This is another in a series of blogs on the basics of estate planning.
Often, our clients are interested in making a gift to charity in a manner that makes sense for their overall estate plan.
The client may just contribute cash to the charity. Certainly, that may be fine with the charity. But there are ways which may be just as beneficial for the charity, and provide a better result to the client.
One such option is to gift appreciated securities. If appreciated securities are given directly to a charity, then the client is allowed to deduct the full fair market value of the gift and never has to pay tax on the gains which had occurred while the client held the asset. See the example below.
Mike purchased ABC, Co. at $10 per share in 1998. It was a wise investment, and the ABC, Co. stock is now worth $150 per share. Mike is considering giving 1,000 shares to one of his favorite charities. If he sells the stock outright, he will realize a gain of $140 per share ($150 value less $10 basis) or $140,000. Depending upon his tax bracket and state income taxes, he is likely to pay at least 20 percent in taxes, which would be a minimum of $28,000. He could contribute the remaining cash, $112,000 ($140,000 less $28,000) to the charity and would get a charitable deduction for up to that amount.
If, on the other hand, Mike gives the 1,000 shares of stock to the charity now, he will not have any realized gain and will not owe any tax. Rather, he would get an income tax deduction for the full $150,000. When the tax-exempt charity sells the stock, it will not have to pay tax on the gain. Thus, Mike and the charity both benefit by Mike’s decision to give the appreciated stock to the charity now: Mike gets a larger deduction and the charity receives property worth $150,000 rather than $112,000.
This is a simple way to give valuable estate planning advice to your client.
Joe received his law degree from the University of North Carolina–Chapel Hill School of Law and his Accounting degree from the University of Rhode Island. He is admitted to practice law in Connecticut, Massachusetts, and Rhode Island, and he is a CPA. He is an Adjunct Professor and lecturer at the University level and has been a frequent speaker on business planning and legal matters.