Planned Giving Examples

Whatever your personal experience with Habitat for Humanity, you understand the value and benefits of owning a home and the importance your contribution has made in the lives of families here in the Mt. Washington Valley. You can help provide homeownership opportunities for generations by remembering our local affiliate.

Currently there are a number of approaches that can be used that may present tax advantages to you as a donor. Some of these are presented below for your review and consideration.

Should you require additional information, we would be happy to refer you to organizations that deal with investment products.

Thank you for you support of MWV Habitat for Humanity

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1. Give appreciated securities, rather than cash.
Donations made by cash or check are, by far, the most common methods of charitable giving. However, contributing stocks, bonds, or mutual funds that have appreciated over time has become increasingly popular in recent years, and for good reasons.
Most publicly traded securities with unrealized long-term gains (meaning they were purchased over a year ago and have increased in value) may be donated to a public charity, without the need to sell them first. When the donation is made, the donor can claim the fair market value as an itemized deduction on his or her federal tax return—up to 30% of the donor’s adjusted gross income. Other types of securities, such as restricted or privately traded securities and donations to nonpublic charities, may also be deductible, but additional requirements and limitations may apply. When the securities are donated, no capital gains taxes are owed, because the securities were donated, not sold. The greater the appreciation, the bigger the tax savings will be.

Here is a hypothetical example:

A couple, Bill and Margaret, purchased a publicly traded stock 10 years ago for $20,000, and it is now valued at $50,000. Let’s assume their taxable income places them in the 20% capital gains tax rate and they don’t have any long-term capital losses available to them to utilize. If they sell the stock first and then donate the after-tax proceeds to a public charity, they will pay a federal long-term capital gains tax of $6,000 on the $30,000 of gains, leaving $44,000 ($50,000 − $6,000) for their charity, and Bill and Margaret should then be able to claim the $44,000 donation as a federal tax deduction.

If, however, Bill and Margaret donate the stock directly to the charity, the tax calculation is based not on the gain but on the amount donated, and their tax deduction increases to $50,000. As a result of using this method, their charity receives an additional $6,000. One additional consideration: If you have long-term appreciated assets with an unknown original value, donating the assets directly to charity can save you the time and trouble of finding out the original basis and paying the applicable capital gains tax.

2. Consider establishing a donor-advised fund
A donor-advised fund (DAF) is a program of a public charity that allows donors to make contributions to the charity, become eligible to take an immediate tax deduction, and then make recommendations for distributing the funds to qualified nonprofit organizations on their own timetable. With charities that have donor-advised fund programs, you can make irrevocable contributions to the charity, which establishes a DAF on your behalf. There are a number of public charities, including Fidelity Charitable®, that sponsor donor-advised funds. You can then recommend grants to other eligible charities—generally speaking, IRS-qualified 501(c)(3) public charities—from your DAF.

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Establishing a donor-advised fund can be a particularly useful strategy at year-end because it allows you to make a gift and take the tax deduction immediately, but doesn’t require you to decide at that point to which charities that money will go. It can be a great way to offset a year with unexpectedly high earnings, or to address the tax implications of year-end bonuses.

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3. Consider using a charitable donation to offset the tax costs of converting a traditional IRA to a Roth IRA.
Even with higher top income tax rates, many investors are considering converting from a traditional IRA to a Roth IRA. In addition, the American Taxpayer Relief Act made it possible for active employees to convert a 401(k), 403(b), or 457(b) plan account to its Roth counterpart within the same plan.

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The most essential difference between traditional retirement savings vehicles (whether they’re IRAs or workplace plans) and the Roth versions is that with the former, contributions are usually tax deductible in the year they are made and can grow tax deferred within the account; the contributions and earnings are then taxed at “the back end” (i.e., upon withdrawal). With a Roth, contributions are not tax deductible. They are included in income and subject to income taxes, but subsequent growth, and withdrawals, are tax free.2 Roth accounts generally make sense if you believe your current tax rate is lower than it will be in the years you’ll make withdrawals; however, there are many other factors that must be evaluated to determine what makes sense in your individual situation.

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Any time you convert a traditional retirement savings account into a Roth, you will owe taxes on any pretax monies converted. Depending on the amount converted and your tax rate, the taxes on the conversion can be significant.
Converting in a year in which you can claim a large tax deduction, such as a charitable deduction, can be helpful in offsetting the conversion taxes. By taking a close look at your individual situation, it may make sense to develop a strategy of using a charitable deduction to offset conversion taxes. Developing such a strategy may give you an opportunity to give to a charity while reducing your taxes.

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4. Consider donating complex assets.
Donors may also contribute complex assets—such as private company stock, restricted stock, real estate, alternative investments, or other personal property—directly to charity. The process for making this type of donation requires more time and effort than the gifting of cash or publicly traded securities, but it has distinct advantages.
These types of assets often have a relatively low cost basis. In fact, for entrepreneurs who have founded their own companies, the cost basis of their private C-corp or S-corp stock may be zero. In cases in which these assets have been held for at least a year, the outright sale of the asset would result in a large capital gains tax for the owner. If, however, the asset is donated directly to a charity and the charity then sells the asset, the original owner is, in many cases, able to eliminate capital gains taxes on the sale of the assets, while potentially receiving a charitable donation deduction as well.

Take this hypothetical situation:

Karen is an entrepreneur who founded a private software company 20 years ago and intends to sell the business as she heads into retirement. Karen decides to donate a portion of her shares to a public charity before selling the business. If she obtains a qualified appraisal and completes the donation before the sale, she should be able eliminate capital gains taxes on the appreciation of the donated shares, and claim a tax deduction for them,3 based on the company’s appraised value.

Contributing these complex, nonpublicly traded assets to charity, however, involves additional laws and regulations, so investors should consult their legal adviser, tax adviser, or financial adviser. Also, not all charities have the administrative resources to accept and liquidate such assets. But many public charities with donor-advised fund programs, like Fidelity Charitable, are able to accept these assets and can work with advisers, providing them with guidance throughout the process.

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Once again, before undertaking any of these giving strategies, you should consult your legal adviser, tax adviser, or financial adviser. But, properly employed, each of the strategies represents a tax-advantaged way for you to give more to your favorite charitable organizations and causes.