If you are charitably inclined and have highly appreciated assets (e.g., publicly traded stock, real estate, collectibles, artwork), an ideal way to retain some level of control over those assets for the long term – and enjoy significant tax savings on their appreciation – is to donate them to a private foundation. In doing so, you can avoid capital gains tax and get a charitable income tax deduction. And the ultimate cherry on top is the unsurpassed philanthropic flexibility and financial control that come with having your own private foundation.
Unlike other charitable solutions, the assets contributed to a private foundation stay under your direct control and your financial management. You receive immediate income tax savings, even though the contributed funds or assets don’t need to be distributed to charitable causes right away. And in addition to reducing or eliminating capital gains exposure, a private foundation offers a bonus: the opportunity to effect positive change in the world.
Consider the following three tax strategies that utilize a private foundation:
- Donation of Appreciated Securities
- Donation of Stock and Cash
- Donation of Other Appreciated Securities
Maximize Tax Savings with a Donation of Appreciated Securities
One tax-effective strategy is to contribute highly appreciated, publicly traded stock that has been held for at least a year. You can donate stock that's valued at up to 20% of your adjusted gross income (AGI) to a private foundation.
If you were to sell these securities, they could have a tax liability arising from long-term capital gains. If you’re in the highest marginal tax bracket, the effective long-term capital gains tax rate would be 23.8% (taking into account the 3.8% net investment income tax). However, if you were to take that stock and donate it to your foundation, you’d be eligible to get a fair-market value deduction and avoid the substantial capital gains tax.
"Unlike other charitable solutions, the funds contributed to a private foundation stay under your direct control and your financial management."
Example: Let’s say Mary Smith, who is in the highest marginal tax bracket, bought stock for $100,000 five years ago, which has since appreciated to $1M. If she were to sell the stock for its current value, her capital gains exposure would be $214,200 ($900,000 gain at 23.8% = tax bill of $214,200), leaving $785,800 for her personal benefit. If, instead of selling the stock, she donated it to her private foundation, her foundation’s tax rate would be, at most, its 1.39% excise tax. The resulting tax bill would be $18,000, leaving $982,000 for charitable purposes and under her direct control.
Make a Combined Donation of Stock and Cash
Alternatively, Mary could combine her donation of highly appreciated stock with a cash donation.
Example: Let’s say Mary’s AGI is approximately $5M. Her AGI maximum is therefore $1M for stock (20%). If she were to donate cash, she’d be permitted to donate up to 30% of her AGI—an additional 10%. She could therefore donate that same $1M of highly appreciated stock used in the previous example along with an additional $500,000 in cash. Assuming she has no other limitations (this example is exclusively for illustrative purposes), she would be eligible for a deduction of up to $1.5M. Meanwhile, her private foundation would only pay a 1.39% excise tax on the stock’s gain of $900,000, resulting in a tax bill of $18,000 and a $1,482,000 endowment for her foundation.
Donate Other Types of Appreciated Assets
Private foundations can be funded with a wide variety of assets. And unlike other giving vehicles that require liquidation of donated assets, private foundations can continue to hold them. These assets could include:
- Publicly traded securities
- Alternative assets, including private equity
- Real estate
- Tangible assets (art, jewelry, collectibles)
- Intangible personal property (copyrights, patents, royalties)
- Life insurance and annuities
- Cryptocurrency
Note that not all contributions are treated the same with respect to cost basis and deductibility. Whereas cash donations are deductible up to 30% of AGI, assets are generally deductible at the lesser of cost basis and fair market value (with the exception of certain publicly traded stock, as mentioned above) for 20% of AGI. Any contributions that exceed the applicable AGI caps can be carried forward for up to five years. And if you have a charitable remainder trust, you can name your foundation as the beneficiary.
Almost Immediate Gratification
Because Foundation Launch can establish a private foundation in less than a week, you don’t have to wait to lock in your tax savings. You can get started on your charitable legacy right away!
