Philanthropy Using Appreciated Assets
Updated: May 15, 2021
Long-term capital gain assets are a great resource for funding charitable gifts and furthering the causes that matter most to you. The leading impediment to charitable giving from your portfolio is the income tax liability that results when you reap capital gains. (This will become an even bigger issue if/when the American Rescue Plan is enacted.) There are several ways to relieve this impact:
1) Give appreciated assets in your non-exempt portfolio directly to the exempt organization. Let the organization convert them or retain them in their own portfolio. Either way, you can take a deduction* for the fair market value of the the shares -- and you do not recognize the embedded gain in your taxable income. This works well if you already have a "favorite cause" you want to support or if you want to give a one-time gift. It works reasonably well even if you want to restrict the organization's use of the funds to particular projects -- provided you negotiate that with them up front. If you later choose to make gifting a habit, you can always do it again. However, assets remain at risk of loss in your portfolio until you make the subsequent donation.
2) If you don't yet know which charity best reflects your philanthropic goals, think about Donor Advised Funds (DAF). DAFs are the "have your cake and eat it too" of deferred philanthropic giving. A DAF is administered by an exempt organization. Direct transfers to the DAF qualify for charitable deductions and enjoy, for the most part, the same status as transfers directly to an exempt organization. The advantage is -- the transfer itself triggers the deduction, but distributions from the DAF to your chosen charities can be deferred. DAFs are, therefore, a way to establish a long-term philanthropic program, get your deduction up front, and avoid the complexity of private foundations and planned giving scenarios. You surrender some control over the funds and incur some fees, but DAFs are a very good vehicle for long-term philanthropy.
DAFs are our default vehicle-of-choice for "hard to value assets" that you want to give to charity -- e.g. real estate, privately held business interests, collectibles.
3) If you face Required Minimum Distributions (RMDs) from your exempt accounts (A polite way of saying you're getting old?) and you don't need the cash flow - consider making Qualified Charitable Distributions (QCDs)* (direct transfers from your exempt account to a qualified exempt organization) instead. If you make a QCD, you deduct the contribution whether you itemize or not - the deduction (up to $100,000 / year) directly offsets the income you recognize from the distribution. It's as if you never received the income - AND it satisfies your RMD requirement. The main caveat: You should not gift using a QCD if you need the retirement income for living expenses... charity begins in the home, but so too does starvation.
*1 IRC 170 permits an itemized deduction for contributions to certain types of exempt organizations. Whether the deduction is tax-effective depends on your personal circumstances.
*2 There is a small amount of paperwork and hoop-jumping involved with QCDs. Most stock brokers and investment advisors can assist you with this, but it's best to run it by your tax advisor as well.