Year-End Charitable Tax Planning
The end of the year typically is a time for making charitable donations. If that’s your practice, consider contributing shares of appreciated stocks or stock funds instead of cash. As long as the shares have been held longer than one year, you’ll get a full tax deduction in 2015 for the appreciated assets, and the charity can easily cash in your gift.
Example 1: Beverly Carson donates $20,000 to her alma mater each year. In 2015, she decides to contribute $20,000 worth of shares of ABC Corp., stock she bought near the 2009 market low. Her basis in the donated shares is $6,000, in this scenario.
Here, Beverly gets the same $20,000 tax deduction she would get from a cash donation. The college, a tax-exempt entity, can sell the shares and keep the entire $20,000. Thus, tax on the $14,000 capital gain is never paid, and Beverly has reduced her stock market exposure by $20,000. The cash she would have donated remains in her checking account, for Beverly to spend or invest elsewhere.
Most investment ﬁrms and charitable organizations can help you execute a donation of appreciated assets.
The tactic used by Beverly Carson might be fairly simple to implement, for one $20,000 donation. But what if Beverly’s year-end philanthropy consists of ﬁve $4,000 donations? Or 10 $2,000 donations? The paperwork eﬀort involved might outweigh the tax advantages, for many donors.
If you intend to contribute appreciated securities to multiple charities, consider going through a donor advised fund (DAF). Many ﬁnancial ﬁrms and community foundations oﬀer DAFs, which simplify such philanthropy.
Example 2: Dan Evans, who is concerned about a possible stock market collapse, typically makes $25,000 of charitable donations each year, spread among various recipients. Changing tactics a bit, in late 2015 Dan donates $25,000 worth of stocks and stock funds to a DAF. All of the shares are highly appreciated, after long-term holding periods. Dan’s total basis in the donated shares is $10,000.
For this contribution to the DAF, Dan gets a full $25,000 tax deduction for 2015. After the shares have been sold, that $25,000 goes into his account at the DAF, with no reduction for capital gains tax. Then Dan can simply tell the DAF to distribute $4,000 to this charity, $6,000 to that charity, etc. Th e is no time pressure to make these contributions—and no threat to Dan’s charitable tax deduction for 2015.
Thus, Dan has reduced his exposure to stocks, avoided capital gains tax, and reduced his tax bill.
Give and take
If your philanthropic intentions are signiﬁcantly greater than Dan’s or Beverly’s, consider a charitable remainder trust (CRT). Th principle is the same as it is for the strategies described previously: Donate appreciated securities to get a charitable tax deduction and, if it’s a concern, reduce your exposure to a stock market now trading near record levels. In addition, you (and perhaps another beneﬁciary such as your spouse) can receive an income stream that might ﬂow as long as an income beneﬁciary is alive.
CRTs come in two forms: annuity trusts and unitrusts. An annuity trust pays a ﬁxed amount each year, with a minimum of 5% of the original contribution. A unitrust pays a ﬁxed percentage of the trust value each year, with a minimum of 5% of the trust’s value. You’ll also get a partial upfront tax deduction for the fair market value of the remainder interest in the CRT that will eventually pass to the charity.
Example 3: Flo Grant uses $600,000 of highly appreciated securities to fund a charitable remainder unitrust in late 2015. The trust will pay 5% of its value annually to Flo or to her husband Harold, as long as either is alive.
Setting up and maintaining a CRT requires some eﬀort and expense, so these trusts generally make sense if you have a substantial amount to contribute. You can get similar beneﬁts with a smaller contribution by acquiring a charitable gift annuity (CGA). Many charities and other nonproﬁts oﬀer CGAs, often with minimum investments as low as $5,000 or $10,000. Typically, you need to be 50 or older to qualify for a CGA.