Total charitable impact

 


 September 17, 2019

Save to give header with plant pots with seeds and growing plants

Saving to give means investing charitable assets so that you can give more over time. The following scenario shows the benefits of taking a long-term outlook and carefully choosing what you give to charity.

Want to boost your impact? Rethink what you give

 

Did you know? Generally speaking, donating cash provides less tax savings than donating most other types of assets.

Complex assets in particular may give you a much greater bang for your buck. We examine why in the following scenario:

What are complex assets? 

Also known as illiquid assets, complex assets include non-publicly traded stock, private equity, LLC and LLP interests, hedge fund interests, restricted stock, insurance policies, and other assets that cannot be sold through public markets. Learn more

Gary knew he was going to take a hit on his taxes because he was planning to sell a highly appreciated complex asset.

His tax advisor gave him some unexpected advice: Contribute the asset, or a portion of the asset, to his Vanguard Charitable donor-advised fund (DAF). In return, Gary would:

the number one

Pay no capital gains taxes on the donated asset.

the number two

Receive a tax deduction for the asset's fair market value (FMV). 

the number three

Recommend how to invest the proceeds to grow tax-free over time.

the number four

Leverage a single contribution into multiple grants to multiple charities.

Our experienced complex assets team guided Gary through the entire process. He transferred the asset to us, and we liquidated it.1 The result was a contribution to his DAF that was twenty percent higher than it would have been if Gary had sold the asset himself and then donated the proceeds. This meant fewer taxes for Gary, and more dollars destined for charity.

By donating the complex asset to a DAF, instead of a single charity, Gary widened the scope of his impact. Over time his single contribution came to provide consistent, long-term support to many charities. These charities represented the full spectrum of Gary’s philanthropic interests. In the meantime, the proceeds in his charitable account held at Vanguard Charitable experienced tax-free, compound growth.

Having simply written checks to his philanthropic account in the past, Gary began keeping track of how much money his new giving strategy had saved him—and how much more went to charity as a result. He tabulated the following figures at the 20-year mark,2 all due to his single contribution:

Gary's Giving3

Initial contribution:

Valued at $1,000,000

Annual grant:

10% of account balance

Asset allocation: 

a pie chart representing and 80 percent to 20 percent split on stocks and bonds. 80% stock 

20% bond

Average return:* 

6.01%

Dollars granted over 20 years: 

$1,189,096.30

Balance remaining:

$349,536.14

Total charitable impact: $1,538,632.44

 

Gary’s example, supported by real historical returns data at Vanguard Charitable, shows the power of a long-term strategy. By rethinking what he was going to donate, and planning long-term, Gary was able to increase his giving by more than $500,000 over 20 years. 

View additional save-to-give scenarios here and here.  

Button, contribute to my account, will open on a new page

 

 

1A gift is not a realization event by the donor. The charity recognizes the built-in gain when it sells the assets, but it pays no tax because it is exempt.

Under IRS regulations, the donor is responsible for determining the valuation date and corresponding fair market value. Consult with a tax advisor for more information on your specific circumstances.

2In this scenario, the following assumptions were made:

  • All investments are subject to risk. Past performance does not guarantee future returns. Diversification does not ensure growth or protect against a loss in a declining market.

  • All contributions are made as charitable donations to a philanthropic account held at Vanguard Charitable’s donor-advised fund. No startup costs are incurred, but accounts are charged an annual administrative fee based on balance: 0.60% for the first $500,000, 0.30% for the next $500,000, and 0.13% for the remaining balance. Pricing will continue to decrease as account balance increases.

  • All account assets are invested in a mix of underlying Vanguard® mutual funds, which assess an expense ratio. Expense ratios are assessed by the underlying funds and may vary based on account allocation and status; Vanguard Charitable does not itself charge investment fees.

  • Many donors contribute to a DAF at year-end and then start recommending grants in the following year. To represent a standard accrual time in the scenarios, contributions are counted on January 1 and grants are issued on December 31 of the respective year.

  • Invested assets are rebalanced monthly to match recommended allocations. The allocations in the paper are suggestions, and donors are encouraged to diversify their investment recommendations to take advantage of a broad range of investment options, including international and domestic and across major asset classes.

 

3These values describe the impact of the giving outlined in this scenario alone. They do not include any previous contributions or grants Gary may have made to or from the donor-advised fund.

*Actual average return is calculated as a time-weighted return annualized over a 20-year period.

Net performance is based on actual returns of the Investor share class of Vanguard Total Stock Market Index and Vanguard Total Bond Market Index Funds from January 1999 through December 2018. Performance returns reflect market movement, reinvestment of dividends/interest and capital gains, and deduction of the underlying fund’s expenses. Vanguard Total Stock Market Index Fund benchmark: Spliced Total Stock Market Index reflects the performance of the Dow Jones Wilshire 5000 Index through April 22, 2005; MSCI US Broad Market Index through June 2, 2013; and CRSP US Total Market Index thereafter.
Vanguard Total Bond Market Index Fund benchmark: Spliced Bloomberg Barclays U.S. Aggregate Float Adjusted Index reflects the performance of the Bloomberg Barclays U.S. Aggregate Bond Index through December 31, 2009, and Bloomberg Barclays U.S. Aggregate Float Adjusted Index thereafter.

Share your opinion