Reducing the Tax Liability of Appreciated Assets

How to Save with a Private Foundation

If you have charitably inclined clients with highly appreciated securities, this could be the ideal time for them to act. By donating those securities to a private foundation, they capture the gains without paying a capital gains tax, plus they get a charitable income tax deduction. The ultimate cherry on top? Unsurpassed financial control and philanthropic flexibility that come with having their own private foundation.

Unlike other charitable solutions, the funds contributed to a private foundation stay under your client’s direct control and your financial management. Your client gets immediate income tax savings, even though the contributed funds need not be distributed to charitable causes right away. And in addition to reducing or eliminating capital gains exposure, a private foundation offers the most important benefit of all: a better world for everyone.

If appreciated stocks are contributing to your client’s bottom line, one tax-effective strategy is to contribute up to 20% of her AGI to a private foundation in the form of highly appreciated, publicly traded stock held for at least a year. If your client were to sell these securities, she could have tax liability arising from long-term capital gains. If she’s 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 she were to take that stock and donate it to her foundation, she’d be eligible to get a fair-market value deduction and avoid the substantial capital gains tax.

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