As the holiday season approaches, our mailboxes are filled with ad campaigns, catalogs, and appeals from charitable causes of every stripe. As the saying goes, ‘tis the season for giving, and there are many worthy causes working to create positive change in the world through our generosity.
Even if you regularly give throughout the year, as we move into December and year-end giving, you may not know that you could be missing out on an important provision of the tax code while making an impact through your investments. This is especially true in a year like we have had in the stock market. Rather than making outright cash donations, giving away appreciated assets can be more advantageous. When you give away a stock or other security with a long-term gain, you get to deduct the full fair market value of the asset, potentially eliminating capital gains tax from the sale of the asset. By donating an asset, the charity receives the full value, you get the deduction, and the capital gains tax on that security’s appreciation goes away, forever.
There’s another secret to wise giving: a donor-advised fund. These are accounts that help you to time your deduction for maximum tax benefit. They can even be used to turn your sporadic acts of giving into a philanthropic legacy. These are especially attractive if you expect your tax rate to be lower in the future than it is this year. You get a tax deduction for the gift in the year that the funds are transferred into the account, even if the funds remain invested and are actually given to your favorite charity sometime in the future.
You may contribute appreciated securities, stocks, or non-liquid appreciated private assets, and real estate to a donor-advised fund. Just as the name implies, you decide which charities ultimately receive the contributions, and in what amount. Grants paid out to selected charities can be deferred, while contributions or transfers of assets made into your charitable account can continue to grow as the balance is invested or re-invested over time.
These two tools can be combined. Donate an appreciated stock to a donor-advised fund. It is important to establish a strategy to structure your assets and plan your contributions and giving to help ensure you and your chosen charities are getting the most benefit. You may even be able to pass on your passion for giving to the next generation through a family legacy account, or incorporate the use of donor-advised funds into your estate planning strategy, leaving a legacy that continues to make an impact beyond your lifetime. Some parents set up these accounts to teach philanthropy to their children and grandchildren.
There is still time to make a year-end contribution, but you need to act soon as the processing deadline is rapidly approaching. It is important to keep in mind that different assets may take longer to process than others, and so may have earlier deadlines. If you are interested in setting up a donor-advised fund and would like more information, contact one of our advisors to discuss your options.