Some will reinvest in
other securities, but many will place their cash “on the sidelines.”
For these persons, 2000 may be an excellent time to use some
of their gains from the long bull market to complete outstanding
pledges and otherwise make larger than usual cash gifts in 2000.
Such gifts can help to offset capital gains taxes that would
otherwise be due as a result of taking gains in the market.
There are other ways to
combine charitable giving with realignment of investment portfolios.
Three options
We start with
the fact that there are really only three possible scenarios
for investment markets — they can go up, go down, or trade
at current levels. Each of these different scenarios provides
planning strategies that can help your donors meet both personal
and charitable goals with gifts of appreciated securities.
If a donor believes that
the market is headed downward, one strategy would be to make
charitable gifts with appreciated securities to conserve cash.
This strategy would allow the donor to fulfill charitable obligations
with “paper profits ” that the donor thinks may be
further eroded by future decreases in the market while, at the
same time, preserving cash for other purposes. The donor enjoys
a federal, and perhaps state, income tax deduction based on
the full value of the donated assets, and capital gains tax
is bypassed entirely.
If your donor is uncertain
as to which direction the market may go,you might want to suggest
that, instead of giving cash, he or she consider making outright
gifts using appreciated securities. Then the donor can use the
cash that might otherwise have been donated to repurchase additional
shares of the same stock at today’s value. That way, if investments
lose value in a market correction, the donor will have a capital
loss to declare for tax purposes. On the other hand, if the
markets go up, the donor will enjoy a new, higher cost basis
in the stock that “replaced ” the donated stock. This strategy,
sometimes referred to as “reloading,” may have particular appeal
to donors who are receiving large cash bonuses and thus have
the funds to give while “replacing ” their investments.
“Balancing” interests
If your donor
simply wants to reduce his or her position in the market, the
donor may want to consider a combination of giving some shares
of stock and selling the remaining shares. This is called a
“balanced sale ” of the stock.
Let’s examine how a balanced
sale works. Suppose Bill Turner owns stock worth $20,000. He
bought the stock for just $5,000 several years ago. He believes
that the stock is unlikely to increase in value in future years
and he would like to sell it. He does not, however, wish to
pay capital gains tax of as much as $3,000, which would leave
him with net proceeds of no more than $17,000.
Mr. Turner is also interested
in making a charitable gift of approximately $6,000 while enjoying
the greatest tax savings in his 36% tax bracket.
Here
is how a balanced sale would help him accomplish both of his
goals.
Take a look at the chart
above. Note that the $2,160 in tax savings from the gifts more
than offsets the $2,100 in capital gains tax due on the securities
sold. The tax liability on the portion of the securities that
are sold is thus “balanced ” by the tax benefit for the charitable
gift portion.
Mr. Turner is able to
enjoy cash proceeds of $14,000 and the satisfaction of making
a $6,000 gift, a total of $20,000 in value to him, while effectively
bypassing capital gains tax liability. Had he sold all of the
securities, he would have netted just $17,000 after paying some
$3,000 in taxes. Mr. Turner has thus been able to make a $6,000
gift at an after-tax “cost ” of just $3,000.
Giving gains for income
In today’s environment, many donors may wish to use stock
that has increased in value in recent years to fund gifts that
provide additional income for themselves and/or loved ones for
life or other period of time. Funding such gifts can be an excellent
way to unlock value from appreciated securities while reducing
tax liabilities and providing an additional source of income
for future use.
Helping donors
While these strategies
may seem obvious to charitable gift planners, it is doubtful
that many of your donors have seriously considered the possibility
of combining their personal and philanthropic planning. Charitable
organizations and institutions must be prepared to assist donors
and their advisors with advice about the most effective ways
to give securities in today’s economic climate if they hope
to reap future rewards.
For more about ways you can communicate
the benefits of stock gifts to your donors, check
out the Sharpe booklet “A Guide to Year-End
Giving.” Explanations of the strategies
described above along with detailed examples
your donors can understand are featured. See
page 6 of this issue for more details.
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