“Just Give it Away.” – George Strait
Jim Shellenberger, CFA | Financial Advisor
George Strait sings about a heartbroken man whose wife is leaving him, refusing to take anything with her. Instead, she tells him to “just give it all away”: the picture from their honeymoon, their king-sized bed, her diamond ring, her share of everything. If the thought of just giving all your assets away petrifies you, do not fret for that’s not what this commentary will urge you to do. The lyrics of this song seem quite fitting for discussing philanthropy, though. With the run-up in stocks we have experienced this past year, many individuals may be sitting on some highly appreciated assets. The good thing about that – well, one of the many good things – is that those holdings can be donated in several tax-advantageous ways which can benefit both you and the charity of your choice, and also help you rebalance your portfolio.
Why donate in-kind? An in-kind security donation allows an individual to contribute financially to a charity in such a way that neither the charity nor the individual are forced to realize the capital gains on that security. The benefits of this option are that a larger sum of money actually goes to the charity and there is a reduction in tax obligations and capital gains. This option also comes with an opportunity to rebalance the individual’s investment portfolio by donating highly appreciated securities. Below is a visualization demonstrating the potential benefits of donating securities in-kind versus selling securities and donating the cash directly. For the example below, the security has appreciated from $100k to $150k for a $50k long-term unrealized gain. The example couple has to pay 20% capital gains tax and are in the 37% tax bracket.
By donating in kind, the couple was able to save $10,000 in capital gains tax and $3,700 in income tax. The charity also received $10,000 more than they would have, if the individual had sold the securities and simply donated the proceeds. While this specific scenario is for donating securities, it can be applied to any asset.
What about a donor-advised fund? A donor-advised fund gives you more flexibility than donating a security in-kind. But what exactly is a donor-advised fund? Think of it as a personal giving fund. You can contribute cash, securities, and other assets to this fund. As soon as you contribute to it, you get the charitable tax deduction. Once in the fund, you can invest the money and let it continue to grow tax-free. When you choose to support a charity, you can direct your account to make a grant to most qualified 501(c)(3) public charities (the majority of organizations accepting donations should fall under the 501(c)(3) status.) The donor-advised fund allows you to donate, get the tax deduction right away, and then spread out your donations to charities when and where you see fit. It is almost like your personal, private foundation.
Donate RMD? Once you are 70 ½ years of age, you can donate to qualifying charities straight from your IRA through a process called qualified charitable distributions. Such qualified charitable distributions can be a tax-efficient way of meeting your required minimum distribution (RMD), and you won’t even need to itemize your deductions to benefit. This strategy is best suited for someone who does not need their RMD from the IRA and who, instead of paying the income tax on it, would enjoy donating to a qualifying charity. In the process, they help themselves pay less taxes.
When looking to give some of your money away, the different strategies are important to consider. If you feel like the wife in the song and simply want to “just give it away,” there are better succession tools. However, if you have a philanthropic inclination and wish to see the charity of your choice get as much of your donation as possible – and wouldn’t mind personally saving some in taxes while at it – consider these strategies.
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