TIS THE SEASON TO BE GIVING
APPRECIATED SECURITIES
by Phil Ivory
![[cartoon: charitable donor man holding the evil IRS man at bay]](/publications/images/q65security.jpg)
The holiday season is a natural time to think of giving to help others. But what's the best way to give?
Dickens' Ebenezer Scrooge, having transformed from unfeeling miser into warm-hearted humanitarian, made a year-end gift of a splendid Christmas turkey to the struggling family of his clerk, Bob Cratchit.
These days, you might choose to help more than one family by giving to a favorite charitable cause. With a little planning and foresight, it should be possible to arrange a gift that's life-giving and sustaining, in the spirit of Scrooge's Christmas feast, and that helps many people, while also conferring practical advantages on the giver.
A SPECIAL WAY TO GIVE
One way to do this is to give an appreciated security, an investment such as a stock, bond or mutual fund share that's been owned for longer than a year and which has gone up in value. The historic success of the stock market in recent years has helped many people to see their investments grow dramatically, putting them in prime positions to donate appreciated securities. Real estate can also be used to make this kind of gift.
"With the run-up in the stock market, we see a lot of individuals who have been blessed beyond what they need for income," says Mitch Barnes, a family wealth counselor in Louisville, Ky., who facilitates gifts to support MDA's programs in research, clinic services and summer camps for children. Barnes started urging clients to include a philanthropic component in their financial planning after his son, Mitchell, received a diagnosis of Duchenne muscular dystrophy in February 1998.
Barnes says that, in order for the giver to reap the advantages, the gift has to be made in the right way.
Take, for example, the case of an investor who bought $2,000 worth of a stock 10 years ago. Say that those shares have risen in value to $10,000, making a sizable capital gain. Suppose also that the investor feels motivated to make a charitable gift and doesn't expect to reap much more gain by holding on to that particular investment.
You might think the best way to make a charitable gift would be to sell the stock and contribute the $10,000 realized from the sale to a cause such as MDA. Think again.
Yes, a cash charitable gift of this nature will entitle the giver to deduct the gift amount from the adjusted gross income portion of his income tax return on April 15. This kind of benefit can be particularly helpful if the donor's income has risen and he wants to prevent himself from being bumped into a higher tax bracket.
Unfortunately, the donor will have to pay capital gains tax on the $8,000 gain, resulting in a tax liability of as much as $1,600 and effectively nullifying a good portion of the tax benefit derived from the gift. |
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Rules for Giving Appreciated Securities
- Gift must be completed by Dec. 31, 1999, in order to reduce your 1999 taxes. All pertinent documentation must be kept.
- You must have owned the security for more than a year.
- You must itemize your deductions on your tax form.
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Tax Advantages of Giving Appreciated Securities
- No capital gains tax.
- Market value of gift is tax deductible.
- Deductions not used in the present year can be "saved" for subsequent years.
- The higher your tax rate, the more you save from each dollar donated.
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AVOIDING CAPITAL GAINS TAX
There's a way to basically make the same gift, while avoiding the $1,600 capital gains tax bite: by simply giving the security outright, instead of selling it first. When you hand over ownership of an appreciated security that you've owned for more than a year, you're still entitled to deduct the fair market value from your adjusted gross income. In addition, you'll bypass the whole process of paying capital gains tax, no matter how much the investment has grown.
Barnes says that some people who make the mistake of selling a security and giving the proceeds to MDA, rather than giving the security, compound the problem by deducting the amount of the capital gains tax from the dollar amount intended for MDA.
"Thus, a gift that was meant to be $100 for MDA ends up being an $80 gift," Barnes says. Giving the appreciated security rather than cash avoids this trap and allows the charitable cause to make full use of the gift amount to implement its programs.
A key to deriving the best benefit from this kind of contribution is to pick the security you own that has realized the greatest capital gain.
If you've held a security that has decreased in value, it's still possible to use it to make a gift. In this case, you may want to sell the security first and donate the resulting cash to realize a capital loss which can be used to help reduce your taxes. The gift amount will still be tax deductible, resulting in a tax benefit potentially greater than the current value of the security.
Gifts of cash are fully deductible up to 50 percent of your adjusted gross income, while gifts of qualified assets are deductible up to 30 percent. The excess can be used to reduce your taxes in as many as five additional tax years.
Life insurance policies that have built-up cash value and that are no longer needed for their original purpose can also make convenient tax-deductible charitable gifts.
GIVING PAINLESSLY
Barnes says that some people with sizable assets shrink from philanthropic giving because they don't want to eat up assets intended for family members or heirs. But he says potential contributors change their minds when they realize that an astute financial planner can formulate a gift out of funds that would otherwise go to pay taxes.
"They're happy when they realize their families aren't losing anything, they're just not going to pay so much in taxes," Barnes says.
Ask your financial adviser for more information on giving appreciated securities. You can also call Fred Stecker, director of MDA's planned giving program, at (800) 572-1717, or Mitch Barnes at (800) 465-5188.  |
