Gifts of Appreciated Assets

Contents

1. The two gifts side by side
2. What the donor deducts
3. What the charity receives
4. Limits, forms and appraisals
5. Losers, trusts and the remainder

Brent O’Mara supports PlaySmart, Angels Among Us and Susan G. Komen in Omaha, and a gift to any organization of that kind can be made in two ways that look alike and are not. The first is to sell something that has grown in value and give the proceeds. The second is to give the thing itself. The charity ends up with the same dollars either way, and the donor’s income tax deduction is the same either way, but the first route leaves the donor with a capital gains bill and the second does not. The New York Times put the distinction first on its list of ways to give more at no extra cost: give appreciated assets to a qualifying charity instead of cash.²

The two gifts side by side

The Times example is worth following in full. A donor in the 25 percent bracket gives shares that cost $3,000 years ago and are worth $10,000 on the day of the gift. The direct tax saving is $2,500, the same as for a $10,000 check, but the donor also escapes the 15 percent capital gains tax that a sale would have triggered on the $7,000 gain, a further $1,050.² In an American College of Trust and Estate Counsel video, a fellow reduces it to a single share bought for $10 and worth $100: the donor deducts $100 and never recognizes the $90 gain, and the charity, being exempt from tax, loses nothing by receiving stock it must sell rather than cash.⁴ Money’s rules for year end giving call it two tax breaks for one gift: no tax on the gain, and a deduction for the full market value.³

Figure

Sell first or give the shares

	Sell, then give the cash	Give the shares directly
Shares bought for $3,000, worth $10,000	Donor sells and gives $10,000	Donor transfers the shares
Income tax saved, 25 percent bracket	$2,500	$2,500
Capital gains tax on the $7,000 gain	$1,050 owed by the donor	None, the gain is never realized
What the charity can keep	$10,000	$10,000, since it pays no tax on the sale

What the donor deducts

The deduction depends on how long the asset was held. Kiplinger explains that shares owned for more than a year can be deducted at their current value by a donor who itemizes, with no tax owed on the appreciation; the holding period is what turns the gain into long term gain and the gift into a full value deduction.¹ The Internal Revenue Service states the general rule that property other than cash is deductible at fair market value, with adjustments when the property has appreciated, and refers donors to its publication on valuing donated property.⁵ The deduction itself is subject to the itemizing requirement and the ceilings described in the charitable deduction.

Those ceilings are lower for property than for cash. The Atlantic, summarizing a Forbes columnist in 2010, recorded the traditional limits: adjusted gross income could be reduced by up to 50 percent for cash gifts to public charities and by up to 30 percent for donations of appreciated assets such as stock held longer than twelve months.⁶ The IRS confirms that a special limitation applies to certain gifts of capital gain property held long term, alongside the 30 percent ceiling for gifts to private foundations and similar organizations.⁵ Amounts above a ceiling are not lost; the IRS allows them to carry forward.⁵

What the charity receives

The charity’s side is simpler. The college fellow’s point is that a tax exempt organization does not care whether it receives stock or cash, because any gain on the stock when it sells is not taxable to it.⁴ What the charity does need is notice. Kiplinger quoted the development officer of a large food bank, which had seen a rise in gifts of appreciated stock, on the practical problem: shares that arrive by electronic transfer often arrive without the donor’s name, leaving the organization with a mystery, so the donor should tell the charity the name of the stock, the number of shares and the expected date, and should ask for a receipt for the tax file.¹ The gift counts on the date the shares are transferred, which must be by December 31 for that year’s deduction, and a brokerage transfer form is usually required.¹

Figure

Giving shares before year end

1. 01
   Check the holding periodShares held more than a year qualify for a deduction at current value; shares held less do not get the full benefit.
2. 02
   Contact the brokerageA transfer form is usually required, and the broker should confirm the transfer can clear by December 31.
3. 03
   Tell the charityGive the name of the stock, the number of shares and the expected arrival date, since electronic transfers often arrive without the donor's name.
4. 04
   Get the receiptThe gift counts on the date the shares move, and the charity's receipt goes in the tax file.

The same logic extends past publicly traded shares. The Times cited a charitable giving instructor at a law school who described a couple considering gifts of paintings from a collection worth several million dollars to a museum and a man weighing gifts from a rare book collection; the tax savings could be considerable, but the rules are more complicated than for securities.² CNBC’s survey of trust planning listed the assets families move in this way, appreciated securities, art collections and land, and noted that a donor who places one in a charitable trust can take annual income from it and deduct the gift in the year the trust is created.⁸ The donor who wants to give over time rather than at once can place the shares in a donor advised fund, taking the same deduction in the year of the transfer.¹

Limits, forms and appraisals

Property brings paperwork that cash does not. Money’s rules note that a donated car or other property worth more than $500 requires Form 8283 with the return, and that a vehicle’s deduction is generally limited to what the charity gets by selling it.³ For gifts valued above $5,000, the Times reported, a qualified appraiser must value the property within 60 days of the gift, and the appraiser and the charity must sign Form 8283 for attachment to the donor’s return.² Used clothing and household items are deductible only in good condition or better, at values the donor rather than the charity assigns.³ Which asset to give depends on individual circumstances, including what else is in the estate, so qualified professionals in tax, estate law and planning belong in the conversation before shares are moved.

Figure

One share, two outcomes

paid for the share years ago

$10

its value, and the deduction, on the day of the gift

$100

gain the donor never recognizes

$90

tax the charity pays when it sells

$0

Losers, trusts and the remainder

The rule has an inverse. Kiplinger’s advice is that an asset which has lost value should be sold first and the cash given, because the deduction is still based on current value while the loss becomes available to offset other gains, and up to $3,000 of any excess loss can be deducted against ordinary income.¹ For the largest gifts of appreciated property, the structure of choice has long been a charitable remainder trust. CNBC explained that such a trust is tax exempt, so a person with substantially appreciated property who has planned a bequest to charity may find that moving the property into the trust during life delivers income tax benefits the bequest never would, with the gain avoided at sale.⁷ The mechanics are the subject of charitable remainder trusts.

What the gift cannot do is as clear as what it can. It cannot turn a loss into a benefit; the loser should be sold. It cannot lift the donor past the income ceilings in a single year, though the excess carries forward. It cannot skip the appraisal that property above $5,000 requires, or the form that property above $500 requires. And it cannot help a donor who takes the standard deduction, for whom, as CNBC noted of the estate tax exemption, the charitable deduction on either side of death has ceased to matter and income tax planning is what remains.⁷ The shares still do the charity the same good. The arithmetic is only ever about who pays the tax on the way there.