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San Clemente Journal

Wealth Trends - Donating

May 01, 2008 10:06PM ● Published by Don Kindred

by Michael Vandenburg, CFP®

Every year between Christmas and April 15th I get a lot of questions about charitable donations. I am generally quite surprised at the knowledge that people have about charitable donations and the tax benefits, but I also get just as much confusion and misinformation as I do correct concepts. 

Many of you probably already know that the IRS provides an incentive to individuals who donate appreciated securities instead of cash to fund their charitable gifts, but I’ll bet that just as many do not. For those in the know, I would also wager that even though the concept is clear, the actual details and numbers get a little fuzzy. One way that I have found to help with the details is to break it down to its most simple form, and then you can replace the nice round numbers with your own and see how much it will actually benefit you directly. 

First of all, I would want to make clear that most people donating large amounts to charity are not just doing it for tax purposes … but if you are going to make the contributions anyway, you might as well get the most bang for your buck.

The current tax code encourages charitable contributions by allowing donors, in most cases, to reduce their taxable income by the amount of any gift. For example, a donor in a 35% tax bracket generally receives $3,500 in tax savings from a $10,000 charitable contribution. A donation of appreciated long-term capital gain property offers even greater tax benefits because gifts are deductible at full fair market value, effectively allowing the donor to escape paying taxes on the appreciation. 

Gifts of appreciated property can be made directly to qualified charities or individuals may choose to use a donor-advised charitable fund. In either case, the charity can immediately sell the stock without paying capital gains and the entire amount can be used for charitable purposes. 

Donor-advised funds have become a popular choice among wealthy donors because they operate very much like a Private Foundation, but without all the paperwork. You can even title the account just like a family foundation. Individuals can contribute cash or appreciated long-term capital gain property to the fund and receive a fair market value deduction in the year of transfer. Once an investment is received by the sponsoring organization, it is liquidated and placed into one or more pooled accounts selected by the donor. The donor can then use these funds to make cash gifts to one or more charitable organizations. The gifts can be made all in one year or over decades. When a donor wants to make a donation to a charity, he or she simply sends information regarding the gift to the sponsoring organization that, after verifying the charity’s tax-exempt status, sends a check directly to the charity indicating that it is from the donor’s account. Donor-advised charitable funds can be found at most major brokerage firms.

The real beneficiary here is the charities that receive the funds, but being able to pay less in taxes and help others at the same time is a beautiful thing. b
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