Financial Abundance

As we celebrate the spirit of Thanksgiving we realize what a blessed and abundant life we have, even in tumultuous financial times. Many of us will want to share some of our blessings with those that are not as fortunate through our year-end charitable giving. Did you know that there is a simple and free way to give to all of your favorite charitable organizations and receive a double tax break? All you need to do is establish a Donor Advised Fund.

You may be aware that when you can give appreciated, long-term capital gain property, such as stocks, bonds and mutual funds, to a charitable organization, you can receive a double tax savings. You may deduct the full market value of the capital property as a charitable deduction plus you are not required to pay capital gains taxes on the property’s appreciated value. However, to give stock, bonds or mutual funds directly to multiple organizations can be both cumbersome and very time consuming.

To overcome the problems of directly gifting appreciated capital property, you can create a Donor Advised Fund. These are qualified, private, non-operating foundations that pool their donations and allow you to select your favorite charities for gifts. The gifts that you can make can be as little as $50 and can be given to any qualified charitable organization.

Donor Advised Funds are simple to establish. Fidelity, Schwab, Vanguard and other brokerage firms offer these accounts to their clients. Ask your brokerage firm if they provide for Donor Advised Funds and how you can set one up. You may even deduct more in a given year than you actually grant to your chosen charitable organizations, with any excess amounts available for charitable gifts in future years.

Let’s look at an example of how a Donor Advised Fund works. Suppose that you bought 100 shares of IBM stock in July 1993 at $10.50 per share (yes, it was actually that low in 1993!) You now wish to sell this stock, but you would prefer not to pay the long term capital gains taxes on your profit.

Today, IBM is trading at approximately $82/share. Your $1,050 investment in 1993 is now worth $8,200. If you donated this stock to your Donor Advised Fund, you would get an immediate charitable deduction of $8,200 and pay no capital gains taxes on your $7,150 capital gain. If you are in the 25% Federal and 5% State tax bracket, you would save almost $4,000 in taxes. Thus, a gift of $8,200 to your favorite charitable organizations has an after tax cost to you of only $4,200.

Even if you wanted to continue to hold IBM stock, you could gift the stock to the Donor Advised Fund and immediately buy 100 shares of IBM stock, which would have a new cost basis of $8,200. Since you are gifting the IBM stock and not selling it, the “wash rules” do not apply. This is a great method of increasing your stock basis while almost doubling the amounts of your charitable gifts, on an after tax basis.

Donor Advised Funds are similar to having your own charitable foundation, without the overhead and legal expenses required to establish a foundation. To make a gift to your charitable organization, you simply do an on-line request for gifts of $50 or more for each organization. It is easier (and cheaper) than writing a check. If this approach seems appropriate for you, either visit on-line or call your brokerage firm today.