subject: Gifts of Securities [print this page] Gifts of Securities Gifts of Securities
GIFTS OF SECURITIES
In making a gift of securities, you may save taxes two ways.In the first place, the full current value of the security may be deducted for income tax purposes. Secondly, there is no capital gains tax to be paid on the appreciation in value of theassets. If you paid $200 for some Xerox stock five years ago,and it is now worth $5,000 you may make a gift of $1,000worth of stock to your church, claim a full $1,000 tax deduction, and pay no capital gains tax on the stock whichincreased in value from $40(Vs of your original $200 investment) to $1,000(Vs of the current maket value of the original $200 investment)
In some instances, you may make a "bargain sale" of securities to a philanthropic or charitable institution, where therehas been substantial appreciation in the value of the security.This will enable you to take an income tax deduction for theappreciated portion which you are giving away, and yet have back your original investment without any tax liability. Thus,
if you paid $200 for 10 shares of stock of the Vollito Corporation in 1960, and in 1967 the 10 shares had a market valueof $1,000, and you chose to "bargain sell" the stock to a philanthropic or charitable organization for $800, the amountof the shares appreciation, you would be entitled to an $800income tax deduction and would have $200 in tax-free cashreturned to you when the charity or philanthropy sells thesecurities at their current market value of $1,000. In thehigher tax bracket, this method of making a contribution maywork to increase substantially the net number of dollars whichyou are able to keep for yourself.
Actually, any property which has appreciated hi value maybe utilized advantageously as a philanthropic gift. A painting,purchased by you for $25 in 1950, may now be worth $500since your friend, John Strugglingartiste, no longer the penniless dreamer, has now "arrived," and all of his works are ingreat demand. The swampland with which you were "stuck"for $1,000 twenty years ago, and on which you have paidsmall taxes each year in order to avoid the complete loss of your investment, now finds itself in the path of a state highway and people are clamoring to buy it. As with securities,you may avoid the capital gains tax, effect a substantial taxsaving, and remove from your estate an asset which might bechargeable to the estate but difficult to dispose of at a timewhen immediate cash is needed by the estate.
Learn More About Life Estate Planning
You may even make a gift of your home and grounds to aphilanthropy, reserving the right to live in your home until your death. You may then take an income tax deduction forthe computed value of the "remainder interest" which goes tothe charity and the property will not be taxable to your estate at your death although you may have the full use of it duringyour life. If your home and grounds have a value of $50,000, and you are 64 years old, the life interest in any gift made byyou will be worth 35% of the total value of the property givenaway and the remaining 65% (remainder interest) will beattributable to the remaindermen or those who are to take iton your death. If you transfer your home and grounds, worth $50,000, to a charity, you will be allowed a charitable deduc tion of 65% of $50,000, or, $32,500.
Suppose, however, you want to be charitable but also wantto provide for your children. There is still another way toobtain a current income tax savings to offset gift taxes applicable to the transfer of a remainder to your children. If you
transfer stock worth $50,000 to the Good Hearted SamaritanCorp., a recognized charity, with the Good Hearted SamaritanCorp. to receive the income of $2,000 a year from the stock during your life, but with the stock and the income or divi dends from the stock to go to your children after your death,you will, in the long run, be making money by giving it away.
Let us suppose that you are 64 years of age, and that youare in a 53% income tax bracket, and can deduct about$25,000 a year for gifts to charity without exceeding thelimitation of 30% of adjusted gross income for gifts to charity.
By giving to a charity for your life, property worth$71,000, you get a current deduction of approximately$25,000. At the same time you reduce your taxable estate, but this reduction will be offset by the possible gift tax on the remainder interest of the children. At the same time, there will be a reduction of your taxable income by the income which otherwise would have been earned on the $71,000.
Let us take a look at the specific figures involved. You are64 years of age, and the ratio of your life estate to theremainder is 34%o% for the life estate and 65%>% for theremainder. To obtain the $25,000 deduction, based upon the ratios, you transfer to the charity for your life property worth$71,000. You therefore achieve an income tax saving of$14,000. As against this saving, however, you lose $1,750 inincome and, in addition, you will eventually make a gift taxpayment of $3,000 (assuming gift-splitting with your wife, butalso assuming that you are not utilizing your $30,000 specificexemption, and that there is no annual exclusion since the giftis a gift of a future interest). You, therefore, have effected asaving of $9,250 and you have, hi fact, made money by givingit away.
Although savings may be effected in almost all brackets,major savings are effected for taxpayers hi the higher brackets.Take the case of John Welltodo, who is in the 64% bracket.On December 2, 1967, he invested $5,000 hi the capital stock of the Wilduck Uranium Exploration Corporation, solely as aspeculation and as a favor to a college friend. By March 2,1968, the stock is worth $11,000. He would like to unload itand take the profit because he feels that the price cannot holdup. However, he is restrained by the huge tax burden which will be thrown upon him if he sells and takes a short-termcapital gain. On such a basis, his tax would be $3,840, leavinghim with $7,160 ($11,000 minus $3,840). He can risk hold
ing the stock for another three months to take a long-termgain but his business sense and experience tellhim that bythat time the stock may not be worth even the $5,000 whichhe paid for it. He then consults his tax lawyer and his accountant (which you should do, too, since moves like this shouldnot be made without expert professional advice) and theydecide to sell the stock to a charity for what it costhim$5,000. Mr. Welltodo then gets a charitable deduction for the bargain element of the sale$6,000. In his 64% bracket, sucha deduction is worth $3,840. Since Mr. Welltodo will pay$3,840 less income tax at the end of 1967, he actually has left to him, after the sale of the stock, his original $5,000 invest ment (paid tohim by the charity) and his $3,840 tax saving.Therefore, he has increased the monies available tohim at theclosing of the transaction by $1,680. Instead of being left witha net of $7,160.00 ($11,000 minus his tax "bite" of $3,840),he has $8,840 (his $5,000 plus his $3,840 which he doesnot have to pay in income taxes).
Generally speaking, on short-term or ordinary income deal ings, and business transactions, the "bargain sale" to a charitywould save taxes for those taxpayers who are in a 50%bracket or higher. In any such sale, however, be sure that it isa true sale and a clean-cut sale. Exchange letters with thecharity, making explicit the understanding that you intend to make a gift to the charity of the increase of the value of the property. Another pair of general rules to be followed indetermining whether to make a charitable gift in cash or inkind, that is, hi property, is:
(1)If the property or the securities have increased in
value, make the gift in property in order to avoid a capital
gains tax, and receive income tax credit for the full increased
value of the property.
(2)If the property or the securities have depreciated In
value, sell them first, to take advantage of the capital loss for
income tax purposes, and then make a cash gift of the pro
ceeds; and since the cash gift of the proceeds is a charitable
gift, that will also be deductible when your income tax return
