New Ideas for Philanthropy to Reduce Your Tax Bill
Last Updated (Friday, 01 August 2008)
While there is no rule prohibiting charitable donations to be made 365 days a year, unfortunately the vast majority of us choose to do our giving at year's end. We seem to get caught up by the holiday spirit and greatly increase our generosity in December. Rather than wait until the holiday season to begin a charitable giving strategy, I've compiled a couple of ideas for philanthropy that you can begin immediately.
Ideas for Philanthropy: Property Owner
Real estate, whether agricultural, commercial or rental residential, may sometimes be a problem for the owner. It may be low earning, time consuming or facing a declining market value. An outright charitable gift of the property may be very helpful, assuming it is readily marketable. If used to fund a “net income plus make-up” charitable remainder unitrust, what was a problem becomes a source of improved income. When long-term appreciated real estate is used, either for an outright gift or for funding an income-producing gift, there will be avoidance of capital gains tax as well as income tax savings from the charitable deduction.Ideas for Philanthropy: Crowded Collector
Individuals that have downsized their living circumstances often find themselves with an assortment of valuable works of art, historical documents, antique furniture and scientific collections that they no longer have room to display. Rather than storing these items in a storage unit or basement, a donation to charity can be a very satisfying alternative for the donor. The collector is able to share beauty or knowledge with others, reduce impediments, and realize income tax savings. One of the caveats of this approach is that to be tax deductible at present fair market value, tangible personal property gifts must be something that can be used in ways related to the purpose or the function of the charity.Ideas for Philanthropy: Business Owners
Closely held non-marketable stock in a profitable corporation may be used to make cost effective charitable gifts. The firm may have profits it needs to distribute, and the sole stockholder does not need additional taxable income. A gift of a minority block of stock is deductible at its independently appraised fair market value, subject to a minority position value.Most charitable organizations do not normally want funds invested in non-marketable securities. If the corporation, or its employee stock ownership plan, later wants to redeem the stock at its appraised value, it naturally prefers to have cash. If the stock is then placed in the corporation treasury, the sole stockholder still has 100% of the equity. Should younger executives or family members purchase it, a capital gains tax is likely avoided. Neither subsequent event, however, can be a prearranged condition of the gift.
Charities may also want to avoid "S Corporation" stock, which can lead to either "phantom income" or unrelated business income to the charity.
Ideas for Philanthropy: Investors
Because unrealized capital gains are subject to one's top combined federal and state income tax rates, using a charitable gift in kind instead of a sale avoids the tax. This will also increase the tax savings compared to a cash gift of the same value. Stock gifts to charities can be considered when:- A take-over bid has raised the value of holding stock
If it succeeds, the stockholder faces a forced sale with heavy capital gains tax. If the take-over is unsuccessful, the stock is likely to fall back in value. Making an outright gift of the stock, or using it to fund a life income charitable remainder trust, can be advantageous alternatives.
- A part of the portfolio needs to be shifted from equities to fixed
An older donor wants to shift a portion of a portfolio from equities to fixed income, without erosion of principal by taxation of long-term gains. A charitable remainder annuity trust can make the shift with no erosion and with an improved effective rate of return after considering the combined tax savings.
- Continuing equities investing with tax-free changes
A middle-aged donor may like to continue investing in equities for retirement years, with the ability of the trustee to make changes in the portfolio free of taxes on realized gains. A charitable remainder unitrust of the “net income only, plus make-up” type provides tax sheltered growth and complete flexibility in shifting investment objectives to produce retirement income.
- Cash is available to make a significant gift
However, the gift can be made with highly appreciated stock, using the cash to purchase replacement shares of the same stock with a new and much higher basis. There is the same charitable deduction for the current year, and the prior appreciation will no longer be subject to capital gains tax when the stock eventually is sold.
- Gifting the difference of market value and sale price
If stock to be used in a charitable gift plan is in the form of a single certificate worth more than the intended gift, there may not be time to have two replacement certificates issued by the company’s transfer agent this year. A “bargain sale” may be feasible, with the deductible difference between the fair market value and sale price as the charitable gift. Any gain of the stock is prorated between the gift and sale portions of the transaction, with no tax on the gift portion.
Just a quick note before you jump out and start implementing any of these ideas for philanthropy. It is always a good idea to meet with your financial advisor before taking on a new tax strategy. A qualified financial professional will be up-to-date on current tax laws and will know of subtle nuances that may affect the effectiveness of your strategy.
Brock and Associates, LLC is a Utah based financial planning firm. We specialize in retirement, estate, legacy, and tax planning.
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