Jan. 30 (Bloomberg) -- Taxpayers looking to maximize their charitable deductions and save on taxes can replicate a strategy Republican presidential candidate Mitt Romney uses.
By donating stock directly to a foundation, Romney and his wife Ann eliminated taxes on gains, received a deduction for the securities’ full market value and can donate the money to multiple charities over many years, said Steven Bankler, a former investigative accountant for the U.S. Senate.
Individuals can achieve similar results with a donor- advised fund for a “whole lot cheaper,” said Bankler, a certified public accountant in San Antonio, Texas.
“Unsophisticated investors and taxpayers typically sell assets and then donate the proceeds to charity so they pay tax on the gain and then get a charitable deduction,” said Bankler.
The Romneys donated about $7 million to charity in the past two years, documents the campaign released last week show. The couple had deductions for more than $2 million in donations that are listed as noncash charitable contributions. That includes tens of thousands of shares of stock in Domino’s Pizza Inc., Sensata Technologies Holding NV, Dunkin’ Brands Group Inc. and Warner Chilcott Plc that went to their family’s Tyler Charitable Foundation, based in Boston.
A donor-advised fund is an alternative to giving directly to a charity or setting up a foundation. It enables benefactors to give assets, including appreciated stock, to a central source and get an immediate tax deduction. Donors also retain advisory rights over their accounts. They can choose investments and direct distributions to public charities over many years.
Better Than Checks
Assets in donor-advised fund accounts reached almost $30 billion in 2010, an increase of about 12 percent from the prior year, according to a December report by the National Philanthropic Trust, a public charity and national provider of donor-advised funds based in Jenkintown, Pennsylvania.
Giving appreciated stock directly is better than writing a check because individuals generally receive a larger charitable deduction and make the donation with pretax dollars, said John O. McManus, principal of the law firm McManus & Associates in New Providence, New Jersey, and Manhattan, whose clients include those in the hedge-fund and private-equity industries.
If someone bought a share of stock for $1 and it’s now valued at $100, they would have a $99 gain when selling, McManus said. That means they may pay about $20 in state and federal capital-gains levies and if they donated the after-tax proceeds, that leaves them with an $80 charitable deduction. If they gave the share worth $100 directly, it may generate a $100 deduction and the foundation or donor-advised fund could liquidate the position without paying tax, thus keeping more assets to spend on its charitable endeavors, he said.
Taxpayers contributing securities to donor-advised funds should understand that the tax treatment may differ depending on how long they’ve held the shares of stock, said Gaines Norton, a certified public accountant in Snowmass Village, Colorado. With assets held less than a year, individuals may only receive a charitable deduction for the original price of the securities, not any gains, Norton said.
Firms that sponsor donor-advised fund programs include Fidelity Charitable, Schwab Charitable and Vanguard Charitable. All three are nonprofits affiliated with their namesake financial services companies: Fidelity Investments in Boston, San Francisco-based Charles Schwab Corp. and Vanguard Group Inc., in Valley Forge, Pennsylvania.
Both Fidelity Charitable and Vanguard Charitable reported record contributions in 2011. At Fidelity they reached almost $2.9 billion, while at Vanguard, they surpassed $859 million, the companies said in statements last week.
Donations of appreciated securities were 71 percent of contributions to Fidelity Charitable last year, compared with about 51 percent in 2010, said Sarah Libbey, president of the nonprofit. The increase was due in part to improved market conditions, Libbey said. The Standard & Poor’s 500 Index returned 2.1 percent with dividends reinvested last year, according to data compiled by Bloomberg.
“We’re pleased to see that rebounding,” Ben Pierce, president of Vanguard Charitable, said of people giving shares of appreciated stock such as Google Inc. and Apple Inc. Google returned about 40 percent from January 2007 through December 2011 and Apple gained about 377 percent in the same period.
When individuals give stock to donor-advised funds, the shares generally are liquidated, said Libbey. Fidelity Charitable clients may then invest the money in a variety of funds or, if the account is managed by an investment adviser, in individual securities, she said.
Both Fidelity and Vanguard charge a brokerage commission to liquidate shares when donors contribute them to their accounts. That fee usually is $2 per stock trade for those using Vanguard Charitable, said Pierce.
Sponsors of donor-advised funds usually provide the legal, recordkeeping, and accounting services, which generally results in lower startup costs and administrative burdens compared with a private foundation, according to a December report by the U.S. Treasury Department.
For a $10 million account, Vanguard Charitable charges as low as 25 basis points in annual fees for administration and investments, said Pierce. By comparison, the Romneys’ Tyler Foundation, which had a fair market value of about $10 million at the end of 2010, reported operating and administrative expenses of about 53 basis points of assets, or about $53,000, according to tax documents.
Fidelity Charitable and Vanguard Charitable charge as much as 60 basis points annually for accounts with smaller balances. A basis point is 0.01 percentage point.
Foundations are required to pay out 5 percent of their assets to charity each year, said Mark Bosswick, co-managing partner at Berdon LLP, an accounting and advisory firm in New York. Donor-advised funds generally don’t have a mandatory distribution requirement under current law, according to the Treasury Department study.
Private foundations generally do have more investment flexibility than donor-advised funds, Libbey said. Fidelity Charitable offers seven actively managed funds and three index funds, all of them from Fidelity Investments. Clients with more than $250,000 may choose an investment adviser and pick a customized portfolio. At Vanguard Charitable, 10 of the 11 investment choices are Vanguard-based, said Pierce.
--With assistance from Steve Sloan in Washington. Editors: Rick Levinson, Larry Edelman.
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