Charitable Giving Requires Thoughtful Planning

The easiest way to give to charity is to write a generous check or to donate appreciated securities to the organization whose mission you find meaningful and worthy.  But for philanthropic investors, highly compensated executives and successful business owners, founders or entrepreneurs, donating privately held assets is a tax-efficient and effective funding alternative. Privately held assets would include C-corp/S-corp stock, restricted stock, limited partnership or LLC interests. They’re also referred to as complex assets.

Those types of assets usually have a relatively low cost-basis. If you started the business, the cost basis may very well be zero. For that reason, selling your interest in a successful enterprise can generate huge capital gains that trigger a significant capital gains tax and the 3.8% net investment income tax. Donating complex assets directly to a public charity allows the donor to eliminate the capital gains taxes and take an income tax deduction of the full current market value of the asset, not just the cost-basis.

Nothing good is easy…

Most charitable organizations do not have the capacity to accept, manage or liquidate complex assets. They don’t have professionals on staff  to review and approve those kinds of gifts. This would result in added professional service fees. Professional services do not come cheap.

For that reason, charities will often ask donors to sell the asset, then contribute the after-tax proceeds to the charity. That would make things easier for the charity to manage, but it’s not better; neither for the donor, nor  for the organization. Any sale of assets triggers gains taxes, reducing the amount available for the charity. Besides, the donor is only able to take the charitable tax deduction for the amount of the after tax cash contribution, instead of the fair market value of the asset prior to the liquidation.

…but it's doable

For donating complex assets, the donor advised fund (DAF) is the way to go.  A sponsoring charity of the DAF accepts responsibility for liquidating the assets. They know how to do it in compliance with IRS rules and regulations. The charities to which donors recommend grants from their DAF get to focus on what they do —fulfilling their missions—rather than undertaking the complicated process of  liquidating assets in accordance with tax rules and regulations.

So, the donor pays no capital gains on the sale of the asset and gets the deduction for the full amount of the value of the donation. This double tax benefit allows the highest possible percentage of the asset's value to go to the charitable causes. Otherwise, donations to private charities are limited to a cost basis deduction.

Giving cash is more expensive and less tax-efficient when there are appreciated assets, to choose from,

The first step is to talk with your tax advisor. They can help you make smarter tax-advantaged charitable giving choices while also empowering you to support the causes that the matter most to you.

“I don’t have complex assets. I just have money.”

Even if you’re not Privately Held Asset kinds of people (some people are not), you still need to re-think your “just write the check” donation strategy. A better way to do it might be the Charitable Remainder Trust. The charitable remainder trust is a set up that allows you to put in a pile of money to that will eventually go to your favorite charitable organization. Prior to that though, the trust will make quarterly distributions, based on a pre-determined percentage of the trust's annual asset value, to your heirs for a defined period of time; say fifteen years. The assets are invested within the trust so ideally the distributions don’t deplete the trust. At the end of the defined period, the trust will terminate, with the remainder going to the pre-determined beneficiary organization.

With long term investment expectations for the trust of a little more than 8 percent and the trust distributing a lower fixed percentage of the trust value, it is anticipated that the payments to the heirs will increase over time to help keep pace with inflation while still leaving a good chunk of money for your alma mater or the ballet or the art museum or the Boys and Girls Clubs or whomever.

Funding your trust with appreciated stock will enable you to avoid the capital gains tax liability you’d have incurred if you sold the stock. Once the stocks are transferred to the trust, the trust would likely sell the stocks and reinvested the money into a  diversified portfolio of stocks and bonds. As a result of the trust's charitable status, you will receive a charitable income tax deduction.

With thoughtful planning, and savvy professional consultation, you can accomplish multiple legacy and philanthropic goals with minimal punishment from the tax vultures.

William S Jiggetts

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