Originally created 12/24/01

Avoid capital gains tax with a gift to charity

In 1789, Benjamin Franklin said, "In this world, nothing is certain but death and taxes."

Well there is one way to avoid capital gains taxes on investments - hold them until you die. Your heirs will receive assets with a cost basis "stepped up" to their value on your date of death.

There is one other way to avoid capital gains tax and make a difference in your community. Give a gift of appreciated shares to a donor advised fund.

Donor advised funds allow you to make your contribution now, allow you to deduct the full present value of your contribution against this year's taxes, and delay making the ultimate gift to the charities of your choice until you are ready.

You can make your contributions in any year to fit your own tax situation and distribute to charities of your choice in future years.

Donor advised funds have been around for a long time. They are offered by local community foundations and some other charities that act as intermediaries for giving.

They have become so popular that a few mutual fund companies such as Fidelity, Charles Schwab and Vanguard have created nonprofit charitable affiliates to offer funds under the label "charitable gift funds."

Here is how donor advised funds work:

Donors contribute appreciated shares of stock or mutual funds or other assets to the fund, which is usually named for them. For example, the John and Jane Smith Advised Fund.

As with any gift to charity, the donors may deduct the market value of the gift from federal and state taxes in the year they make the donation, regardless of when the funds are distributed from the account. Appreciated assets such as mutual fund shares must have been held for at least 12 months to qualify for the market value deduction.

The nonprofit community foundation sells the asset. Because they are a charitable organization, they pay no capital gains tax.

Although the donors have given away the assets, they serve as the "advisers" for the account. That is why these accounts are usually called donor advised funds.

As advisers, the donors recommend when and to what charities the assets will be distributed. Legally the advisers' recommendations can be denied, but as a practical matter, they are honored as long as they are not self-serving, meet legal criteria and are made to recipients who are U.S. charities.

Once the donated asset is sold, the proceeds can be invested and allowed to grow in value before distributions are made.

The adviser chooses one of several mutual fund allocations or "investment pools" where the assets can be invested until the adviser is ready to make recommendations.

Making a difference has never been so easy, or saved so much tax.

If you are interested in establishing a donor advised fund, look at such things as the minimum balances required to open and maintain the account, the minimum amount for each distribution to a charity, limits on the number of distributions the adviser can designate each year, sales commissions, administrative fees and the investment pools offered.

Make certain your account allows contingent advisers such as your children in case something happens to you.

Check your local community foundation, which frequently has much better features, lower costs and better help from the staff than mutual fund companies and brokers.

Since Sept. 11, I have found that many people place a greater value on their friendships and want to make a bigger difference in their communities.

Donor advised funds are a great tool for making a difference, helping others and avoiding taxes.

(Frank Jones is a Memphis-area business executive and investment adviser. E-mail him at summit15@aol.com.)


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