Scott and Pat advise a caller who wants to donate to charity, but doesn’t understand the risks.
Scott: Steven, you're with Hanson McClain.
Steven: Yeah, hi, thanks for taking the call.
Steven: Okay, I was going to give a contribution to a charity, and I was going to do it by selling some stock and then taking the money from that and then donating that money to the charity. But I was thinking, wait a minute, if I do that, I'll get taxed for capital gains. So I thought, well, then maybe I'm better off just by donating stock directly to the charity.
Steven: That is a better idea?
Scott: Yes, absolutely. If you have the ability to gift appreciated assets to a charity, you...
Scott: Listen, by the way, anybody out there that is giving any amount of money more than let's say $500 a year.
Pat: This is the way to do it.
Pat: So let's ask a little bit about the charity because some charities have the ability to take … large charities do, but small ones don't … but there's a way around that which is by using what's called a gift trust.
Scott: Donor-advised fund.
Pat: Or a donor-advised fund. So tell me about the charity you're giving the stock to.
Steven: Okay, the charity is a senior organization. It hosts lunch and community events.
Pat: Okay, so it's small. It's pretty small?
Steven: It has a clientele of maybe 200 people.
Scott: Okay. So first, so I would ask them, Steven, say, "Look, can you guys accept stock or mutual fund shares of securities as a donation?" If they say they cannot, you can set up a donor-advised fund at many of the large institutions: Charles Schwab, Fidelity, TD Ameritrade, and they're very simple. And what happens with that, you take your securities and you instruct them. Let's say you want to transfer $1,000, you say, "Please transfer," and you just calculate how many shares that's going to be. And it's going to work out close to it because you're not going to know the exact price of the date of transfers. You say, "Please transfer X number of shares of ABC company to this nonprofit," and they do that. And then whatever the average trading price was that day between the high and the low, that is the value of your gift. And as long as you've held the shares for more than 12 months, you are eligible for a tax deduction for that.
Pat: And you do not have to pay capital gains on it.
Pat: So I'll tell you how my wife and I manage this. Throughout the year, we know how much approximately we're going to give to charity throughout the year. We don't know exactly, dollar for dollar, which charities they're going to go to. So what we'll do is we'll actually transfer appreciated assets in the form of either exchange-traded funds, stocks, or mutual funds...
Scott: Or real estate.
Pat: ...or real estate to this gift fund. Once it gets in there, it's liquidated. We liquidate it, and it goes in cash. And Scott Hanson's wife calls up and said, "Hey, Pat. Can you give $1,000 to Casa?" I just go online. I type in the name of the charity and their tax ID number, and it populates the field. I say, "Okay, I'm going to give $1,000 here." It comes right out of this account and goes to the charity.
Pat: It is so simple. We give to our church the same way. We give to the Sacramento Food Bank and Family Services the exact same way. It all comes out of this account. I get the deduction when the money goes in, not when it's given away.
Steven: Okay, what is that process called, again, please?
Pat: It's called a donor-advised fund or a gift trust. It goes by both names. They're available through... If you've got a financial advisor, we set them up for our clients in our firm all the time.
Pat: All the time. We recommend them as a great way, if you're charitably inclined, to give money away. Now, you can replicate that stock you just gave away of that mutual fund, immediately.
Steven: Oh, okay.
Pat: So even if I wanted to keep that particular holding, I give $10,000 of that holding away, I turn around and buy $10,000 back in my portfolio, and I've reset my cost basis on it, which is a good thing.
Scott: There's a limit for tax deduction. First of all, you have to itemize your deductions, and it's limited to 30 percent of your adjusted gross income. So just as a rough example...
Pat: And if you're giving away 30 percent of your adjusted gross income, Steven, you are an incredible man.
Scott: But it also carries forward to other years. So let's say you have a particular stock you own that's way up in value and think, "I'd like to give this over the next number of years. Stock's high now. I don't want to incur any tax liability by having capital gains. You can transfer to a donor-advised fund or a charity...actually, a donor-advised fund at that particular point would make sense. You get the tax deduction that year and whatever you can't use that year carries forward to future years.
Steven: Okay, you’ve kind of answered my second question which was, is there a cap or a limit on how much you could donate in stock? I guess my question...
Scott: Yes, so it's 30...and it's actually so important. If it's a private foundation, I believe the limit's 20 percent, not 30 percent, so that's a private foundation. And if it's cash, it's up to 50 percent. So those are the limits.
Pat: But for stocks, you get the deduction...
Scott: Appreciated assets. And if you haven't held the asset for at least 12 months, the tax deduction is limited to your cost basis, not the fair market value. We appreciate the call, Steven. It's interesting, Pat, as we talked with a guest we had on, Dr. Jacquelyn James, from the Center of Aging and Work at Boston College, who talked about how retirees want to make a "contribution," was the word that she used a number of times, making a contribution to Society. And here you are, Steve, you’re a perfect example of this.