Gifts of appreciated stock: Let the numbers do the talking
Professionals who advise clients regarding their wealth understand that giving long-term, appreciated assets is often one of the most tax-savvy ways their clients can support their favorite charities. Nevertheless, many clients still give cash. Consider using one of the following illustrations* to help clients see the benefits of giving appreciated stock.
Example #1: Sally and Bob Jones
Sally and Bob Jones plan to give $100,000 to their donor advised fund (DAF) at GCF to organize all their giving for the calendar year. Let’s assume Sally and Bob have a combined adjusted gross income of $600,000, which lands them in the 35% federal income tax bracket. If they gave $100,000 in cash to their DAF, they could realize an income tax savings, potentially, of $35,000.
What if instead of giving cash, Sally and Bob gave highly appreciated, publicly traded stock, valued currently at $100,000, to their DAF? Let’s assume they’ve been holding the stock for many years, and the shares have a cost basis of $20,000. Not only are Sally and Bob eligible for a potential income tax deduction that will save them up to $35,000, but they have also potentially avoided $12,000 of capital gains tax that they would have owed if they’d sold the stock (using a long-term capital gains tax rate of 15%).
Example #2: Jenny and Joe Smith
Jenny and Joe Smith plan to give $1 million to community causes this year. They’ll do that by adding $500,000 to their DAF at GCF, which in turn they will use to support their favorite charities. They’ll also be making a $500,000 gift to an unrestricted fund at GCF to help address the region’s greatest needs for generations to come. Let’s assume that Jenny and Joe are in the highest federal income tax bracket because they earn multiple seven figures. If they were to give $1 million in cash, they could save, potentially, up to $370,000 in income tax. If they gave publicly traded stock instead of cash, assuming a $200,000 cost basis in stock valued currently at $1 million, they would still potentially save up to $370,000 in income tax, and they would also potentially avoid $160,000 in capital gains tax (based on a long-term capital gains tax rate of 20%).
Example #3: Tiffany and Brett Thomas
Tiffany and Brett Thomas plan to give a target amount of $5 million to charity as the cornerstone of their overall philanthropy plan. They would like to use publicly traded stock that they’ve held for many years, valued currently at $5 million. They would love to receive a lifetime income stream from these assets, so that the remaining assets will flow to their fund at GCF after their lifetimes. In this case, a charitable remainder trust can pay out an income stream to Tiffany and Brett while they are both living, and then to the survivor for the survivor’s lifetime.
Let’s assume that Tiffany and Brett are both 55 years old and that the stock has a very low cost basis–just $500,000–because the Thomases have held it for so long. Depending on the IRS’s applicable rates, and assuming a 5% annual payout rate paid at the end of each quarter, here’s an approximate tax result when working with a community foundation like GCF to help Tiffany and Brett establish a charitable remainder trust:
- $1,042,550 approximate potential income tax deduction based on the present value of the gift of the remainder interest to charity
- $4,500,000 in capital gains that may not be subject to tax
- $250,000 in total payments during the first year
- Annual payments of 5% of the value of the assets in the trust, which means the income stream will fluctuate depending on the value of the assets
Following the death of the survivor of Tiffany and Brett, the remaining assets will flow to the Thomas Family Fund at GCF, which Tiffany and Brett have already established and which, upon their deaths, will split equally into two funds. The first fund will be a DAF for which their children will serve as advisors, and the second fund is an unrestricted endowment fund that aligns with their passion for ensuring that no child is hungry and will make annual grants to organizations that provide food solutions for families.
While no client’s circumstances will exactly match these examples, GCF is happy to discuss the various tax-savvy options that match your client’s charitable goals. Please reach out to discuss creating a tailored plan for your client.
*These examples are for illustration purposes only. Every client’s situation is different, and therefore the tax strategy and tax impact will be different for each client. For example, these illustrations are based on federal income tax rates only, and you’ll need to evaluate, among many other factors, the impact of state taxes.
