Case Study: The Simplest Planned Gift: Funding Outright Gifts with Appreciated Securities

Case Study: The Simplest Planned Gift: Funding Outright Gifts with Appreciated Securities

Case study posted in Outright Gift on 7 February 2005| 5 comments
audience: National Publication | last updated: 18 May 2011
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Abstract

When most people are asked to make a charitable gift, they reach for their checkbook. Why? Because giving cash is simple and convenient. For small gifts, giving cash certainly makes sense; but when the donation gets larger, you should consider giving appreciated assets such as publicly traded stocks or mutual funds.

Giving Cash

Suppose you would like to make a $10,000 gift to your favorite charitable organization. If you write a check for $10,000, you will receive a $10,000 charitable income tax deduction. If you are in a 35% income tax bracket (federal and state) and itemize your deductions, you will reduce your taxes by $3,500 ($10,000 x 35%). The net cost of your gift will be $6,500 ($10,000 - $3,500).

Giving Appreciated Securities

Now, suppose instead of giving cash, you donate $10,000 of publicly-traded stock you purchased ten years ago for $2,000. First, just like a gift of cash, you will be able to claim a $10,000 income tax charitable deduction, thereby reducing your taxes by the same $3,500.[1] In addition, you will avoid paying the capital gains tax you would have paid if you had sold the stock rather than giving it to charity.

If you sell the stock, you will realize an $8,000 long-term capital gain. If you are in a (federal and state) 20% capital gains tax bracket, you will pay $1,600 ($8,000 x 20%) in capital gains tax. However, by donating the stock instead, you will forever eliminate this potential tax liability.

By giving stock instead of cash, the net cost of your gift will be further reduced from $6,500 to $4,900!

How Much More Can You Give?

If giving $10,000 cash costs $6,500 after-tax, how much more stock can you give for the same after-tax cost as giving cash by taking into consideration your additional capital gains tax savings? Based on these assumptions, you can give $13,265, nearly 33% more!

So, by funding your charitable gifts with appreciated securities, you can either give the same amount for a lower tax-cost ($4,900 vs. $6,500), or give more for the same after-tax cost as giving cash ($13,265 vs. $10,000). The choice is yours!

Giving Stock You Want to Keep

If you own highly appreciated stock you would like to keep, consider still funding your charitable gifts with that stock and then use the cash you would have donated to purchase new shares of the same stock, even on the same day! You will increase the cost basis in your newly repurchased shares to the new repurchase price! That can save more taxes later!


Disclaimer: This case study is intended to provide information of a general nature only and is not intended to provide legal, accounting, investment or other professional advice. Persons mentioned within this case study are fictional with any resemblance to real persons, living or dead, coincidental. Tax law rates and federal discount rates used in examples are based on those rates in effect at the time of publishing. Those viewing this case study should always check for latest tax and other relevant state and federal laws and regulations prior to completing charitable gifts.


Footnotes

[1] The amount of charitable deduction you can claim in any one year is limited to a percentage of your adjusted gross income. For gifts of cash to public charities, the limit is 50% of your adjusted gross income. For gifts of long-term capital gain property, the limit is 30%. In both cases, any deduction that exceeds the amount you can claim in the year of your gift due to these limitations can be carried over up to five additional tax years.

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Re: Case Study: The Simplest Planned Gift: Funding Outright ...

For single individuals with an AGI of 300K, what are the limits to giving appreciated securities to public charities (assume the gift is $100K of long term appreciated stock, assume the cost basis is $90K, marginal tax 35%). Assuming the limit of 30% AGI or 90K is the limit and 10K is carried forward. Does this 90K gift equate to 90K x 35% is tax savings? What about the Pease 3% tax? Is it still better to give appreciated securities than cash?

Re: Case Study: The Simplest Planned Gift: Funding Outright ...

You have it essentially correct. The Pease amendment phaseouts have very little effect and are dependent on other factors such as the rest of the itemized deductions

Re: Case Study: The Simplest Planned Gift: Funding Outright ...

You have it essentially correct. The Pease amendment phaseouts have very little effect and are dependent on other factors such as the rest of the itemized deductions

stock gifts

Fellow GP's, This is a great reminder that a return to basics is good for the mind and soul. I had the pleasure to interact with a grateful patient who told her MD and me that she wanted to help fund a rather significant research project here at Long Beach Memorial Medical Center. The plan called for a significant infusion of funding. She (a very significant investor) said "I can do that and will sell some stock and write you a check" ... I exclaimed "if its appreciated stock there is a better way" ... to which she replied "is it legal?"... Well after some discussion and confirmation by her investment advisor she transfered 33 different issues to complete a gift of $2.7 million. She is happy about her gift funding the research project, but even more happy about giving away untaxed and unrealized LTCG. Sometimes we assume (dangerous) more than we should. It's the simple things that mean so much. Thanks PGDC

Re: stock gifts

Jim,

I love success stories like yours. As I review the survey data, it appears even the very affluent still mostly write checks. Poor advice or no advice still plagues our careers.

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