As an attorney, accountant, or financial advisor, you are well aware that giving long-term appreciated assets is often one of the most tax-savvy ways your clients can support their favorite charities.

Sometimes, it can be hard to convince clients the value of giving appreciated assets over cash. Below are two simple examples to help illustrate the benefits to your clients.

Example: Jennifer and John

Jennifer and her husband John plan to give $1 million to community causes this year. They’ll do that by adding $500,000 to their donor advised fund at Greater Worcester Community Foundation, which in turn they will use to support their favorite charities. They’ll also be making a $500,000 gift to an unrestricted fund at the Foundation to help address Worcester County's greatest needs for generations to come.

Let’s assume that Jennifer and John are in the highest federal income tax bracket because they earn multiple seven figures. If they were to give $1 million in cash, they could save, potentially, up to $370,000 in income tax. If they gave publicly-traded stock instead of cash, assuming a $200,000 cost basis in stock valued currently at $1 million, they would still potentially save up to $370,000 in income tax, and they would also potentially avoid $160,000 in capital gains tax (based on a long-term capital gains tax rate of 20%).

Example: Abigail and Thomas

Abigail and Thomas plan to give a target amount of $5 million to charity as the cornerstone of their overall philanthropy plan. They would like to use publicly-traded stock that they’ve held for many years, valued currently at $5 million. They would love to receive a lifetime income stream from these assets, so that the remaining assets will flow to their fund at Greater Worcester Community Foundation after their deaths. In this case, you’ll explore setting up a charitable remainder trust that pays out an income stream to Abigail and Thomas while they are both living and then to the survivor for the survivor’s lifetime.

Let’s assume that Abigail and Thomas are both 55 years old. And let’s assume that the stock has a very low cost basis - just $500,000 - because the couple has held it for so long. Depending on the IRS’s applicable rates, and assuming a 5% annual payout rate paid at the end of each quarter, here’s an approximate tax result if you worked with the Foundation to help Abigail and Thomas establish a charitable remainder trust:

  • $1,042,550 approximate potential income tax deduction based on the present value of the gift of the remainder interest to charity
  • $4,500,000 in capital gains that may not be subject to tax
  • $250,000 in total payments during the first year
  • Annual payments of 5% of the value of the assets in the trust, which means the income stream will fluctuate depending on the value of the assets

Following the death of the survivor of Abigail and Thomas, the remaining assets will flow to their family fund at the community foundation, which Abigail and Thomas have already established and which, upon their deaths, will split equally into two funds. The first fund will be a donor advised fund for which their children will serve as advisors, and the second fund is an unrestricted endowment fund to support the Foundation’s priority initiatives in perpetuity.

Of course, no client’s circumstances will exactly match those of Jennifer and John or Abigail and Thomas. Regardless of the situation, we are happy to discuss the various tax-savvy options for charitable giving in any client situation. We are here for you!