Most of us are accustomed to donating cash, checks or credit cards to make gifts to our favorite causes. But, cash equivalent donations are usually the least effective of all giving options. They create a higher tax bite for donors and result in less money for the receiving charities.
Assets that have appreciated in value can be among the most tax-advantaged items to contribute to charity because they both enable a current-year tax deduction and allow donors to avoid payment of capital gains taxes on their sale. The donor pays lower taxes and the charities they support receive the most money possible.
Annual tax planning and life transitions – including wealth creation, a change in jobs or retirement – can put assets in motion and create a tremendous opportunity to address philanthropic goals with various asset types. Unfortunately, not all charities have the resources or capabilities to accept gifts of appreciated investments directly.
That’s where donor-advised fund accounts can come in handy. These charitable accounts, offered by many financial institutions and community foundations, allow donors to more easily convert appreciated investments into tax-effective charitable contributions. This is because the sponsoring charity may have more experience with these types of gifts and can be in a better position to evaluate prospective contributions of appreciated property and liquidate the property once it is donated.
If you simply transfer the investment into the donor-advised fund account, you obtain a fair market value tax deduction on the date of transfer. Donors pay no capital gains tax when the investment is liquidated, and the cash proceeds can then be invested and you can recommend grants to your favorite charities immediately or over time at your convenience. At Schwab Charitable, one of the largest national donor-advised funds, 65 percent of contributions in the last fiscal year were in the form of appreciated assets.
Publicly Traded Securities
Shares of appreciated publicly traded securities, such as stocks and mutual funds, are straightforward assets to donate to charity. For maximum tax benefit, shares must be held for more than one year and should be transferred directly to the charity or donor-advised fund account. Selling the stock first will trigger capital gains taxes. Appreciated securities held for more than one year are generally deductible at fair market value without recognizing any capital gain.
Shares in an initial public offering are treated similarly, and can make a tremendously effective charitable gift since they are often highly appreciated. Discounted valuations can apply depending on the associated lock up period and timing of the gift.
Donated, publicly traded partnerships – in particular master limited partnerships (MLPs) – are an important exception to the typical fair market value deduction for long-term gain securities, as the charitable deduction must be reduced by the amount of ordinary income that would have been realized if the property had been sold at fair market value on the date contributed. For MLPs with substantial accumulated depreciation, this can greatly reduce the charitable deduction. Additionally, if the partnership carries debt (often the case with MLPs), the donor may be liable for taxes if the contribution is treated as a “bargain sale.”