For many of us, we pull out our checkbook when it is time to make gifts to our favorite charities. Have you ever considered there may be a more efficient and tax-effective way of giving?
After all, by writing a check to your favorite charity, you are donating already taxed dollars whether those dollars were taxed through a W-2, 1099 or as part of a Required Minimum Distribution. Now, what if you don’t want to dip into your cash reserve to write that check? You take a distribution or sell stock to create more cash flow, right? Have you considered that what you really did was create tax to create cash to create a deduction?
There is a better way.
Jack and Dee Twain have consistently made annual gifts totaling $5,000 to their church, their alma mater and the local symphony. With a combined income of $175,000, the Twains’ portfolio includes liquid investments valued at $2.5 million including $100,000 worth of XYZ stock that Dee purchased with a $40,000 inheritance several years ago. The Twains want to sell XYZ stock but don’t want to pay the $11,550 in capital gain tax.
By creating a donor-advised fund, the Twains are able to endow their annual giving while eliminating the capital gain tax on the sale of XYZ stock.
So how does it work?
-
- The Twains open a DAF through a sponsoring charity, like the Renaissance Charitable Foundation (RCF)
- The Twains’ financial planner transfers XYZ stock to the DAF.
- Jack & Dee work with their financial advisor, with the guidance of RCF, to create an investment strategy for the proceeds of the sale of XYZ stock so it continues to grow creating more dollars for charity.
- Jack & Dee start granting money to their favorite charities!
- The Twains open a DAF through a sponsoring charity, like the Renaissance Charitable Foundation (RCF)
How does utilizing a DAF compare to selling the stock outright?
| Capital Gain Tax | Income Tax Deduction | Gifts to Charity | Reduced Tax Burden | Increased Cash Flow | |
| Outright Stock Sale |
$11,550 |
$0 | $5,000 | $1,400 | $0 |
| Donating Stock to DAF |
$0 |
$100,000 | $5,000 and growing | $28,000 | $5,000 |
By transferring the XYZ stock to a donor-advised fund, they receive an immediate $100,000 income tax deduction, which reduces their tax burden by $28,000. Also, with all of their charitable giving coming from The Twain Family Foundation, they have freed up $5,000 of cash flow each year to use for other purposes.
After the stock transfer to the Renaissance Charitable Foundation the stock is sold and the proceeds re-invested in mutual funds or a mannaged account designed to produce an average yield of 6%. The financial advisor also recommends the Twains purchase additional investments with a portion of their tax savings and their previous checkbook giving of $5,000, and within a few years, the new investments may equal or exceed the $100,000 value of XYZ stock. Additionally, the Twains will have a higher cost basis in the new investments.
Contact us to find answers to any of your other charitable planning questions.
Disclosures
Assumptions:
-
- Marginal Federal and state capital gain tax rate of 19.25%.
- Deduction may be limited. Consult a tax advisor.
- For illustration purposes, the income tax burden reduction reflects the Twain’s Federal marginal rate of 28% since many states do not permit itemized charitable deductions.
This example is hypothetical and for educational use only. The situations, tax rates or return numbers do not represent any actual clients or investments. There is no assurance that the rates depicted can or will be achieved. Actual results will vary. Please consult with legal and tax counsel about the suitability.
