Lasting Legacy
Experts break down the three major types of planned giving


Sept. 2018

When handled correctly, charitable donations are a win-win situation for both the giver and the receiver. Today, there are three primary types of charitable donations and each has advantages for specific financial situations. Before you write your check, you should feel confident of which one is right for you. Understanding the ins and outs of a charitable gift is the best way to assure that it really is “better to give than to receive.”

Gifts that use appreciated assets as a substitute for cash

If you have appreciated stock or mutual funds, you will have to pay a capital-gains tax if you sell them. If you have held the asset for more than one year you can donate all or part of it to a charitable organization and forgo paying the corresponding capital gains tax. In other words, if you donate $5,000 worth of a stock for which you paid $2,500 for the shares, you avoid a $2,500 long-term gain, saving $375 at the 15 percent tax rate. And because the charity is tax-exempt, it can sell the shares without paying taxes.

“This would work well for someone that has a concentrated position and is looking to diversify out of it (reduce the stake/risk),” says Bryan Sadoff of Sadoff Investment Management. “By donating some of the appreciated concentrated position, this strategy would help reduce the risk of that large position to the owner and also avoid realizing the gain — and thus paying tax. Conversely, someone with a diversified portfolio that has a stock that has gone up in value quite a bit could save the capital gains taxes by donating the stock. This works well for someone that has cash to invest [and] could just re-purchase the position after they make the donation. They can still have a position in that stock.”

“Either outright gifts of appreciated assets or gifts of appreciated assets to charitable remainder trusts work really well,” adds Jennifer R. D’Amato of Reinhart Boerner Van Deuren. “An outright gift of appreciated securities makes sense for many taxpayers. For example, Mr. Smith pledges $10,000 to a charity. He can either sell securities, pay capital gains taxes and give the net cash, or he can simply ask his broker to move appreciated securities to the charity. If the securities have a basis of $2,000 but a value of $10,000, Mr. Smith avoids taxes on $8,000 of capital gains. The charity can liquidate the securities free of tax, thanks to its tax-exempt status. Everyone wins.”

“One disadvantage to this form of giving — after gifting, the client loses the benefit of the adjustment in basis at the time of death. Under the adjustment in basis rules, any beneficiaries of the client’s estate receive an income tax basis on the property they inherit equal to the fair market value of the property at the time of the client’s death,” notes Frank Mularz of Investment Services at UW Credit Union.

Gifts that return income or other financial benefits to the donor following the contribution 

These are usually sizable gifts and require a contract between the donor and a recognized charity. In the agreement, the donor makes a gift to charity using cash, securities or other assets. In return, the donor is eligible to take a partial tax deduction and receives a fixed stream of income from the charity for the remainder of their life.

“This would be for someone of high net worth,” Sadoff says. “It requires that an attorney set it up, and there are tax filings that need to be done too. One needs to be dealing with a lot of money to make it worthwhile ... and be very charitable.”

Gifts payable upon the donor’s death

These gifts are payable to the charity upon the donor’s death. They do not generate a lifetime income tax deduction for the donor, but the advantage is that they are exempt from estate tax.

“This is for someone that isn’t certain they aren’t going to need the money to support their lifestyle, and they’d rather keep the money for themselves in case they will need it and then donate later,” says Sadoff. “For some people, it is important to actually see the new building or program that their donation started; this is better suited to someone who doesn’t necessarily feel the need to see the money put to use by the charity while they are still alive.”

“It’s best to give to charity those assets that would be taxable as ordinary income if left to the taxpayer’s heirs, such as retirement accounts, D’Amato adds. “This is because the charity can receive them free of income tax, due to their tax-exempt status. Then the other assets that are not taxable can be left to the heirs.”

This story ran in the Sept. 2018 issue of: