- Peter Cook, CFP, CFA and Frank Byrd, CFA
2 Tax Advantaged Giving Strategies
“Virtue isn't in just being nice to people others are prone to care about. So true virtue lies mostly in also being nice to those who are neglected by others, the less obvious cases, those people the grand charity business tends to miss. Or people who have no friends and would like someone once in a while to just call them for a chat or a cup of fresh roasted Italian-style coffee.”
-- Nassim Taleb Skin in the Game
2 Tax Advantaged Giving Strategies The combination of recent tax law changes and the boom in the stock market have made two tax-advantaged charitable giving strategies particularly attractive:
Using appreciated securities for charitable gifts
Donor-Advised Funds (DAF’s)
Each is a useful tool on its own. When used in combination, they can be a powerful means of reducing taxes and thus increasing the capital available for your favorite charities. How to Turn a Tax into a Charitable Donation After a nine-year bull-market in stocks, investors are sitting on a lot of unrealized capital gains. The desire to avoid paying taxes on these gains can leave you feeling trapped in positions you might otherwise prefer to sell. One strategy to manage such positions is to fund your charitable donations with appreciated securities (stocks or mutual funds with unrealized long-term capital gains). Done properly, this may allow you to avoid paying any taxes on the capital gains. The result: money that you otherwise would have given to the IRS goes instead to your favorite charity. This in turn allows you an even larger charitable tax deduction. How to Get a Bigger Deduction with a DAF Recent tax law changes make the Donor Advised Fund (DAF) an even more attractive charitable giving tool. The new tax legislation of 2017 raised the standard deduction to $24,000 for married couples. For families who have few itemizable deductions other than charitable contributions, this means that charitable gifts may not be deductible. For example, a couple who gives $20,000 each year to charities and has no other deductions would no longer receive any tax benefit from their contributions. Here’s where a DAF can help. Rather than donate $20,000 directly to charities each year, the couple could instead donate five years’ worth of giving ($100,000) to a DAF in the current year. The DAF would then donate $20,000 per year to their charities of choice over the next five years.* The $100,000 donation would bring the couples itemized deductions well above the $24,000 standard deduction and thereby ensure that their giving provides them substantial tax advantages, while at the same time maintaining their prior giving schedule. Even better, if the $100,000 donation is made with a stock that has doubled in value, the couple could turn the embedded capital gains liability into a beneficial tax-deduction. The following table shows the value of this combination of tools versus the traditional method of making cash gifts each year outright to charities. The tools save the couple $28,120 in taxes. Foregoing them costs them $11,900 in taxes. The difference between what the first scenario saves them and the second scenario costs them adds up to a $40,080 in tax benefit.
This scenario illustrates how creative planning can mean real money to your family (and the people and organizations you love most). Your situation is unique and might warrant other strategies (like a private foundation). If your primary motivation is to reduce your exposure to a large investment with a low cost basis, there are additional strategies to help you diversify without a huge capital gains tax.
Make us your first call when you need creative solutions. Maybe it's to help you diversify a highly appreciated, concentrated investment in a tax advantaged way. Maybe that's to help optimize your charitable giving. Maybe it's both. Either way, we're here to help.
Yours in the Field,
Peter Cook, CFP, CFA Frank Byrd, CFA
*The DAF you select (managed by an institution like Schwab or Fidelity) must officially approve your preferred charities. In practice, the DAF will direct funds to just about any 501(c)(3) public charity of your choice, with only a few exceptions (such as private foundations). **The scenario in the left side of the table assumes you were to donate $100k worth of a stock that has doubled in value (ie: has a $50k unrealized capital gain). By donating this stock to a DAF all up front in year one, you can deduct $76k of the gift (above the $24k standard deduction). The DAF in turn can donate $20k/year for 5 years to your favorite charity. The right side of the table shows the result of poor planning. It assumes the stock is sold and the proceeds are donated to charity ratably over the course of the next 5 years. In this scenario, you would paying the capital gains tax and fail to get a charitable deduction since the annual gift falls below the $24k standard deduction.
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