Most families support 501(c)(3) charities by giving cash to advance the purpose and mission of the organization, but many should consider being charitable with anything except cash.
Here's why: appreciated assets such as stocks, mutual funds, ETFs, private C or S corp stock, limited partnerships, and even real estate can be given to charity with potentially significant tax savings for the giver. And what's good for the giver could be great for the receiver because a lower cost of giving could lead to a higher level of giving over the long-term.
Giving assets that have appreciated in value allow the giver to avoid selling the asset now or someday and ultimately avoid paying capital gains tax. Plus, taxpayers who itemize deductions on their tax return receive a deduction against their income taxes for the full value of the asset (assuming they've held the asset for more than one year).
- If you purchased stocks, mutual funds, and/or ETFs with a cost basis of $20,000 and they are now worth $35,000, selling these would force you to recognize capital gains of $15,000. Recognizing capital gains increases your income and could result in additional taxes.
- Instead, if you give the stocks, mutual funds, and/or ETFs worth $35,000 to charities, you are essentially giving them $35,000 of value (they would just sell the holdings right away and use the cash)--and neither you nor the charities recognize any capital gains!
- (Ok, what if you want to still own one or more of the stocks/mutual funds/ETFs you just gave away? Go buy the same securities back with the cash you WOULD HAVE given to the charities, and now you have a new higher cost basis.)
Why is giving appreciated assets so uncommon? Why don't charities talk about them more? Great questions.
In essence, cash is the universal medium of exchange, can be put to use right away, is easily valued, involves very little administration, and can be given without significant planning or delay. Therefore, cash is just easier to talk about, ask for, and plan around for charities, givers, and their advisors. Giving cash is simple, and for most people actually does make the most sense. Therefore, cash is the charitable asset of choice for pure simplicity.
While many charities do have the capabilities to receive stocks, mutual funds, and ETFs, most do not. And you can imagine what your favorite charity would say if you tried to give them some private stock, a partnership interest, or real estate. Again, while some organizations do have the mechanisms in place to receive these assets, most do not and would really wish the value of those assets were in your checking account so the cash could easily make it into their checking account.
To receive appreciated assets such as stocks, mutual funds, and ETFs, charities might need a brokerage account, a written investment policy statement, and a staff person or department knowledgeable enough to answer givers' questions.
For more complex gifts such as private stock, partnerships, and real estate, almost all charities flat out have no capacity--nor the desire--to own these. In fact, these assets can become a liability to the charity instead of an asset if not handled properly. Therefore, you just don't have the option to give appreciated assets in most cases.
Or do you?
ENTER THE DONOR-ADVISED FUND (DAF)
“A donor-advised fund is like a charitable investment account, for the sole purpose of supporting charitable organizations you care about. When you contribute cash, securities or other assets to a donor-advised fund at a public charity, like Fidelity Charitable, you are generally eligible to take an immediate tax deduction. Then those funds can be invested for tax-free growth and you can recommend grants to any IRS-qualified public charity.”
- You give cash or other appreciated assets to a foundation and receive an immediate tax deduction
- While the funds are sitting in your DAF, they can be invested (on a scale from cash to conservative to aggressive) until you recommend grants to your preferred charities in the amounts you want
- Then you can direct those funds over time (this year and beyond) by requesting grants to the charities you support, like your church or any other 501(c)(3) charity--with no deadlines
- When you request a grant from you DAF, the DAF provider sells enough investments in your account (tax-free) and disburses a check to the charity with a letter acknowledging you as the grant requester
Those with appreciated assets will soon learn to love their DAF. And with more and more publicly traded securities and privately owned assets with significant unrealized gains, you will hear about DAFs more than ever because of the flexibility and tax advantages.
Gifting appreciated securities from qualified accounts, such as 401ks, IRAs, etc, does not apply. However, for your non-qualified investments, the higher the percentage appreciation, the more capital gains tax you can avoid when gifting.
Before going further, please allow me to encourage you to be as generous as ever and for reasons far beyond tax savings. Generosity breaks the grip of greed, improves your outlook on life, and brings more contentment than anything else. These reasons alone offer plenty of motivation to give generously. Opening and using a DAF simply helps you maximize your gifts and steward your resources well.
HOW TO SET UP A DONOR-ADVISED FUND
Here's how to determine if a DAF is a fit for you.
- Do you have enough cash on hand that you can give at least an initial $5,000 of cash or appreciated securities (non-retirement stocks/bonds/mutual funds/ETFs/etc that you've held for more than a year and have grown in value since you invested)?
- Are you unsure which charities you want to fund but want to claim the deduction for giving cash or appreciated securities this year?
If you answered “yes” to either of these questions, you should consider a DAF.
Several providers offer DAF solutions, but they vary in cost, minimum amounts to open, how you can invest the funds, and who can help you set them up.
Here are three great solutions:
- If you have appreciated investment assets, consider an immediate halt to giving cash to charities. Instead, open a DAF right away, fund it with your most highly appreciated asset(s), and begin requesting grants to those charities
- Every year in early to mid-December, review your appreciated assets for opportunities to "fill up" your DAF for the next year or even several years
- Consider how your DAF can be a tool in a "bunched deduction" strategy--incurring as many itemized expenses every other tax year and taking the standard deduction in the alternating years
The article and opinions in this publication are for general information only and are not intended to provide specific advice or recommendations for any individual. We suggest that you consult your accountant, tax, or legal advisor with regard to your individual situation. The above summary has been obtained from sources we believe to be reliable, but we cannot guarantee its accuracy or completeness. Past performance is no guarantee of future results. Investment advisory services offered through Catalyst Wealth Management, LLC doing business as Ridgeline Private Wealth. Catalyst Wealth Management, LLC and Ridgeline Wealth, LLC are not affiliates. The opinions and views expressed here are for informational purposes only. Please consult with your tax and/or legal advisor for such guidance. All activities of charitable giving and participation in a donor-advised fund program, are subject to the terms and conditions of the Charitable Trust and are governed by an independent Board of Trustees ("Trustees"), who are responsible for all aspects of its operations. The Trustees reserve the right to modify the program at any time, subject to the provisions declared in the Declaration of Trust.