Basics of Estate Planning: Getting the Most out of Charitable Gifts

Blog Author: Stephen C. Hartnett, J.D., LL.M. (Tax), Director of Education,
American Academy of Estate Planning Attorneys, Inc.

This is another in a series of blogs on the basics of estate planning.

Often, an individual wants to make a gift to charity. They don’t want something complicated, but they want to get the most bang for their buck.

Estate planning attorneys and other financial professionals know the client could just contribute cash to the charity. Certainly, that would be fine with the charity. But, there are ways which would be just as good for the charity, and would give a better result to the donor.

Perhaps the easiest way to get an increased bang for the buck is to give appreciated securities. If appreciated securities are given directly to a public charity, the client gets to deduct the full fair market value of the security and never pays tax on the gains which had occurred while the client held the property.

Let’s look at a quick example. Mary purchased Apple stock in its early days for what would be $10 per share, adjusting for splits in the interim. The stock is now worth $150 per share. Mary is considering giving 100 shares to charity. If Mary sells the stock, she will realize a gain of $150 less her basis of $10, or $140 per share, or $14,000. Depending upon her tax bracket and her state income taxes, she is likely to pay 20% or more of that in taxes. That would be $2,800. She could contribute the resulting cash, $15,000 less the tax of $2,800, or $12,200 to charity and would get a charitable deduction for up to that amount.

If, on the other hand, Mary gave the 100 shares of stock to the charity, she would not have realized the gain and would not have owed the $2,800 in tax. She would get the income tax deduction for the full $15,000 (assuming other limitations, such as on itemized deductions, etc., do not apply).

When the charity sells the stock, it will not have to pay tax on the gain as a tax-exempt entity. Thus, by giving the appreciated stock to the charity, Mary is better off because she gets a larger deduction. The charity is also better off because it receives property worth $15,000, instead of $12,800 in cash.

Using this simple trick, clients may easily get more bang for their charitable buck.

Upcoming blogs will examine more of the basics of estate planning.