It’s Not Just Holiday Season

We’ve all seen the videos of throngs of bargain seekers battling it out for the cheap TV or gaming consoles. People camping out on the sidewalks outside of big box stores have become an annual staple of the news after the Cowboys game on Thanksgiving. Black Friday and Cyber Monday represent the start of the shopping frenzy that is so important to retailers’ bottom lines, otherwise known as the holiday season.

But this past Tuesday also marked the beginning of another hectic but important time, for philanthropy. Per GivingTuesday.org , “Observed on the Tuesday following Thanksgiving (in the U.S.) and the widely recognized shopping events Black Friday and Cyber Monday, #GivingTuesday kicks off the charitable season, when many focus on their holiday and end-of-year giving.”

The most recent figures from The Chronicle of Philanthropy shows that in 2012 the Austin metro area contributed $1,216,197,000 to charity, which was about 2.7% of our Adjusted Gross Income (AGI). Many of us wait until December to even think about our charitable plans for the year. Whether it’s the spirit of the season or tax deadlines that motivate our altruism, there are often overlooked ways to effectively increase the amounts we give and/or the tax savings we receive.

A 2005 US Treasury paper, Basic Facts on Charitable Giving, revealed that about 76% of charitable gifts occur in the form of cash. If that’s the case, donors and charities alike may be being shortchanged by HOW most of this giving occurs.

When the urge to give hits, you can effectively give more to your causes if you look to your brokerage accounts instead of your checkbook. The increase is made possible due to the way gains on appreciated property, such as a stock or mutual fund, are treated. Typically, profits are subject to capital gains taxes (and in some cases a Medicare surtax) when the security is sold.

But when you give the property directly to a charity, not only are you entitled to a tax deduction for the fair market value up to 30% of AGI, you also won’t be on the hook for the capital gains tax on the appreciation (up to 20% on securities held > 1 year) or the Medicare surtax (3.8%).

So why don’t more folks take advantage of this? I asked some local charities for their thoughts.

The Eanes Education Foundation, supports the local school district where my children attend middle and high school. I asked Executive Director, Wally Moore, if they have a preference of cash versus property donations. His response was, “We love to receive the gift in the form that the donor likes to make it. We know as a fundraising organization that it’s important to offer a variety of ways for our donors to support us. It is worth noting that the gifts that we receive of appreciated assets are well above our regular average gift.”

He did point out, however, that there are some gifts that they may not be as well equipped to handle. Real estate, restricted stock, business interests, mineral rights, and even life insurance policies were examples of assets that smaller charities may lack the infrastructure or expertise to liquidate or deal with the compliance with various IRS regulations and laws.

This is where a Donor Advised Fund (DAF) can provide an ideal solution. A DAF, is a philanthropic vehicle established at a public charity. Donors make a charitable contribution, receive an immediate tax benefit, and then recommend grants from the fund over time. The DAF liquidates the property and manages the assets until the donor makes a grant recommendation.

A DAF can be thought of as a charitable savings account where you make contributions when you have the desire or need, such as a high income year or prior to liquidating a highly appreciated asset. You then can determine what causes you want to support later, or do so at a level or pace that is not dependent on year to year changes in your financial situation.

Austin Community Foundation is a public charity in Austin which grants more than $20 million annually, mostly through DAFs, to charities in Austin and beyond. I reached out to CEO, Mike Nellis, for his perspective.

“For people who want to give to local emerging needs and join a community of givers, Austin Community Foundation may be the perfect giving partner,” says Nellis.  “Individuals, families and companies can open a donor advised fund in order to gain tax benefits this year—but don’t need to choose which charities they wish to give to until later. We also can accept gifts of complex assets that some other charities can’t. Some families also enjoy using their donor advised fund as a way to share their philanthropic values across generations.”

According to their website, those complex assets include stock, real property, life insurance, retirement plan assets, closely held securities, tangible personal property, and other non-liquid assets.

DAFs are also offered at most major investment companies. Costs and features can vary, so it is wise to shop around or consult with an advisor with experience in incorporating philanthropy into your gift and estate planning. If you anticipate a liquidity event or have other unplanned wealth that you would like to discuss how to manage, let’s get acquainted. No camping out required.

Does the Market Know More Than a 6th Grader?

What was your prediction for the stock market this year? Somewhere in the 8-10% range?

While the S&P 500 Index has had an average return of about 10% since the 1920's, it surprises many to learn that the S&P 500 has NEVER had a single year return between 8-10%?

With returns fluctuating around 0% for 2015, I frequently am asked whether the market is expensive, cheap, or fairly priced. You don't have to look far to find many differing opinions on this topic. CNBC populates most of their programming with various experts weighing in with their opinions throughout the day. My answer is always, YES.

Those of you that know me probably are thinking that a flippant remark like that is not unusual, considering the source. I admit that it is at least 1% of me channeling my inner-wisenheimer, but the other 99% is due to my belief in efficient markets. 

My friends at Dimensional Fund Advisors use jelly beans to illustrate how the many different opinions of market participants collectively tend to result in the right answer. The illustration is based on an an exercise that an investment advisor uses to break the ice in presentations. The advisor shared the results of his clients' guesses of how many jelly beans were in a jar that he had on a table at the entrance to a conference. Individual guesses ranged from 409 to 5,365, but averaged out to 1,653. There were actually 1,670 jelly beans, which shows that together, we know more than we do alone. 

Recently, I had the opportunity to test this concept in real life during a visit to my daughter's orthodontist office, Z Orthodontics, in our hometown of Austin. While waiting for her appointment to conclude, I noticed a jar filled with candy corn on the receptionist's counter. Next to the jar were slips of paper that patients could log their best guess as to how many pieces of candy filled the container.

I struck up a conversation with Dr. Travis Tomblyn about the DFA candy jar and how they use it to demonstrate the power of markets. (Ironically, DFA's home office is literally right across the street from his office.) He offered to send me the results of their contest once it ran its course.

The final tally came in a few days later. The guesses ranged from 106 to 1600 pieces. Out of 112 participants, the average guess was 368. The actual number of candy corn pieces in the jar was 456.

Considering that the patients are, on average, around 12 years old, those guesses came pretty darn close. If nothing else, it lends credence to the belief that the market isn't that much smarter than a bunch of 6th graders. 

That's not to say the people making prognostications, stock picks, and managing portfolios aren't thoughtful and well reasoned. There is just scant evidence that all of those smart folks trying to outsmart one another are able to do better than the broad market over the long haul. In fact, the evidence suggests that most will under-perform the market.

So what should you do? In our opinion, you should create a portfolio of low cost index funds in an allocation that suits your risk tolerance. If you don't have the time, interest, or discipline to do that, we should get acquainted.