Maximizing Charitable Impact: Donating Appreciated Public Securities to a Private Foundation
For those who are charitably inclined and hold highly appreciated public securities, donating to a private foundation can be a powerful way to maintain control over assets while enjoying significant tax savings. This strategy not only helps avoid capital gains taxes but also provides a valuable charitable income tax deduction. In addition, private foundations offer unmatched flexibility and control, allowing donors to support philanthropic causes over the long term without the immediate pressure to distribute assets. While donors benefit from immediate tax advantages, such as income tax deductions, the donated funds do not need to be distributed to charitable causes right away.
The Power of Donating Appreciated Public Securities
One particularly tax-efficient approach is contributing appreciated, publicly traded stock (held for more than a year) to a private foundation. Donors can contribute up to 20% of their adjusted gross income (AGI) to a private foundation in this way. Without making this donation, selling the stock would typically trigger capital gains taxes, which can be particularly burdensome for individuals in the highest tax brackets. At the federal level, long-term capital gains in the highest bracket are taxed at 23.8%, including the 3.8% net investment income tax. State taxes can further compound this, with states like California, New York, and New Jersey adding over 10% in additional tax liability.
However, by donating the stock directly to a private foundation, donors avoid capital gains tax altogether at the individual level while also claiming a fair market value (FMV) deduction. This strategy not only maximizes tax savings but also enhances the donor’s philanthropic impact by increasing the funds available for charitable giving.
Case Study: Cha-Ching Charlie’s Strategic Donation
Cha-Ching Charlie, who is in the highest tax bracket, purchased stock for $20,000 fifteen years ago. Today, that stock is worth $200,000. If Charlie were to sell the stock, he would face a federal tax bill of $42,840 on the $180,000 gain (at 23.8%), leaving him with only $157,160 for personal use.
Instead, by donating the stock to his private foundation which then sells it, Charlie completely avoids paying capital gains tax at the individual level. His foundation would only incur a 1.39% excise tax on the stock’s capital gain, amounting to just $2,502. This leaves $197,498 available for charitable purposes, all of which Charlie controls through the foundation.
Additionally, Charlie qualifies for a $200,000 charitable tax deduction, assuming he isn’t limited by the 20% of Adjusted Gross Income (AGI) cap on gifts of appreciated stock to private foundations. This deduction could significantly reduce his taxable income, offering further tax savings.
By donating the stock rather than selling it, Charlie maximizes his charitable contributions, minimizes his tax liability, and maintains control of the assets within his foundation.
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Combining Stock and Cash for Greater Flexibility
Charlie can increase the impact of his charitable giving by combining a stock donation with a cash contribution. For example, if Charlie’s AGI is $1,000,000, he can donate up to 20% of his AGI in stock ($200,000), and by adding cash, he can contribute an additional 10%, bringing the total to 30% of his AGI. In this scenario, Charlie could donate $200,000 in stock and $100,000 in cash, totaling $300,000. This larger contribution would increase his charitable tax deduction, while the foundation would still only pay the 1.39% excise tax on the stock’s gain.
Conclusion
Donating appreciated public securities to a private foundation offers a powerful combination of tax savings and philanthropic control. This strategy enables donors to minimize their tax burden while maximizing their charitable impact. By leveraging the flexibility of private foundations, donors can shape their giving strategies to meet both their financial and philanthropic goals, ensuring long-lasting benefits for the causes they care about.
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