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Sharing the Fruits of Success

Giving to charity is a great way to support causes close to your heart. It can also be good for your finances—you can generally use charitable donations to reduce your tax liability.

But not every donation packs the same punch. Many investors don’t realize that donating appreciated investments or assets to a donor-advised fund—be they publicly traded stock or mutual fund shares, real estate or other investments—can be a much more efficient way to support charitable goals than selling them first and donating the proceeds afterward. The end result is lower tax liability for the investor and potentially a larger gift to the charity.

Jean Paryl, a Schwab Financial Consultant based in Southlake, Texas, has worked with many clients who wanted to share the fruit of their success but weren’t aware of the potential benefits of donating appreciated investments or assets instead of cash.

“We have a lot of clients who feel very strongly about philanthropy, and they want to be tax-smart while making a bigger impact,” she says. “Over the past few years, more of my clients have expanded their philanthropy and have begun to think about donating some of their more complex investments and assets.”

While cash remains the most popular way to make donations, giving appreciated investments or assets that you’ve held for more than a year can make more sense. Let’s compare the benefits of giving appreciated assets instead of cash and then consider some of the additional advantages that come with using a charitable vehicle known as a donor-advised fund.

Giving assets vs. cash

Normally, selling an investment or asset that has appreciated in value saddles you with taxable capital gains. That is not the case when you transfer it directly to a charity. Avoiding those capital gains taxes means a potentially bigger donation to charity—and possibly a bigger tax deduction.

 

The same process applies to appreciated investments or assets that aren’t traded publicly, though there are a few additional requirements. The IRS requires independent appraisals to be conducted for all non-cash gifts worth more than $5,000 that are not readily marketable and traded on an established exchange, so these types of gifts should be valuable enough to justify the time and expense.

Donor-advised funds

Not all charities have the ability to accept gifts of appreciated investments directly. That’s where donor-advised fund accounts like those offered by Schwab Charitable can come in handy. These charitable accounts can help you meet your charitable giving goals, make grants at your own pace, reap potential tax benefits and potentially increase the amount of the donation. Keep in mind all charitable contributions to donor-advised fund accounts are irrevocable.

One significant benefit of donor-advised fund accounts is their flexibility. As a donor, you decide when and how much to contribute to the account and can claim an immediate tax deduction. You can direct subsequent grants to 501(c)(3) charities that are in good standing with the IRS according to your own schedule—donations don’t need to occur in the same year you claim the tax deduction. Schwab Charitable accounts offer a choice of investment pools. For larger accounts, you have the option of recommending that an independent investment advisor manage the assets.3

Jean recalls working with one couple looking for ways to offset the tax liability arising from the sale of their business. They had owned a parcel of land for several years and decided selling it would allow them to make a significant donation while also reducing their tax bill.

Jean put them in contact with Schwab Charitable to help facilitate the contribution. For real estate, you may take a full fair-market-value tax deduction on the date of donation, while also avoiding capital gains tax on the sale.

Schwab Charitable, with the assistance of a third party, can help find buyers for a piece of donated property, though in the case of Jean’s clients they had already been approached with offers. The proceeds of the sale are then placed in the donor-advised fund account and can be donated to charity.

In the end, Jean’s clients donated their property and secured a tax deduction that helped offset the burden of the bill arising from the sale of their business.

Generally speaking, most complex asset contributions will be processed within several weeks, though more liquid assets, such as publicly traded securities, can be processed in far less time.

Donating appreciated non-cash assets held longer than one year can be a tax-efficient way to support your charitable goals. Making those donations through a donor-advised fund can also make your philanthropy more strategic, giving you the tools to shepherd your resources so you can use them when and as you’d like.

1Assumes cost basis of $5,000, that the investment has been held for more than a year, and that all realized gains are subject to a 15% long-term capital gains tax rate. Does not take into account any state or local taxes.
2Assumes donor is in the 28% federal income tax bracket, and does not take into account any state or local taxes. Certain federal income tax deductions, including the charitable contribution, are available only to taxpayers who itemize deductions, and may be subject to reduction for taxpayers with AGI above certain levels. In addition, deductions for charitable contributions may be limited based on the type of property donated, the type of charity, and the donor's AGI. For example, deductions for contributions of appreciated property to public charities generally are limited to 30% of the donor's AGI. Excess contributions may be carried forward for up to five years.

3Professionally managed accounts are available only through independent investment advisors working with Schwab Advisor Services™, a business segment of The Charles Schwab Corporation serving independent investment advisors and including the custody, trading and support services of Charles Schwab & Co., Inc. Although donors may recommend an advisor, Schwab Charitable Fund must approve the recommendation. Advisors must meet certain eligibility requirements and adhere to fund fee and investment guidelines. You may request a copy of the investment guidelines by calling 800-746-6216.

Schwab Charitable accounts

You can open a Schwab Charitable donor-advised fund account with an initial contribution of $5,000 or more in cash or marketable securities. Other appreciated assets such as restricted stock, private company shares, real estate, private equity or hedge fund holdings are also accepted on a case-by-case basis.

Schwab Charitable accounts are:

Convenient. All of your charitable giving is consolidated in one place. Contribute to your account, manage your investments and recommend grants online or via your mobile device integrated with your Schwab accounts.

Tax-smart. Be eligible for a current-year tax deduction when you contribute. Potentially avoid capital gains taxes by contributing appreciated assets and have more to give to charity.

Flexible. Recommend grants as small as $50 to your favorite charities when and where you want. Schwab Charitable handles all of the charity due diligence.

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Important Disclosures

A donor’s ability to claim itemized deductions is subject to a variety of limitations depending on the donor’s specific tax situation.

Contributions of certain real estate, private equity or other illiquid assets may be accepted via a charitable intermediary, with proceeds of your donation transferred to your donor-advised account upon liquidation. This intermediary considers donations on a case-by-case basis, and assets typically must be valued at $250,000 or more. Call Schwab Charitable for more information at 800-746-6216.

Schwab Charitable does not provide specific individualized legal or tax advice. Please consult a qualified legal or tax advisor where such advice is necessary or appropriate.

Schwab Charitable is the name used for the combined programs and services of Schwab Charitable Fund, an independent nonprofit organization. Schwab Charitable Fund has entered into service agreements with certain affiliates of The Charles Schwab Corporation.

©2015 Schwab Charitable. All rights reserved.

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