Noncash gifts to nonprofits
- Friday, July 16, 1999
Giving gifts of stock, for example, can result in substantial tax savings. Suppose a couple, Gretchen and Dave, purchase 200 shares of stock in a soft drink company for $12 a share. The cost basis, or original value, of this stock is $2,400 (200 shares @ $12 each = $2,400).
The company prospers, and several years later the stock splits, resulting in 400 shares for Gretchen and Dave. Another split in several more years gives them 800 shares. In addition, the value of each share rises from $12 to $40, giving the couple a total stock value of $32,000 (800 shares @ $40 each = $32,000).
Because the cost basis of the couple's stock was $2,400, they have realized a gain of $29,600 ($32,000 - $2,400 = $29,600). This gain is subject to capital gains tax if the stock is sold.
The couple receive about 1.3 percent in dividends per year from their stock, which amounts to $416 ($32,000 X .013 = $416). Therefore, if they give the stock as a gift, they're not sacrificing a substantial amount of income. They also avoid tax on their $29,600 gain.
When giving stocks is better
Suppose a donor named Kathy has $10,000 in cash to give to a nonprofit organization. Also suppose that she owns 100 shares of stock in a local restaurant valued at $100 per share.
This means the stock's total value equals the cash amount Kathy plans to donate (100 shares @ $100 each = $10,000).
Kathy originally purchased her 100 shares of stock for $10 per share, giving it a cost basis of $1,000 (100 shares @ $10 each = $1,000).
Because she likes the idea of having stock in this particular company, Kathy doesn't want to give her stock as a gift. For her, giving cash seems like the clear choice.
But since her stock has appreciated to 10 times its original value, it represents a gain of $9,000 ($10,000 - $1,000 = $9,000). This gain will be taxed if the stock is sold at some time in the future.
To solve this problem, Kathy could give the stock to the nonprofit organization, and the $9,000 gain would not be taxed.
Then, she could take the $10,000 cash and buy the same amount of stock in the same company. Since this stock is being purchased at the current price of $100 per share, its cost basis is equal to the current market price.
If Kathy has to sell this stock in the near future, the gap between her cost basis and the current price won't be nearly as great as it was before. Thus, the tax liability on her gain will be much less.
Gifts of real estate
To further illustrate the benefits of noncash gifts, here's an example using real estate. Betty and Joe purchased a small frame house on five acres of land for $25,000 in a rural county with only a few thousand residents.
A large city was located nearby, and most of Betty and Joe's neighbors drove there in order to work. Joe, however, built a successful local plumbing business and was able to work close to home.
During the following decades, people from the city began moving north to the county where Betty and Joe lived. Industries, shopping centers, and restaurants followed, and because the couple's land was located near a major intersection, its value skyrocketed to $400,000.
In the meantime, Betty passed away and Joe's health began to decline. He retired a few years early and passed the plumbing business on to his son.
Due to his declining health, it became difficult for Joe to maintain a house and five acres. In addition, most of his neighbors were selling their land to developers, traffic was becoming worse, and the neighborhood just wasn't the same.
After holding out as long as possible, Joe decided to move into an apartment complex where someone else would be responsible for maintaining the buildings and lawn. The question was, what would he do with his house and land?
Some 20 years before, he and Betty had become regular supporters of a Christian organization that ministered to needy children in the U.S. and abroad. They even did some volunteer work for this organization and recommended it to all their friends.
Joe remained committed to this organization and, rather than selling his home directly to a developer, he decided to create a trust that would benefit this organization and provide him with an income until he died. He chose a trustee to manage the trust, and the trustee sold the house and land. The resulting sale income was placed in the trust and was free of capital gains tax. Joe made arrangements to have a small percentage of the money in the trust go to him each year for his support.
When he passed away five years later, the remaining value of the trust went to the ministry that he and his wife had promoted, supported financially, and served as volunteers.
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