‍Gifts of appreciated stock: Let the numbers do the talking

No matter how frequently you remind clients to pause before they automatically reach for the checkbook to make their charitable gifts, many clients still give cash! As an attorney, accountant, or financial advisor, you know that giving long-term appreciated assets is often one of the most tax-savvy ways your clients can support their favorite charities. Nevertheless, it’s sometimes hard to convey that message to clients with words that stick. Next time, consider using illustrations to help clients see the benefits.

Below are three simple examples* to help you show your clients the benefits of giving appreciated stock.

‍Case Study 1: Sally and Bob Jones give $100,000

Sally and Bob Jones plan to give $100K to their donor-advised fund at the community foundation to organize all their giving for the calendar year. Let’s assume Sally and Bob have a combined adjusted gross income of $600K, which lands them in the 35% federal income tax bracket. If they gave $100K in cash to their donor-advised fund, they could realize a potential income tax savings of $35K.

What if instead of giving cash, Sally and Bob gave highly-appreciated, publicly-traded stock, valued currently at $100K, to their donor-advised fund? Let’s assume they’ve held the stock for many years, and the shares have a cost basis of $20K. Not only are Sally and Bob eligible for a potential income tax deduction that will save them up to $35K, but they have also potentially avoided $12K of capital gains tax that they would have owed if they’d sold the stock (using a long-term capital gains tax rate of 15%). So, it’s easy to see why Sally and Bob should consider giving highly-appreciated stock instead of cash.

Case Study 2: Jenny and Joe Smith give $1 million

Jenny and Joe Smith plan to give $1M to community causes this year. They’ll do that by adding $500K to their donor-advised fund at the community foundation, which in turn they will use to support their favorite charities. They’ll also be making a $500K gift to an unrestricted fund at the community foundation to help address the region’s greatest needs for generations to come. Let’s assume that Jenny and Joe are in the highest federal income tax bracket because they earn multiple seven figures. If they were to give $1M in cash, they could save, potentially, up to $370K in income tax. If they gave publicly-traded stock instead of cash, assuming a $200K cost basis in stock valued currently at $1M, they would still potentially save up to $370K in income tax, and they would also potentially avoid $160K in capital gains tax (based on a long-term capital gains tax rate of 20%).

Case Study 3: Tiffany and Brett Thomas give $5 million

Tiffany and Brett Thomas plan to give a target amount of $5M to charity as the cornerstone of their overall philanthropy plan. They would like to use publicly traded stock that they’ve held for many years, valued currently at $5M. They would love to receive a lifetime income stream from these assets so that the remaining assets will flow to their fund at the community foundation after their deaths. In this case, you’ll explore setting up a charitable remainder trust that pays out an income stream to Tiffany and Brett while they are both living and then to the survivor for the survivor’s lifetime.

Let’s assume that Tiffany and Brett are both 55 years old. And let’s assume that the stock has a very low-cost basis – just $500K – because they’ve held it for so long. Depending on the IRS’s applicable rates, and assuming a 5% annual payout rate paid at the end of each quarter, here’s an approximate tax result if you worked with the community foundation to help Tiffany and Brett establish a charitable remainder trust:

–$1,042,550 approximate potential income tax deduction based on the present value of the gift of the remainder interest to charity

–$4,500,000 in capital gains that may not be subject to tax

–$250,000 in total payments during the first year

–Annual payments of 5% of the value of the assets in the trust, which means the income stream will fluctuate depending on the value of the assets

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Following the death of the survivor of Tiffany and Brett, the remaining assets will flow to the Thomas Family Fund at the community foundation, which Tiffany and Brett have already established and which, upon their deaths, will split equally into two funds. The first fund will be a donor-advised fund for which their children will serve as advisors, and the second fund is an unrestricted endowment fund to support the community foundation’s priority initiatives in perpetuity.

Of course, no client’s circumstances will exactly match those of Sally and Bob, Jenny and Joe, or Tiffany and Brett. The net-net here, though, is that we are happy to discuss the various tax-savvy options for charitable giving in any client situation. Please reach out. We’re here for you! It is our honor to help you serve your charitable clients.

*These examples are for illustration purposes only. Every client’s situation is different, and therefore the tax strategy and tax impact will be different for each client. For example, these illustrations are based on federal income tax rates only, and you’ll need to evaluate, among many other factors, the impact of state taxes.

“Shell funds” and other handy tools for charitable clients who are planning ahead

Getting a jump on a future “to-do” list is always such a good feeling. We can help you with your clients’ long-term charitable giving plans by putting in place the structures to receive bequests decades from now.

Consider a case where you’re finalizing an estate plan for a client who would like to leave bequests to multiple charitable organizations, but the identity of those specific organizations may be a moving target over the years because of the client’s evolving level of engagement with various charities as a donor, volunteer, or board member. In other words, this client likely will want to make small changes to the estate plan’s provisions for charitable giving but leave everything else as is. For example, a client’s trust could be drafted to provide that 10% of the remaining estate be divided equally among five charities, which, of course, could be listed in the trust document. But what if, a few years from now, the client wants to add another charity to that list? Even a small change like this would require an amendment, which can be time-consuming for both the attorney and the client.

Instead, the client’s trust document could name a fund at the Foundation as the beneficiary of 10% of the remaining estate. Then, the client can work with our team to draft a fund agreement that lists the charities that will share the 10%. When the client wants to add new charities or switch out charities from the list, the client can reach out to us and execute simple documentation of their updated intent for the fund. This process is fast and simple and allows clients to ensure that their bequests are in line with ever-changing needs in the community.

In some cases, the client may not intend to use the fund during their lifetime. That’s perfectly fine; we can establish a “shell fund” to sit dormant and receive assets only after the client passes away. Your client can still name the fund whatever they’d like, and the shell fund agreement can be modified any time before the client’s death.

Please reach out to us to learn how shell funds and other planning tools can help your clients achieve their charitable goals both during their lifetimes and beyond.

 Charitable planning for wealthy clients: In the spotlight

As you read up on techniques to structure philanthropy plans for your high-net-worth clients, we recommend reviewing the potential impact of the estate tax exemption sunset, as well as making sure you’re one of just half of advisors who are truly helping their clients with charitable giving in the first place. We’re happy to help you start the philanthropy discussion with clients; we understand that it’s not always easy, but it’s so important.

‍The team at the Foundation is a resource and sounding board as you serve your philanthropic clients. We understand the charitable side of the equation and are happy to serve as an informed partner as you manage the primary relationship with your clients. 

‍This newsletter is provided for informational purposes only. It is not intended as legal, accounting, or financial planning advice.