In this video, we will walk you through how to create a donor-advised fund for your client and how to demonstrate its effect on a client's long-term taxes.
Transcript
In this video, I will be walking you through how to set up a donor-advised fund in your client's plan.
In the scenario we're looking at today, we have Melinda and Edward Cheney. Melinda recently received a large inheritance. If we click on the details, you can see the inheritance in pink, listed as other income. It was $15 million, and we have swept those funds into an investment account for now.
Melinda has some specific concerns about taxes over the lifetime of the plan, including estate taxes at the end. She has also expressed that she would like to set up some charitable giving from this inheritance.
What I'm going to do is create a What-If scenario. We'll name it “Charitable Giving” and create this plan.
The first step is to create the Donor Advised Fund in the plan. I’ll do that by going to the plus button in the bottom right-hand corner of the screen, selecting Savings and Investments, and then choosing the DAF under type.
Melinda will be the owner of this fund since this is her inheritance. We'll leave the balance as zero for now, but I want to set up some ongoing contributions. I’ll have those start next year. Under contributions, we’ll start next year as our start event and set the plan end as the end event. Click Done.
By going to Year View, you can see the funds starting to go into the DAF beginning in the second year of the plan.
Next, by going to the Taxes section and scrolling down under Federal Taxable Income, you can see the below-the-line deductions for those contributions.
Now, going back to our dashboard, we’ll go to the plus button again and select Expenses. Legacy Expense offers some options here. You can set up contributions to persons outside the plan or to a charity. In this example, we’ll choose a charity.
We’ll set the amount to $350,000. Under Payment Sources, I want to select the DAF, using only this fund to fulfill the expense. The timing will start next year and end at plan end. Click Done.
Returning to the Cash Flow chart and Year View, we can see under Expenses that we now have this legacy gift to charitable giving, and the payment source is the DAF.
Next, we’ll go to the Let’s See screen and Chart View to compare these two plans.
Going to Taxes, you can hover over the last bar in the chart to see the difference in cumulative taxes over the lifetime of the plan. In our top plan, the Charitable Giving recommendation plan, cumulative taxes are $1.7 million. In the current base plan, cumulative taxes are $3.9 million.
Going back to Insights, we can quickly run the potential estate tax between these two plans. We’ll compare the Charitable Giving plan against the base plan. Click Get Started.
Hovering over the chart once it produces results, you can see the difference in estimated estate tax. The purple line shows estate tax for the base plan, estimated at about $6.8 million. For our recommendation plan with charitable giving, estate tax is around $1.4 million.
This is a quick and easy way to present advice to a client and demonstrate the value of your services.
I hope this was helpful. If you have any questions, you can click the name of your client in the top right, select Request Support, enter your question in the text box, and share client access.
Note: To model the tax deductions correctly you will want to toggle off the standard deduction option in the taxes and other information section. For information on how to do that click here.