Charitable Giving: Other Points to Consider

BY WILLIAM B. ERTEL

Charitable Giving: Other Points to Consider

“The Right Philanthropic Vehicle” ( JofA, July01, page 22) addresses one of the fastest growing areas in financial planning.

The article correctly states that a foundation can be used to fund several years of normal charitable giving. Making a substantial or extraordinarily large charitable gift in an unusually high income year may provide a valuable deduction when the client moves into a higher tax bracket. It should be noted, however, that while the client’s economic benefit is derived when the gift is made to a foundation, the “end-user” charities do not receive any economic benefits until the foundation distributes the funds. Some large foundations distribute only the minimum required 5% of their assets every year. Understanding these issues and learning to probe and uncover clients’ charitable goals will enable CPAs to participate in the whole philanthropic planning area, not merely the tax planning.

Also, the article presented an example: “After selling a substantial portion of his company, Mr. A established a multimillion dollar private foundation to help offset his taxable gain.…”

Unfortunately, Mr. A’s CPA may have already missed an opportunity to save him hundreds of thousands of dollars. Proactive philanthropic advice could have reduced Mr. A’s taxable income by the same multimillion dollar amount: If Mr. A had given $2 million of his company to a foundation before selling the business instead of after, it would have reduced his taxable gain by $2 million and provided him with the same charitable deduction.

Because of its complexity, not all foundations can accommodate this type of transaction (receiving a business interest and then selling it), but some do have the capability and expertise.

Efficient and proactive philanthropic planning, not just knowledge of tax laws, is becoming a necessity to provide valuable counsel to clients.

William B. Ertel, CPA
Ronald Blue & Co., LLC
Charlotte, North Carolina

Author’s reply: In many cases donating stock before a sale is a wise move, both for tax and philanthropic reasons.

However, the “Mr. A” referred to in the example was a real client who did not establish his foundation until after he had sold his company. Had he donated company stock before the sale, his deduction would have been limited to his basis, since the stock was not publicly traded.

In fact, his basis was quite low. By donating cash afterwards, he was actually better off—the gain on the sale was taxable at 20%, but some of the donation deduction offset ordinary income taxable at 40%.

One of the hazards of trying to squeeze a lot of information into an article is that some details have to be omitted. Here, the low basis of the stock was one of those details.

Laura Peebles, CPA
Washington, DC

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