CHARITABLE GIFTS OF STOCK

People give to charity for a variety of reasons. These range from soul soothing, peer pressure, furthering the work of a particular organization, a desire to be remembered after they are gone, to improving the quality of life for others, a desire not to leave property to relatives and finally, tax savings.

When most people think of giving charitably, they usually consider giving of their time or making a cash donation. Rather than cash, some donors may want to consider giving away a growing asset, for example, common stocks. These donors should keep two things in mind. First, the capital gains tax is a voluntary tax-- you only pay it if you sell an appreciated asset. The estate tax is involuntary--it's due nine months after death essentially no matter what. One philanthropic way to avoid both these taxes is to give highly appreciated securities to a charity.

Charities are tax exempt entities. When someone gives these types of assets to charities there is no tax on their appreciation. They have also removed this asset and all future appreciation from their taxable estate. Finally, they receive a current income tax deduction for the contribution.

Sometimes donors hold a stock position with which they are comfortable and from which they expect continued success from in the future. They also plan to make a charitable gift for the year in cash. One variation on charitable giving is to make a gift of the favored stock and replace the position with the cash. This effectively removes the past appreciation by giving the replacement stock a kind of “stepped up” cost basis.

Charities are broken down into two types, 50 percent charities and 30 percent charities. The percentage refers to the maximum percentage of adjusted gross income (AGI) that may be claimed as a charitable deduction by a donor in any one year. Fifty percent charities include churches, schools, hospitals, endowment funds for public universities, and state and local governments. Special rules apply to other types of private charities.

Gifts of capital gain property, such as stocks, are subject to further limitations. To qualify as a donation of capital gain property the item must qualify for capital gains treatment (e.g. property held for investment) and must have been held for more than one year. Gifts of capital gain property to 50 percent charities are limited to 30 percent of AGI. Donations of capital gains property are generally valued at the fair market value at the time of the donation.

Gifts of appreciated securities can also play important parts in more sophisticated charitable giving techniques, such as charitable remainder trusts. If you are considering such strategies and would like to maximize the benefits of your gift, talk to an investment adviser to explore your alternatives.