Using Appreciated Assets to Fund Gifts
Beginning in 2008 the U.S. and Global economy took a hit and made a dip that almost matched what happened in the 1930’s – but thankfully didn’t. So it was dubbed “The Great Recession,” instead of a depression. People were laid off from their jobs, banks quit loaning money, homeowners became “underwater” on the their mortgages, the real estate market tanked and the stock market lost almost half of its value.
But now it is coming back, in some segments of the economy even stronger than ever. The stock market has reached new heights even though it still is “yoyoing” as it reacts to world events. Because it dipped so low in its recession, there now are capital gains to be realized in many stocks. Real estate is said to have regained 95% of its all-time high in most markets.
What this means for charities and their donors is that it once again is tax-wise to use appreciated assets to fund gifts.
There are many reasons why someone would want to look at the blessings they have received over their lifetime and decide to fund their gifts to their favorite charities with appreciated assets. Perhaps the most important reason is “want to.” The next two reasons are “can do” and “afford to.”
There is a saying that nothing is final until its signed, sealed and delivered. This is especially true when it comes to transferring ownership of property such as stocks, bonds and real estate from one party to another. So it takes a bit of doing to give appreciated securities and real estate to charities. It involves enlisting the aid of your portfolio manager, possibly a real estate broker and oft times an attorney.
However, “sealing the deal” are the tax givebacks accompanying such transactions. Long-term capital gains are washed. Reportable income is significantly reduced by the tax deduction. Looking further ahead, potential estate tax is avoided. Because state and federal governments favor philanthropy and encourage generosity toward others by their citizens, we can afford to give away what we have accumulated. What American do for others, the government does not have to do.
Ever the romantic, Elizabeth Barrett Browning once penned, “How do I love thee? Let me count the ways.” How do we support the charities that represent our life-time values? There also are many ways.
Gifts of Appreciated Securities and Real Estate
The benefits of such giving are relatively easy to find out. Determine how much of the gifted property is long-term capital gains. Multiply that figure by 15 or 20%, depending upon what tax bracket you are presently in. That is your long-term capital gains tax avoidance. Then multiply the overall value of the gift by your state and federal tax brackets. That dollar figure is your charitable deduction. Add the tax avoidance and tax deductions and subtract that figure from the value of the gift to arrive at the real cost of the gift.
You may find that you can afford to be a tax-wise philanthropist.
Gift Annuities and Charitable Remainder Trusts (Unitrust and Annuity Trust) =
– Funding Split-interest Gifts
You could use the analogy of giving away the tree but keeping the fruit to describe these types of gifting arrangements. These ways of giving do require advanced planning and the use of professionals, but many generous donors have found it well worth their time, effort and expense.
Every asset has two identifiable interests: a present interest and a future interest, an income interest and a remainder interest.
Gift Annuity: The income received by the donors from the gift annuity is often a nice mix of income – tax-free, long-term capital gains and ordinary income. Such a mix of income means that the real rate of return is higher than it looks.
Unitrust and Annuity Trust: Whether a donor should use a unitrust or an annuity trust often depends on the type of assets he is using to fund the gift and what his objectives are in making the gift. This is where seeking the counsel of a qualified professional is most advisable.
Each of the charitable remainder trusts has certain characteristics which make it attractive to different donors. The distribution rate must be at least 5% for both of them, but the rate should not be so high that the underlying principal would be depleted. For the annuity trust, if there is a 5% probability that the trust principal would be depleted, the trust would fail to be qualified by the IRS and the charitable tax deduction would be denied.
There is a fixed rate of return for the annuity trust and the income must be paid even though there may not be sufficient income. The unitrust can be written so that the payout can be more flexible due to the “income only with make-up provision.” This unique “spicket on, spicket off” provision would allow the astute donor to manipulate the income stream according to his/her financial needs by choosing the type of assets he puts in the trust – income producing or growth assets.
Another attractive feature of the trusts is duration and do-ability, especially the unitrust. The trusts can “wash” the long-term capital gains of the assets, grow tax-free, distribute income when desired, serve as a retirement income-producing investment for the lifetime of one or more individuals, an inheritance vehicle for a term of years, and leave a charitable legacy to one or more charities that the average donor would only dream about doing.
Last but not least, the “build as you go” feature of the unitrust allows the every-day donor to do what most people think only millionaires can do. Donors can add to the trust over the years as their financial needs become less. As the value of their assets grow, they can receive all the above benefits until they leave a legacy they thought only the very wealthy could afford to do.
Such is the magic of charitable gift planning.
Donor Advised Fund A few years back we dedicated an entire newsletter to this subject because of its value both to donors and to the charities they support.
There are essentially two very good reasons to use a Donor Advised Fund to support your favorite charities:
1. There are no up-front costs to do so, unlike setting up a private foundation.
2. Making a large transfer to the Donor Advised Fund results in a large charitable deduction. This reduces one’s tax burden for that year, even though the gifts might actually be delivered to charities in subsequent years. A number of brokerage firms offer Donor Advised Funds, and some require a minimum of $10,000 to start one.
We hope these examples will be helpful as you consider your planning. We look forward to hearing from you if you have questions about them.