Don't you just love this time of year? Snowmen, carolers, hot cocoa, warm fires, presents under the tree, long lines at the mall . OK, maybe not the long lines, but you get the point. For many, this season truly is the "most wonderful time of the year." It's also a wonderful time to consider giving to your favorite charity as the 2006 tax season draws to a close.
One option for giving to charity, which is available to many of us, is to donate stock. Donating stock rather than giving cash can have significant tax advantages. If you were to sell a stock and then give the proceeds to charity, you would have to first pay taxes on the capital gains and you'd only be able to donate whatever's left over, reducing your tax-deductible gift. Instead, if you were to donate stock that's been held for longer than a year, the entire value of the stock is counted as a tax deduction AND you don't have to pay any capital gains.
Gifting appreciated stock can even be beneficial to those who hold for the long term. Let's say you're sitting on some fairly sizeable capital gains from long-time Hidden Gems recommendation, Middleby (Nasdaq: MIDD ) . Assuming you have some extra cash on hand to invest, you could donate your Middleby stock to charity, pay no capital gains, and immediately repurchase the same number of shares at the market price. In essence, all you've done is increased your initial cost basis in the stock, which reduces the amount of capital gains tax you'll have to pay if or when you ever do sell it.
So how does one go about donating stock to charity? Well, one way is to contact the charity directly and see if they have the ability to accept stock donations. Unfortunately, not all charities are set up to accept them, and it can be a lot of hassle if you want to make multiple donations to various organizations. That's where the charitable gift fund comes into play; this is a donor-advised fund that allows people flexibility in managing their giving. Here's how it works:
First, open up a private account with one of the many brokers who offer donor-advised, charitable funds. Below is a list of some of the more familiar names that offer this service:
- Fidelity Charitable Gift Fund
- Schwab Charitable
- T. Rowe Price Program for Charitable Giving
- Vanguard Charitable Endowment Program
Next, make an irrevocable, tax-deductible contribution. The types of acceptable contributions vary by program but can include cash, stock, real estate, life insurance policies, and even limited partnerships. Once the contribution is made, the broker liquidates it and deposits the liquidated value of the asset into your newly created charitable fund. All contributions made to a charitable gift fund are fully tax deductible for the year in which they were given and cannot be taken out for personal use. This can be a huge tax benefit for those who need a large deduction in any given year but would rather distribute the funds slowly over time.
After the contribution has been liquidated, the third step is to allocate the capital among a variety of investment pools. Investment pools vary by broker but usually range from very conservative money markets to more aggressive growth-oriented mutual funds. Your gift has the potential to grow tax free in the investment pools, which can increase the amount available for future grants.
Grants can be made at any time to any public charity. As the donor-advisor, you have complete control over your grants. Once a grant has been made, the broker takes money out of the selected investment pool and mails a check to your designated charity. One of the great advantages is that donors can take one large gift and distribute it in smaller cash portions to multiple charities.
So now that you're ready to set up your very own charitable gift fund, remember that not all funds are created equal. Some of the things you may want to consider when selecting a fund are:
- Administrative fees (usually around 0.5%).
- Annual expense ratios for the various investment pools.
- Types of available investment pools.
- Minimum initial deposit.
- Minimum account balance.
- Minimum grant amount and the maximum number of grants per year.
Utilizing a charitable gift fund not only gives you flexibility in managing your giving, but it also allows investors to maximize their tax benefits. As with anything tax related, each person has his or her own set of unique circumstances to consider. Remember to consult old Uncle Sam or even a tax professional for the rules on charitable deductions. And if you need more tax guidance, feel free to visit our Tax Strategies area here on the Fool.
Finally, if you're looking for more information on some worthy charities, drop by our Foolanthropy wing, where, over the past decade, over $2.5 million has been raised for charity. Let's try to make this year a wonderful time for all.
Fool contributor Elliott Orsillo lives in Pasadena with his wife and his basset hound, Lola. He regularly contributes to his T. Rowe Price Program for Charitable Giving Fund. The Motley Fool has a disclosure policy.