Why Traditional Tithing Doesn’t Work for Me—And How I Fixed It
The classic approach to Christian charitable giving is to donate a set percentage of your income to charitable causes each year (e.g. tithe 10%).
This may have worked well in situations where income was relatively consistent throughout life, but I dislike the implications for many households today. Should the church I attend in my peak earning years receive way more than the church I attend in retirement? That doesn’t seem right.
To solve this conundrum, I’ve designed an economics-based approach that still donates 10% of lifetime earnings, smooths donations across time, and optimizes taxes along the way.
We value consistent consumption (and giving)
A key concept in economics is that of diminishing marginal utility. The first piece of pizza that you eat is incredible. The second one is enjoyable, but less so than the first. And so on.
If you have enough lunch money to buy 7 pieces of pizza this week, you are happiest having 1 piece each day. The incremental joy of buying 2 today is less than the pain of having 0 tomorrow.
Diminishing marginal utility helps explain why people generally prefer smooth consumption over lumpy consumption.
I think this principle holds for charitable giving as well (it certainly does for me).
Setup: Create a charitable endowment with 2 accounts
My solution to the above problem is to create a personal “charitable endowment” fund which is the combination of two accounts.
Designated taxable brokerage account
From a legal perspective, you (or your revocable trust) will own this account, and you will pay taxes on the earnings.
But from a conceptual perspective, you don’t consider these assets yours anymore. You track your endowment assets “off balance sheet”, but do not consider them as part of your net worth.
You can draft your estate plan to be consistent with this intention. Make it clear in the documents that these assets should go to charity upon your death.
From a practical perspective, I recommend setting this account up with the same custodian you use for your Donor Advised Fund. Since I use the Fidelity Charitable DAF, I set up this brokerage account at Fidelity.
Donor Advised Fund
The second account in your charitable endowment is your Donor Advised Fund (DAF). You control the investment and distribution of these assets, but they are no longer legally yours.
The optimized lifetime giving approach
Your charitable plan now consists of 3 simple steps as depicted in the diagram below.
Implementation of the Personal Charitable Endowment
Step 1: Tithe to your designated brokerage account every year
Each year, tithe your income by moving assets into your designated brokerage account. By moving 10% (or your desired percentage) into this endowment account each year, you satisfy the criteria of ensuring a full tithe of your lifetime earnings.
The amount that you transfer into this account each year may be highly volatile. Some years you get your full bonus, other years you don’t. One year you sold your business for a large gain, etc. That is completely okay.
Of course, it’s optimal to transfer appreciated securities in-kind to this account. Eventually you will donate these assets, and donating appreciated assets with a low-cost basis could save you over $100k in your life.
Two practical notes:
You want to transfer the assets in-kind. This simply moves the assets from your base brokerage account to your designated endowment account. Since it is not a sale, this is not a taxable event. You DO NOT want to sell the assets and move the cash (which would be highly tax inefficient).
It’s generally cost inefficient to hold one company’s mutual funds at a different custodian. If your endowment brokerage account is at a different custodian, consider a tax-free ETF conversion of any mutual funds prior to the asset transfer. (For example, I converted Vanguard mutual funds to their ETF equivalents before transferring the assets to my designated brokerage account at Fidelity.)
Step 2: Contribute to your DAF account strategically
Since using a Donor Advised Fund (DAF) greatly simplifies charitable giving and could allow you to save even more on taxes, the next step will be to contribute assets from your endowment brokerage account to your DAF account.
Many people can further reduce their taxes by utilizing a “bunching strategy”, where you aggregate your contributions to the DAF into a single year, and then do nothing for the next 2-3+. I previously wrote about how this strategy could save $130k in lifetime taxes.
The magnitude and timing of your DAF contributions is completely independent from when the assets went into your designated brokerage account (step 1) and when you donate to charity (step 3). This allows you to optimize your taxes without implications for when charities receive the money.
Step 3: Grant to charities each year
Now for the fun part: make your grants to the charities of your choice! The charities receive a check or electronic funds transfer, so it is ridiculously easy for them.
You can choose your annual grant amount in such a way to smooth your inflation-adjusted giving throughout your life. The amount you give each year is a separate and independent decision from both steps 1 and 2.
In your high earnings years, the inflows to your designated brokerage account (step 1) will be larger than the outflows to charity (step 3). The net effect is that your endowment will be growing (ignoring market fluctuations).
After retirement, your outflows (step 3) will likely be greater than your inflows (step 1), representing that you are now using your endowment assets.
Parting thought
As the Managing Director of your personal charitable endowment, this structure opens new ways of thinking about investing and distributing your philanthropic assets.
Of course, money’s only purpose is that it ultimately can be spent. It would be pointless to keep it in the endowment forever and never grant it to charities who can use it to feed and clothe people.
But perhaps there is a way to effectively give today, smooth giving over time, and increase your impact by benefiting from market growth.
Imagine that post-retirement you decide to distribute 4% of your endowment balance each year to charity. You invest the endowment assets with a high-stock allocation (which is palatable given you can adopt a purely variable withdrawal rule).
If market returns exceed 4% as they historically have, the power of compounding could greatly amplify the charitable impact you have on the kingdom of God during and after your life.