A More Efficient Way to Give: Donor-Advised Funds


 
Being philanthropic can mean you donate your time, expertise and/or financial resources to support a charitable organization. When donating financial resources, there are ways to give that maximize the benefit of the gift. Did you write a check? If so, where did that cash come from? Did it require you to withdraw from a retirement account, or realize any capital gains to create this cash? If you have a taxable investment account, then using a donor-advised fund is a more efficient way to give.

What is a donor-advised fund? 

A donor-advised fund (DAF) acts like your own mini-charitable foundation. DAFs have been around since the early 20th century, but more recently have become the fastest growing method of giving in the United States. Grants to qualified charities in 2015 alone from donor-advised funds totaled $14.52 billion. You can donate assets to a DAF and receive the tax benefit that year, while having the flexibility to distribute the funds in increments, and over whatever period you’d like. Unlike private foundations, DAFs don’t have legally required annual distributions.

What can be put in a donor-advised fund? 

  • Cash
  • Publicly traded securities including stocks, bonds and mutual fund shares
  • Restricted and controlled stock * Privately held stock
  • Real estate
  • Proceeds from life insurance or from a full-paid policy
  • Private foundation grants or terminations
  • Bequests
  • Named beneficiary of charitable remainder trust
  • Named beneficiary of an IRA, 401(k) or other retirement account
  • Tangible personal property

Most commonly, families donate appreciated securities such as stocks and mutual fund shares from a taxable investment account to a DAF.  read more…

The Ins and Outs of Deferred Compensation Plans

If your income is greater than $400,000 a year, does making a $18,000 deferral to your company’s 401(k) retirement plan do much toward replacing your income in retirement? This less than 5% of income deferral to your retirement plan would leave you significantly underfunded to maintain your lifestyle in retirement. While you can save elsewhere through non-retirement accounts, your company may permit you to postpone receiving income through a Section 409A deferred compensation plan.

There are no IRS limits on how much compensation can be deferred; however, your company’s plan may have a limit. You could defer a bonus, incentive, or part of your salary in the present year and receive that, plus the potential for earnings on its investments, in future stated years. To do this, you must make an irrevocable election to defer compensation prior to the year in which you expect the compensation to be earned. If you’re in the top tax bracket (39.6% in 2017), this can allow you to defer income now and receive it at a later date (such as when you retire) in a lump sum or a series of payments when you expect to be in a lower tax bracket.

The major requirement to receive this deferral status is that your funds are subject to substantial risk of forfeiture. Unlike 401(k), 403(b), and 457(b) accounts where your plan’s assets are qualified, segregated from company assets, and all employee contributions are 100% yours, a Section 409A deferred compensation plan is nonqualified, and your assets are tied to the company’s general assets. If the company fails, your assets are subject to forfeiture, as creditors would have priority. Only through accepting this risk does the IRS permit unlimited contributions to this plan. If your employer doesn’t include this deferred compensation as part of the company’s general assets, making them subject to forfeiture, the deferred compensation becomes taxable immediately, plus a 20% penalty and interest. A potential reason for this requirement of substantial risk of forfeiture is to incentivize executives and business owners to maintain the health of the company, and to ensure they don’t inappropriately withdraw too much of its resources, and then try to leave. read more…

Why We Now Incorporate Your Held-Away Accounts in Your Investment Plan

When creating and monitoring a retirement plan, and providing advice on how to best achieve your financial goals, we often run into a roadblock on implementation when a large portion of your wealth is tied up in an employer retirement plan. This isn’t to say that participating in your employer plan is a bad thing; it’s more an issue related to investment options, fees and how to best align that account with your overall investment plan. By incorporating your outside retirement plans into your overall allocation, we can now pick the best investment options available in your retirement plan and manage your wealth like it’s one portfolio, instead of viewing accounts separately.

The benefits of incorporating your outside retirement plan into your overall asset mix include the following.

  • Higher net-of-fee, risk-adjusted expected returns through:
    • Stronger small and value tilts
    • Greater diversification with more international exposure, larger exposure to specialized risk premiums (Reinsurance and Marketplace Lending) and reduction in concentrated stock positions
    • Closing the behavior gap (reduced performance chasing)
    • Lower expense ratios
    • Disciplined rebalancing
  • Increased tax efficiency and reduced trading costs
  • More comprehensive reporting of returns and portfolio history

We can enhance what we do for you by bringing your employer retirement plan onto our Merriman web portal. This allows us to monitor your total portfolio allocation on a daily basis. By using the best of what’s available in your retirement plan and augmenting it with the accounts Merriman manages, we can estimate a net-of-fee performance improvement annually that’s specific to your situation. In many cases, there may be just two to five funds utilized in your retirement plan.

If you have a taxable account, we can move the international holdings into it, so you may be able to deduct the foreign taxes that are withheld, and place the less tax-efficient investments, like REITs, Reinsurance and Marketplace Lending, in your IRAs.

We suggest speaking with your advisor about how to incorporate your employer retirement plans into your overall investment allocation.

The Benefits of Consolidating Dormant Retirement Plans

Like most people, you’ve probably switched jobs at some point in your career. If you’ve done this a few times, you may have several outstanding retirement plans, like a 401(k), 403(b), etc. In the flurry of paperwork between leaving your former employer and starting a new job, you should have been given the option to either leave the retirement plan as-is (default), transfer it to an individual retirement account (IRA), move it to your existing employer retirement plan or cash it out. If these plans aren’t consolidated after each job change, whether to an outside rollover IRA (or Roth IRA if you made after-tax contributions), or to your current employer retirement plan, they can start to accumulate and become more of a frustration later to deal with.

Consolidating your retirement plans has several benefits:

Investments align with the asset allocation your financial plan recommends 

When you enroll in a new employer’s retirement plan, they ask how you’d like to invest the proceeds. You may not have even made a choice and were put into the default investment option. In the past, the default option was the stable value or money market fund, which is not designed to help you grow your assets; instead, it preserves the value with minimal interest. Nowadays, the default options are target date retirement funds that at least have a more diversified breakdown of assets between stocks and bonds.

Importantly, your financial plan may require that your investments be more aggressive (stocks) or conservative (bonds) than how your dormant retirement account is invested. Regardless of the account’s size, you want all of your investments functioning in a cohesive manner, as that investment allocation will drive the long-term returns necessary to achieve your financial goals. read more…

Provide Support for Disabled Family Members with an ABLE Account

ABLE, short for Achieving a Better Life Experience Act, is a type of savings plan established in 2014 to provide support for those with disabilities. The accounts are similar to traditional 529 plans in that contributions can grow and be distributed tax-free for qualified expenses. The difference between a college savings 529 plan and an ABLE 529A savings plan is that ABLE funds can be withdrawn tax free to cover qualified disability expenses versus just qualified education expenses.

Does having assets in an ABLE account impact federal benefits?

Assets in an ABLE account won’t impact federal benefits unless the balance exceeds $100,000. Any excess beyond $100,000 in an ABLE account is considered personal assets, and once personal assets exceed $2,000 (such as in their checking account), Social Security benefits are suspended. This means that if assets in an ABLE account are $100,000 or more, plus checking or any other account surpass $102,000, Social Security benefits are halted. Social Security benefits resume once personal assets fall below $2,000 ($102,000 including $100,000 in ABLE account).

If you take distributions from your ABLE account for qualified housing-related expenses and retain them to be paid the following month (such as paying rent the following month), those distributions are countable resources for Social Security.

ABLE accounts do not impact Medicaid eligibility. However, upon the death of the recipient of aid, Medicaid can claim assets, such as those in an ABLE account, for payback. Outstanding qualified disability expenses, such as burial costs, receive priority over Medicaid claims. If Medicaid payback claims are greater than the remaining ABLE account, there is no further recourse against the disabled beneficiary’s other assets. read more…

Determining the Best Charitable Vehicle for Your Goals

We’ve been working with clients across the country for over 30 years, and we understand how important it can be to share your success by donating to charitable organizations, whether it’s through volunteering time or giving money. Once this charitable intent is determined, the next step is to determine how best to give. The following steps can help you identify the most efficient way to give, according to your circumstances.

Step 1 – Identify a cause that’s important to you

From supporting education and providing funds for cancer research, to protecting the environment and ensuring human rights for all, the list of worthy causes is endless. What’s important to remember when being philanthropic during your lifetime is that you have complete control over who receives your money or time.

Step 2 – Decide if you want to volunteer your time, money, or both

Being philanthropic doesn’t always mean writing a check. Many people give their time or expertise to organizations. This includes volunteering at events, raising money, participating on the board of directors, committees, etc. Some volunteer and also give money to organizations that are important to them. For many, they may not have the time or ability to volunteer due to a number of circumstances, however they choose to share their financial resources instead.

Step 3 – What are your funding sources?

If you decide to give part of your wealth, then the next step is determining how best to fund your gift. Do you have cash? Taxable investment accounts with securities (stocks or bonds) that have appreciated in value? Do you have a retirement account? Do you have a life insurance policy?

Step 4 – Is this a one-time or recurring gift, and do you want to make it during your lifetime or from your estate?

These are important considerations, as they impact the method you use to make your donation. For some of the methods listed in step 5, you can make a one-time, planned gift that can be distributed over many years to one or many charitable organizations. The giving method may be different for a one-time gift or recurring annual gifts to an organization or to charity in general. read more…

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