But man, I’ve just been put to shame in those types of situations.

Daniel Wrenne (17:38):
So those are like the rock stars, the sacrificial giving. And they don’t, you can’t spot them or stereotype them, you know, they’re, they’re not, they’re not which is the best part about it. They talk about, they don’t even, they don’t even you can’t figure it out unless you happen to have known their financial situation.

Justin (17:58):
That’s right. And that’s why it’s so amazing as you know, that you’re going to be the only person that finds out. Cause it’s not like we’re putting her name on a building. Like we’re sending this to the orphans in Haiti and, and there’s a lot of people that are gonna, you know, eat dinner and have a little school to go to and have a life that is marketed better because of that sacrifice. And that’s, it’s real, it’s a real privilege to be in that conversation.

Daniel Wrenne (18:19):
Yeah. One little side note too on giving, just to clarify. So we’re, we’re mainly talking about today talking about giving property or money or whatever. I’ve had clients in the past talk about giving time and, you know, professional time and that that’s kind of a different world and it doesn’t typically affect your taxes, get into the strategy, but we’re just going to be talking about actually giving property.

Justin (18:46):
Yeah. It’s no less important though.

Daniel Wrenne (18:50):
Yeah. That’s a, that’s a completely different thing, but it’s definitely definitely important as well. So

Justin (18:57):
Nail guns happening next door. There’s a, there’s a new HVAC system that my neighbors installing stuff. You hear any of that construction noise? I’ll try to mute my mic as,

Daniel Wrenne (19:04):
And then yeah. It’s all good. So let’s talk, start talking about the mechanics. So I guess just if I’m giving, how does it affect my tax return? I know that’s not easiest answer, but like let’s start to talk about,

Justin (19:18):
Yeah. So this year is, it’s a little bit unique. There’s this nice little icing on the cake that our friends in Washington DC decided to give us in terms of giving us an above the line deduction. Usually charitable contributions are a below the line deduction. You, can you clarify that? Yeah. So what this means is normally whenever you give charitably, you need to give in excess of the standard deduction in order for it to make a difference on your taxes. So for a single person the standard deduction, $12,400 in the year, 2020, until you have itemized deductions of which charitable contributions is one in excess of $12,000, it doesn’t make a difference for you.

Daniel Wrenne (19:59):
So let’s do like an example.

Justin (20:02):
So other things that could impact your, that, that could be itemized

Daniel Wrenne (20:06):
Like mortgage insurance is the big one and then salt tax. Yeah.

Justin (20:10):
Yes. Right. And there was a bunch of them that were recently done away with with the tax cuts and jobs act, but just put concrete terms around this. You know, if you have a little bit of mortgage interest, say like $3,000 of cumulative interest, you pay on your mortgage. It’s probably gonna be more than that. Actually it might be more like five or 6,000, say it’s $5,000 you pay in mortgage interest every month you make a mortgage payment. Some fraction of that is interest at interest could be tax deductible. If it exceeds this $12,400 ceiling or a single person. So if you’ve got $5,000 a mortgage interest, you’re almost halfway. And if you had no other deductions, you would need to make a charitable contribution in excess of, you know, 4,400 minus 5,000, $7,400. That’s sort of your hurdle to say, I want my charitable contributions to reduce my taxes. If you didn’t get, if you gave some amount less than that, say I’ve got 5,000 mortgage interest, then I write a $6,000 check. That’s $11,000 total. In that instance, it’s better for you to take the standard deduction of 12,400 and reduce your taxable income by that amount rather than the 11,000 amount.

Daniel Wrenne (21:22):
Right. So just to kind of get that into perspective, did you say 5,000 for the mortgage? So just to put it, put it in perspective, if you have like a 3% interest rate ish, these are like super round numbers. Not exactly. That’s probably around like what, like one 75 of mortgage balance, maybe you’re around that realm of mortgage balance would kind of tend to generate that or costs that sort of interest on a 12 month timeframe ballpark

Justin (21:48):
On the, on the front end, like at the beginning of the amortization

Daniel Wrenne (21:50):
Schedule, I’m just, I’m very much ballparking, like, yeah,

Justin (21:53):
Sure. So that’s probably, I’m probably too low then a lot of the other listeners to your podcast, or maybe have a mortgage balance of 500, 700.

Daniel Wrenne (22:00):
Yeah. Let’s say it’s 500,000. So that’s 3%. That’s going to be 15,000.

Justin (22:06):
So we’re in, we’re in itemization territory here for a single person. Now maybe if they buy a big house, it’s probably because they have a family. So there may be a joint filer, a joint filer is going to have double the standard deduction of a single person. So for a single person, that’s 12,400 for a married person. That’s going to be 24,800. So although your origin interest is now about 15 grand, that the ceiling, that the gap you need to close to have that charitable contribution, reduce your taxes a little bit is now an additional nine grand.

Daniel Wrenne (22:35):
Yeah. That’s the thing a lot of this ties into, you’ve probably heard people say, Oh yeah, you got to get a mortgage because it’s tax deductible, but that’s not actually true because same concept, you have to exceed the hurdle for it to even move the needle on your tax return at all. And that hurdle got a lot higher in 2018 with the new tax laws. So basically it does not affect your tax return in normal circumstances, except for this exception, Justin talks about normal circumstances. You just give cash, it doesn’t affect your tax return at all until you exceed that hurdle called the standard deduction. Okay.

Justin (23:10):
This is probably a good teachable moment to say, whenever you hear the phrase, you should fill in the blank because it will reduce your taxable income. A lot of the time, that’s not a good trade. You want to make sure you’re thinking through now one exception might be, Oh, let’s contribute to a 401k. No, that’s going to reduce our income. But if it’s like buy a house to reduce your taxes, we’re letting the tail wag the dog on that one.

Daniel Wrenne (23:31):
Yeah. Good point. Good point. So you’re talking about the the cares act, the freebie kind of thing above the line.

Justin (23:38):
Normally we’ve got that. We’ve got to give to that in excess of that standard deduction in order for our taxes to go down this year, we get a little one year reprieve in some little amount of money, which is $300, which is great. You know, it’s better than nothing. So what that means is your $300 contribution. Even if you don’t hit the the standard deduction is going to reduce your taxes before the standard deduction talked relation happens. So if you make 60 grand, you’re a resident out there and you’re, you’re unmarried. Your standard deduction is still 12,400. So that’s double your gross income. It’s probably going to be difficult, especially if you don’t own a home to give enough to reduce your taxes at that point. And you know, it was great. If you want to do that, you’re doing it obviously more cause you’re generous than as a tax play. But even if you only make 60 grand, if you give $300, that 300 comes off the top. So your taxable income goes from 60,000 to 59,700, obviously not earth shattering, but if you take that $300 times your effective tax rate you know, say you’re taxed at about 25%. Well, it’s going to be less than that. If you make 60 grand, but you know, you can take that 25% times 300 bucks and that’s essentially the tax benefit to you.

Daniel Wrenne (24:51):
Yeah. So anybody that gives $300 in 2020, it’s going to reduce their taxable income and ultimately their tax bill, you know, some, but then above the $300, that’s when that whole hurdle comes into play with the standard deduction and all the, all that stuff we’re just talking

Justin (25:11):
Exactly. And one way to think about this is like if I knew for a hundred bucks, uncle Sam was going to kick in, you know, 10 or 15 it’s 25% is probably too high for the resident example, maybe, you know, five or 10 or 15% in my direction. I can either give 300 to charity or 270 to uncle. Sam is another way to sort of think about it.

Daniel Wrenne (25:29):
Now, if you’re in practice, the numbers get, I guess you could call it worse or better. Your rate, your marginal rate, your tax, you pay on your last dollar of income goes way up on average when you’re in practice. So those numbers, those percentages get higher on what you make of any extra dollar of income, which also in turn makes the impact of this gift better on your reduction of taxes.

Justin (25:51):
So the bottom line is 2020 is a year. There’s a lot of need out there. And if you have any awards, everybody should give at least 300 bucks. Yeah,

Daniel Wrenne (25:59):
Yeah, yeah. Minimum, minimum, that’s it. And if you’re wanting to just kind of get started giving, you know, at least give $300. So then you know that we talked about the tack, the cash gifts you know, just how that affects tax return and the standard deduction. There’s several other strategies. We’ll, we’ll get into that in a little bit more, I guess, you know, strategic really. But the first one I was gonna throw out there was giving appreciated securities. So let’s talk about that.

Justin (26:25):
Yeah. So an appreciated security is not a security that you like very, very much. It is some security, whether it’s a stock, a bond, a mutual fund, an ETF that you bought at a low price and it went up to a higher price. So the price goes up it’s appreciated.

Daniel Wrenne (26:41):
Or you could even give like a car, like a collector car that went up in value or Bitcoin. Right. You know? Yeah.

Justin (26:46):
W yeah, I’ve never tried to give a cryptocurrency. That’s an interesting place.

Daniel Wrenne (26:49):
Does that mean anything with a capital gain? Anything that’s grown in value that you have now

Justin (26:54):
Organization to whom you’re giving would have to be able to receive that asset. So I don’t know if they would have like a head or whatever. I’m very,

Daniel Wrenne (27:02):
No, no, it isn’t cryptocurrency come on.

Justin (27:05):
Well, I actually, I had a conversation last night with one of my clients. This is particularly useful for people who have a taxable accounts. So a taxable account is a type of investment account where there’s no tax advantage inherently. It’s not like a 401k. It’s not like a Roth IRA. Those have tax advantages. The taxable account has no tax advantage. So if I buy a stock in a taxable account, I bought Tesla say at 50 bucks, and now it’s at 1500 bucks. It’s appreciated in immense amount. And if I wanted to give some money to charity, I have two options option. Number one, I can stroke a check for 1500 bucks and write a check to that charity option. Number two is I can give them a share of Tesla stock and that, and we’ll talk about the donor advice fund in a minute, but I could give them that share of Tesla stock and they will then sell it and use the 1500 bucks that they, however they want to.

Justin (27:56):
And what I’m effectively doing is I’m taking this embedded taxable gain. So that $1,450 that this stock went up. I have to pay taxes on that whenever I sell this security. But when I give it away, I’m essentially removing that taxable gain from my, from my taxable account. And I don’t have to pay taxes on it. So hypothetically, if I like the stock, I want to still own it, but I don’t want to pay the taxes on it. I can give away the $1,500 stock that, that grew and give away that gain. And then I can actually, instead of stroking that check to the charity, I can take that money and immediately rebuy Tesla if I wanted to. So there’s zero impact to my portfolio. And what I’m doing is I’m removing taxable, gains that down the line. I may have to pay uncle Sam for

Daniel Wrenne (28:42):
It’s kind of like uncle Sam starts to get a stake in your securities, in taxable accounts. As they grow, uncle Sam starts to get a steak because it’s like, well, eventually, you know, you got to sell it or when you sell it, and then you gotta pay back, pay bait, pay him off on his, his, his stake in the share. But this is kind of a way around that. And so you’re, you know, you, you hand it off to charitable organization, then there’s no tax impact. So you’re essentially taking a asset that has embedded tax. Like you’re saying Justin, and remove it from your balance sheet, which has its Mo. So from just a pure tax standpoint, it’s completely better to give the security with the embedded gains than the cash. Right. That’s precisely,

Justin (29:30):
Right? Yeah. And you can see the power of this principle over time, especially if you’re charitably inclined, you buy stocks or whatever over time they go up and open up and you have this taxable, this tax bill that has not yet been received by you, but that’s kind of like out there in the future for whenever you sell, if you’re a disciplined and you’re giving and you do it every year and you give away the appreciated securities year after year, you’re giving away those tax bills

Daniel Wrenne (29:53):
And the charity doesn’t play it either. That’s the other thing, make it the charitable organization. There’s no tax hit for them by doing it

Justin (29:59):
Right. And we’re taking advantage of the fact that they are a, non-profits want a five Oh one C3 sells the security with an embedded gain. They don’t pay any taxes.

Daniel Wrenne (30:06):
Yeah, I guess, I guess the downside with this approach, it is a little bit of a more administrative or, you know, not as straight forward approach, like just writing checks to charities is easier. I mean, you just write the check. And so at least in our experience, I think there’s a point where the bigger, the gain, the bigger, the amount that’s being given, you know, all that kind of leans more towards making this strategy appealing. Versus if you just have a tiny bit of gain and it’s not, you’re not giving a ton, it’s, there’s a point where it’s probably not worth it to add a little complexity to your situation. So just keep that in mind. Like if I’m hearing this, I’m probably thinking, Oh, well I’ll always give appreciated securities. That’s, that’s, that’s a no brainer. But there is that added little bit of you know, administrative burden. You have to kind of work through accounts and replace money and move, move money from one pocket to the other.

Justin (31:05):
Yeah. And there are certain assets that frankly just don’t appreciate that much. And so depending on what securities you’re holding, this is great for people who have a lot of equity investments. So this is like, yeah, so stocks or stock oriented mutual funds or stock oriented ETFs that are, have more growth opportunity. Those are the types of securities you’re going to have an opportunity to give. And another challenge, you know, Dan, you mentioned the administrative hassle in air quotes is some little, you know, I’ll call them like a rinky-dink five Oh one C3. They might not have a brokerage account. They might not be able to like facilitate this type of transaction. So sometimes if you go to them and say, Hey, I want to give you 20 grand of an appreciated security. They’ve got to like open a charitable brokerage account at TD Ameritrade.

Daniel Wrenne (31:48):
You’re like, what do you mean? What are you, what, what are you going to do with the security? Like that? That’s another issue I didn’t. Yeah.

Justin (31:54):
If they spend a lot of time running a soup kitchen, you know, they’re not financially savvy, they’ve never run into this before. So maybe that’s also probably a good opportunity for you to say, Hey, let me be on the board. Let me help you do this. And let’s start talking to people who want to give us appreciated securities, because those are probably going to be bigger contributions.

Daniel Wrenne (32:09):
Yeah. Yeah. That’s where the yeah. Larger dollars.

Justin (32:13):
Yeah. And given the that’s where you can give a little time, which is great.

Daniel Wrenne (32:16):
Yeah. Another way around that hurdle you just mentioned is the, the donor advised fund

Justin (32:22):
That’s right. Yeah. So this is a great way to streamline this process. And essentially what you’re doing is you’re setting up a little like a think of it as like a bucket in the middle between you and the nonprofit. So you might say, Hey, nonprofit, I to give you $20,000 of the Tesla stock and they kind of look at you like, wow, that sounds great. But like, I don’t even understand what that means or how to transfer the assets or whatever. And so you can say, okay, don’t worry about it. What I will do instead is take 20 grand of appreciated Tesla stock. And I’ll put it in a donor advised fund, which is essentially, you can think of it like a, a very small foundation functionally, the way it works. And you would take your 20,000 shares or $20,000 with Tesla, and you would transfer it to this account, which is an account with your name on it.

Justin (33:09):
But it’s not a taxable brokerage account. It’s a donor advised fund in the eyes of the IRS. Whenever you transfer assets into this account, with your name on it, that is a donor advised fund. You have constructively made a contribution to charity. And the reason that they can deduce this is because putting money in this account is a, it’s an irrevocable act. You can’t get it back. So although you can control disbursement, you can’t say, Oh, just kidding. I want that Tesla stock back. It’s already on its way out the door. And so the donor advice fund can be a way to sort of administratively simplified this process. Maybe you’re thinking I want to give to three or four different charities before the end of the year. And I want to do it. You know, sometime in the future, I haven’t maybe determined what those charities are yet.

Justin (33:56):
I want to wait and see, but I know right now I want to give the money. And Tesla is at an all time high. And Elon Musk just said something and the shop, the stock shot through the roof. And I want to take advantage of this moment right now, you can then take those Tesla shares and move them into the donor advised fund today. And that 20 grand is sitting in this account and you can then let it sit there until the end of the year. And then you can cut checks from that account later on. And you can even cut checks next year or the year after that in the eyes of the IRS, the contribution has been made. The moment the transfer happens into that donor.

Daniel Wrenne (34:26):
It’s a way to kind of facilitate your giving through kind of a sub account that you still are able to direct, but you don’t own it anymore. Technically you don’t, it’s no longer your asset, but you’re kind of like the lead. You can, you are able to direct where it goes and in most cases and how it’s invested in most cases now there’s

Justin (34:50):
Yeah. I mean, this is, do you use this with your PR? I think this is a really great you know, a vehicle for people who are going to be giving regularly.

Daniel Wrenne (34:57):
Yeah. It seems like everybody that we work with the gifts kind of like graduates to a point where they are using the donor advised fund. So going back to what I was saying before, like the appreciated securities, and then the donor advised fund, you got to get to a certain level where you’re giving at a large enough amount and then you have appreciated securities. And then depending on situation, it’s typically people get to the point where this is a home run, sort of a strategy. Do you have any go-to like donor advised fund companies

Justin (35:26):
Use TV there. Okay. fidelity every great one. I think fidelity probably has the best reputation from what I’ve seen as far as like sort of simplicity and all that

Daniel Wrenne (35:35):
We’ve enjoyed Schwab Schwab charitable is, is solid

Justin (35:38):
Or these Schwab in the past as well. I think any of those are are good options.

Daniel Wrenne (35:43):
There’s a lot of local ones too. Just keep that in mind. And I think that there’s even some, sometimes some local perks associated with them. So there’s all kinds of like in my area and I’m sure every area, there’s all kinds of like local Oli based charitable donor advise funds really, but they’re like kind of locally branded or local impact and they kind of handle the money for you. So that’s, that’s, that’s kind of a subset of this, but so when you were getting into the other concept I wanted to talk about, which is batch giving. So you want to kind of explain what that is and how that works. Yeah,

Justin (36:18):
Absolutely. So batch giving is, is strategically thinking about the timing of your gifts as it relates to your tax circumstances. So if you want to give, just to use round numbers, I want to give $10,000 a year to this charity, and I’m a single person and I rent my apartment. So I don’t have any really momentum towards that itemized deduction, ceiling of 12,400. I’m going to give $10,000 away per year. One way to do it is to just cut a $10,000 check every year. And that’s fine. And I’ll take the standard deduction every year. Another way to do it a little bit more intentionally is to do what we would call a batch gift where I take the 20, 20 gift and the 2021 gift. And I do them all in December of 2020. So it’s $20,000 this year. And now instead of taking standard deduction for thousand 400, this year standard deduction, 12,400 next year, I’m now taking in this year, the itemized deduction of $20,000 in 2020. And then next year I can give zero because I’ve already given that $10,000 and I’ll take the standard deduction next year. So the net impact, if you compare batch giving versus non batch giving in this example is I’ve reduced my taxes by an incremental 7,500 bucks and reduce my tax bill by perhaps a couple of grand just by being strategic about the timing of my giving. I’m giving the exact same amount, but the timing helps me out on the tech side. Yeah,

Daniel Wrenne (37:39):
Yeah. You basically, the net of the three years, your total standard plus itemized deductions over that three-year period ends up being higher when you smush it all into one year is the ultimate effect of it. Exactly.

Justin (37:54):
So instead of, yeah, instead of giving weekly or monthly give once every two or three years now, charities don’t like that because they have to do financial performance to say, how much money are we going to make next year? So you’ve got to balance the you know, the tax planning with the practical need of how are those, the people who I’m going to get this money gonna use it. Yeah.

Daniel Wrenne (38:11):
Right. Yeah. So yeah, that, that’s, that’s, that’s a good point as well. I would say that the challenge, the biggest challenge with this, this will always the strategy pretty much always works if your having years where you’re kind of under that standard deduction and over it. Now, if you’re always over the standard deduction, this is irrelevant. But anybody that has years where they’re kind of claiming the standard deduction and they’re giving, you know, a decent amount, this strategy can, can work really well. The challenge to it is you have to have the money up front, right? So like you got to have, or you might have an investment account with money in it. And so a lot of people just don’t have the resources now they’re giving on out of their income. And so that’s, I think the one big challenge or hurdle, and then the second thing is if you’re going back to what we’re saying at the very beginning, and you were hitting on, I think a minute ago is you give for values.

Daniel Wrenne (39:04):
If your values are to give and give as much as you can, why would you not give it to the charity immediately? Right. So like why like play the tax game to hold up your money so that you can give it to the charitable organization later? Why not just give it to them all now if you happen to have the money. So, I mean, I think that’s a, that’s a personal preference and that sort of thing, but it, and it depends on your situation, but it definitely, if we’re strictly looking at it from a tax standpoint, it can work really well. And then especially if you can combine the two, right. So combine batch giving with also giving appreciated securities and then using a donor advised fund. So that’s kind of like bringing all the things we’ve thrown up together into one collective strategy. Right?

Justin (39:50):
Yeah. And the nice thing about this is especially, you know, I don’t know about you. I just, it just so happened that I had some clients that opened investment accounts in like February and March, and we dumped a bunch of money in back then. Now you might remember what happened in February. There was this thing called coronavirus that was just coming on the scene and we had no idea what the heck was going to happen. Is this like the end of life, as we know it, stock market tanked significantly in that time. So we actually ended up putting a bunch of money at work just by dumb luck at the perfect time. So I’ve got this batch of money from like early or late March that we invested that now is up, you know, from that low point to right now, we’re at all time highs, it’s up like 50% and that’s a perfect candidate in a taxable account, a perfect candidate to do everything that you just described, the trifecta of bachelor, giving appreciated securities, donor advise fund.

Justin (40:40):
And another thing to think about if we’re trying to reduce taxes, you know, we want to think about what is, how’s my tax situation going to change year over year. There’s two sort of, there’s an internal and external factor, right? Internal is, am I going to make more money this year or next year? Am I in a higher tax bracket this year? Next year, the other external factor is what’s going to happen assuming that Joe Biden does eventually transition to the white house as you know, as things move towards January and what is his tax policy going to be? And is that going to leave me in a better or a worse situation from a tax standpoint? And so it might behoove me as somebody who’s a physician with a good income, making a lot of money and paying a lot of taxes to think about if I’m going to we’ll call it this like reverse batch giving instead of batching this year, maybe I take that big December contribution. I make it in January because I think that whatever Joe Biden does in 2021 is going to be a bigger benefit to me next year than it would be for me this year. So we can’t know what’s going to happen, but that’s food for thought.

Daniel Wrenne (41:39):
Sometimes you can, but, and we I’m, I’m sure you do this as well, Justin, like I try to stay out of the predicting game. It doesn’t seem to play out usually very well, but taxes and anything really. But but so that’s the external, and now sometimes you do know for sure now the examples I would give when you would know for sure that taxes are going to change. Number one is like they’ve passed the tax law. It just hasn’t gone into effect yet. So that’s totally completely possible in the next. So often everybody’s talking about it. If what they say they’re going to do actually plays out and they do change the tax laws. In some cases, they might change it for a future year instead of like the current year. And so in that case, there becomes this kind of rush to do it before the end of the year. The second scenario is if your situation is changing and you know, it say, you’re going into practice classic example, your income is going to go way up the following year. And so that can present, you know, kind of a really good opportunity. That’s a good year. Ideally you, you know, batch to the giving in the years when your income is the highest, and that will give you the best bang for your buck.

Justin (42:47):
Yeah. So to put this in just very concrete terms, if you’re graduating from residency or fellowship this year, next year, you’re going take an attending job in like August, September, October, sometime in the fall, you’re going to have three months of higher income. So your income is starting to ratchet up a little bit, but then the following year is the year when you got 12 months of a big paycheck. And that would be an optimal time to batch your giving into that year to take advantage of the tax impact.

Daniel Wrenne (43:10):
Right? Yeah, that’s a good point. So there’s a couple more strategies. There’s a, there’s actually just to kind of clarify on the strategy, there’s a lot of different strategies for giving. We’re kind of hitting on the most common, I would say in our world. I think the last few we were going to talk about, they become a little less common. They’re definitely, definitely great strategies, but they become a little bit more dependent on circumstances. So the first one QCD, so that’s, you can take, ’em qualified charitable distribution from IRA and, and give it directly to a charity. You want to break that down, Justin?

Justin (43:48):
Yeah, I’ll take a stab at it. So qualified charitable distribution is, you know, whenever you reach now is age 72, you’re forced by the IRS to start kicking money out of your tax deferred accounts. So 401k IRAs, these accounts where you’ve never, ever, ever paid any taxes, you put it in pretax, it grows tax deferred. Eventually the tax man comes calling. And so when you have to start taking these distributions they’re called RMDs required minimum distributions. There’s a formula for how that amount of money is derived. It starts at somewhere between two and 3% of the total balance. And then it goes up over time as you age. So if I’m 72 and I’ve got a million dollars in an IRA, my RMD might be $27,000. So I get 27 kicked out of this IRA, whether or not I need it. I might have social security and other sources of income.

Justin (44:37):
I might still be working, but I get this money. I get this taxable event, $27,000 of taxed money that I now have to stroke a check for to uncle Sam. One way that you could handle this in terms of, you know, managing your giving proactively is to, instead of picking an RMD where the money goes from your IRA. So your checking account take a qualified charitable distribution QCD, where you send that money straight away that 27 grand that you couldn’t hang onto anyway, in that account, send it straight to the charity. And so one of the benefits of doing this is, you know, it may or may not, you know, it obviously depends on your tax situation, the actual tax impact, one benefit that it generally does have, is it re it may reduce your Medicare part B premiums because it, it the money does not count towards the Irma cliff, which you can Google that IRM a if you want to get down to the weeds, but this is one of the reasons that this can be helpful for, you know, retirees or people sort of getting up there in years who are starting to have to take these RMDs qualified, charitable distribution can be helpful in those instances.

Daniel Wrenne (45:45):
Yeah. And then I think the classic example is the if you have, you’re taking the standard deduction, if you subtract out giving from your world and you’re taking the standard deduction, it might be a much better strategy to do this, use this GCD thing. If you’re in retirement and getting RMDs, because you are effectively reducing your income dollar for dollar on the contribution, whereas giving like the normal way you have to exceed that itemized deduction hurdle, like we were talking about before,

Justin (46:26):
Can you give an example? Just so that people like me are a little slow to understand, can comprehend.

Daniel Wrenne (46:31):
Yeah. So like, same example is we were talking about at the very beginning, you have to give above what’s the standard deduction for a married couple. Now, is it 24, 24 grand change? Yeah. So some somewhere around there. So if you’re married, you, you got to give above 24,000 to have to move the needle on anything. Okay. So let’s say you’re retired and you’re, you know, you’re in your seventies, late seventies or something. And you normally give $25,000 a year. And so you have already paid off your mortgage and you really don’t pay any state income tax. So basically the 25, you give just barely above the standard deduction. So you get a, if you didn’t give, and I’m talking about cash right now. So if you gave cash 25,000, you get a little bit of benefit because you’re just slightly above that standard deduction.

Daniel Wrenne (47:25):
So it affects your taxes by the difference between the 25 and whatever the standard was. So it’s like a few hundred dollars of tax impact. On the other hand, if you give using this QCD strategy, you’re you have, you don’t get to get that few hundred dollar tax benefit. I was just talking about, but you’re able to take a fully taxable asset and give it straight away and kind of like, get it off your balance sheet without, without having a tax impact. Same, same sort of thing is what we were talking about with the appreciated security strategy. You can kind of remove something from your balance sheet that has substantial embedded taxation and the impact of that for you and maybe your future tax rate is going to be like a marginal rate of 25%. You’re getting 25 cents on the dollar on that. If you use this QCD strategy, when you, when you are in that example, am I making sense, Justin? You check me on this.

Justin (48:25):
Yeah, I I’m trying to think. I don’t like complex tax questions on the fly.

Daniel Wrenne (48:31):
I know. So the further down we go this list, they get more complicated. So

Justin (48:36):
I should have researched this in advance and I haven’t. So we’ll just, I’ll say yes, and we’ll go with it, but please consult your tax advisor or planner before making any big, important charitable contribution decisions.

Daniel Wrenne (48:48):
Don’t worry. The disclaimer is built, built in already speaking of complex tax sheds. You want to talk about the last one? So private foundations.

Justin (48:57):
Yeah. So I’ve sometimes had actually had a question this year with a couple of clients that are like, we want to start a private foundation. We want to start a foundation. They, they expressed desire to start giving meaningfully charitably, which again is awesome. I love to see, I love to enable and encourage at every opportunity. And they were talking about like, we want to seed it with like 30 grand. We want to give like 30 to 50 K a year and start to, you know, express generosity in this way. And what we found and what I shared with them was there’s a critical mass that you need before a private foundation makes sense. So what a private foundation is, is instead of giving money to the five Oh one C3 that’s out there that has a separate mission. And instead of the donor advised fund, that is sort of this intermediate bucket to receive money and then disperse a private foundation is your own, it’s your own non-profit.

Justin (49:47):
So giving money to this private foundation is in itself a charitable contribution. Now there’s a high hurdle for opening, maintaining, administering a private foundation. Frankly, I don’t have any clients right now that do it. I have in the past, it’s something that you’ve got to make and give a lot of money in order for that, to make sense, usually, you know, an excess of two or 300 K maybe up towards the end. If you said, I want to give half a million and I want to do it in a way that, you know, I can build some structure around and maybe with a recurring gift, you know, now we’re in the strata where opening a private foundation could make sense, but you know, if you’re 10, 20, 30, even 50 we’re still in donor advised funds territory, and it’s just much simpler. You don’t need any lawyers. You don’t need any, there’s no particular correspondence with the IRS. It’s a, it’s a much more streamlined option. So the foundation is sort of like when you’re making a lot and you want to really get into the big leagues of, of giving. Yep.

Daniel Wrenne (50:45):
Right. So that would, that’d be like, you’re saying the bigger dollar amounts, but it definitely comes with more complexity and costs typically translate so well, as we wrap up, I think I want to circle back. I think the biggest thing here is circling back to, we were talking about the very beginning it was. So we got all these strategies and the temptation, even for me, like I’m tempted to do this. I’m I love strategic thinking and let’s try to, you know, let’s, let’s see how we can maximize efficiency, but with this type of thing, giving you really have to remind yourself, I have to remind myself that it’s, you know, typically about the values first or it should be about the value first and the actual gifts. So I think it’s important to kind of keep that in mind and then circle back to how do we maximize efficiency, at least that’s, that’s how my mind works. And I, you know, I have to remind myself that as well. I’m sure. Justin, what are your thoughts on that?

Justin (51:42):
I totally agree. I mean, I, I think this is one of the benefits of working with a financial advisor who is philosophically aligned with you and to whom you can express goals. It’s, I mean, it’s all this, it’s sort of a, I’ll say it’s just a very common sort of analogy, but I think it’s so maps on very nicely is the personal trainer example. You know, it’s one thing to like, know how to lift a weight and do curls. It’s another thing to get a gym membership. And it’s another thing to say. I’m paying somebody, you know, on a monthly basis to show up at the gym at 5:00 AM and give me some accountability and some constructive feedback to make sure that I am doing the best I possibly can getting achieving my fitness goals. I think with giving, this is the one thing, as I mentioned, that just gives me so much, it energizes me and it, it holds me to, I, and I love this about my job is I get to serve as a coach, as a, an accountability partner is giving feedback, holding up the mirror, asking my clients, what are your goals for this?

Justin (52:38):
What are your values? And how do we support those? And when I have clients who are charitably inclined, who they, you know, I’ve had people tell me, like, I want you to hold my feet to the fire. You know, obviously in some kind of like reasonable way, but to challenge me, like, here’s my goal. I want to give away 20% of my gross income this year. Let’s think about how to do it. And I want you to make sure that it happens. And if it’s November, it’s still in my checking account, let’s have a conversation. Now that’s kind of an extreme example. But I, I love those conversations and I do have them. And I think that it does make you it, it, just to come back to the happiness factor, I think it it just makes you happier person when you kind of build your life intentionally in that way,

Daniel Wrenne (53:18):
Our clients that give a lot, I don’t, I don’t ever hear them talk about how they wish they gave less, which I think is a good,

Justin (53:26):
That’s a great 0.1. It lasts you come to die. You’re not going to say, dang, I gave away so much to charity. Yeah, no, I’m sure it’s the reverse most of the time. It’s like, and I think that’s why giving in ways where you can perceive the constructed impact. It really is useful. And it really does that. It’s again, the American cancer society example is like not to, not to. I mean, we need cancer research and everything, but for myself and the way that I want to give, like being able to see that tangible impact, it does give me more endurance and more excitement about continuing to give in a disciplined way. So I think if you’re, if you’ve got a missing link there, it can, it can make you procrastinate. But if you can see the impact and you’ve given away where it’s real, that can be really helpful. If you liked what you heard this week, head on over to APM, success.com, where you can find more content and free resources to help you build a successful career in anesthesia and pain management. If you want it to leave a review in iTunes, that also really appreciate it. Thanks for using some of your valuable time to join me today on APM success.