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Developing a Charitable Strategy

December 18, 2016
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Many of us cherish the opportunity to give back to our community. We can volunteer, donate property, and we can make monetary donations to name just a few of the ways we can better the world around us.  Volunteering, or donating property and money can occur during our lifetime giving us the chance to see our contribution in action, or we can give at our death by naming a charitable beneficiary or leaving assets through your will or trust.  In fact, Americans are very generous in terms of charitable donations giving a record $373 billion in 2015 according to the National Philanthropic Trust.  I encourage you to think beyond giving cash.  In fact, writing a check to your favorite charities may not be the best way to give, especially if your income is particularly high this year.  It may be time to consider a charitable strategy and this is something that you and I can develop together as part of your financial plan.  Here are a few things to consider when developing your charitable strategy.


  1. Instead of writing a check to your favorite charities, consider giving appreciated stocks or mutual funds. You could also give real estate, privately held stock, or appreciated personal property such as art.  By giving appreciated property such as stock or real estate, you avoid paying capital gains taxes from selling the appreciated property.  In addition, the cost of giving appreciated property may be lower than the cost of giving cash.  Let’s take a look at an example:


In our hypothetical example, you are interested in giving $1,500 to a favorite charity.  You could give a check for $1,500, which cost you…$1,500.  It turns out that you also bought 100 shares of a particular stock during the depths of our last recession at a price of $2 per share and that same stock is now worth $15 per share.  Your original cost of buying these shares was $100 x $2 = $200 and it is now worth $15 x $100 = $1,500.  By giving the shares of stock to charity instead of cash, you avoid paying long term capital gains tax on the stock due to the nice appreciation you’ve experienced.  Also, the cost of this gift is $200 not $1500 in the case of giving cash.  So this may be a more efficient way of accomplishing your charitable goal in a more tax and cost efficient way.


  1. By itemizing your deductions on your taxes, you are able to deduct charitable contributions of long term capital gain property such as the stock in the example above up to 30% of your adjusted gross income(AGI). Occasionally, there may be a situation where an individual would like to donate more than 30% of AGI.  Donating cash allows you to deduct up to 50% of AGI, so donating a combination of cash and securities can help you give more as well as deduct more of your contribution.  If you give more than 30% of AGI, you are allowed to carry forward your unused portion of the charitable deduction up to 5 years.


  1. If you have stock or mutual funds that have lost value, consider selling them and giving the cash.


For example, you are interested in giving $1,500 to a favorite charity. You own a mutual fund that you originally purchased for $2,000 but due to market losses is now worth $1,500.  By selling this fund, you are able to realize a $500 long term capital loss (assuming you owned it more than one year) and you can deduct losses up to $3,000 per year on your taxes.  You can also use losses to offset gains in other securities and this technique can lower your taxes as well.


  1. Consider looking at your charitable strategy over multiple years. In years where your income is higher or your taxable portfolio gains are higher, you might consider making more charitable contributions that year to offset the additional income.  A donor advised fund (DAF) may be an effective tool to accelerate charitable deductions in the current year but spread them over multiple years. The way a donor advised fund works, is it is a special type of account where you can donate cash or appreciated property such as stocks, mutual funds, even real estate in some cases.  You receive an immediate deduction for your charitable gift assuming you itemize your taxes that year, usually limited to 30% or 50% of AGI depending on the type of property donated.  You are able to avoid long term capital gains tax by donating the property instead of selling it.  The account is typically invested in mutual funds that have the potential to appreciate over time.  The account owner can recommend charitable gifts to any 501c3 charity or charities at any time.


Using our example from above, let’s say you donate $1,500 worth of highly appreciated stock to a donor advised fund.  You avoid paying capital gains tax by donating shares instead of selling and donating cash.  Your shares are deposited into the donor advised fund giving you a tax deduction of $1,500.  Your donor advised fund balance is now invested in mutual funds that have the potential to grow over time.  Hypothetically, your donor advised fund grows from $1,500 to $2,000 a few years later.  You can now make a donation to a single charity for $2,000, or you could make donations to 10 charities for $200 each.  There is no requirement that you leave the money in the donor advised fund for a particular period of time, so you could spread your donations over many years if you like or recommend specific gifts right away.  So if you have a high income year, you could give more to a donor advised fund to offset the income, but spread the future gifts over a number of years.


  1. Finally, you may be in a position where you would like to increase your charitable giving, but you still need income during your retirement. One device we might consider is a pooled income fund (PIF) or charitable remainder trust (CRT). Similar to the donor advised fund outlined above, the pooled income fund or charitable remainder trust allows you to make a donation of cash or appreciated property right away.  The pooled income fund or charitable remainder trust will then pay you or even you and your spouse a lifetime income.  You receive a partial deduction for your charitable gift.  Why only partial? Because the value of your donation is being offset by the income you are receiving over your lifetime.  At your death, or the second death in the case of a spouse, the charity receives the remaining value left in the pooled income fund or charitable remainder trust.  Using these types of vehicles can help you fulfill your charitable goals while you are alive, and help you reach your income needs at the same time, while being more tax efficient.


Developing a charitable strategy, along with your other financial goals is an important first step. Please contact me to develop or review your financial plan including developing a charitable strategy that is right for you.


All investing involves risk, including the possible loss of principal. There is no assurance that any investment strategy will be successful. Past performance is not an indication or guarantee of future results.