2014 stock market rally pays off for charitable giving

The markets giveth, and keep on giving

Jan 26, 2015 @ 1:22 pm

By Darla Mercado

Last year's market gains were great for investors and even better for charitable organizations, as clients sought to mitigate the ill effects of capital gains taxes.

The S&P 500 wrapped up 2014 with a gain of about 11%, continuing the recovery that's been unfolding since the market nadir in the worst of the recession back in March 2009. Just as the market keeps on giving, so do the people who reap the most from their holdings of appreciated stocks.

Schwab Charitable reported more than $1.8 billion in charitable contributions for the calendar year 2014, reflecting a 10% bump from 2013. Meanwhile, donors opened up more than 10,000 donor-advised funds with Fidelity Charitable in 2014, up 43% from the previous year.

“If you look at the last 20 to 30 years, giving tends to mimic the stock market,” said Kim Laughton, president of Schwab Charitable. “Part of it is wealth accumulation and an aspect of that is around tax planning."

Fidelity Charitable received $4.4 billion in charitable contributions in 2014, up 22% from the previous year, according to Amy Danforth, president of Fidelity Charitable. Historically, uncertain tax policy has encouraged clients to give. “We found tax uncertainty propelled philanthropy because there were those who thought it would change for the worse,” Ms. Danforth said.


Charitable giving in the name of tax mitigation is nothing new for advisers.

But it's a strategy that's been picking up popularity as clients confront two major developments: They are contending with several years of strong market gains at a time when income and capital gains taxes are high. In 2015, individuals with taxable income upward of $413,201, as well as married-filing-jointly taxpayers with income of $464,850, are in the highest bracket and facing income taxes of 39.6%.

Those in the highest brackets also are paying top levels of long-term capital gains taxes: 20%, plus a 3.8% kicker in the form of the net investment income tax.

Charitable giving mitigates harsh taxes when taxpayers donate appreciated stocks, thus avoiding capital gains and obtaining a charitable deduction that they can use to offset their income.

Given that, it's no surprise donor advised funds have been such a hit in 2014. At Commonwealth Financial Network, the firm opened 97 of these accounts by the end of the year, up from 45 in 2013, according to Gavin Morrissey, senior vice president, wealth management at Commonwealth.

(More: InvestmentNews list of donor-advised fund charitable sponsors.)

“The big one we're seeing is donor-advised funds,” noted Tim Steffen, director of financial planning at Robert W. Baird & Co. “They've become hugely popular.” Consider the fact that at Schwab Charitable, fully 71% of the $1.8 billion in contributions received came in the form of appreciated stock or other investments.

In fact, in some respects, a gift of appreciated stock is a more tax efficient gift than the charitable rollover — a strategy where clients meet the required minimum distribution rule by taking a charitable distribution out of a qualified account and giving it directly to charity.

“You're in a better tax situation giving away the appreciated securities than you are with the charitable distribution from the IRA,” Mr. Steffen said. “If you give from the IRA, it goes to charity and it isn't reported as income, but you get no charitable deduction.”

Charitable gifts of stock, however, allow you to offset income and eliminate capital gains, he added.


Trusts are also a fantastic way to facilitate charitable giving. Consider the charitable remainder trust and the charitable lead trust.

Charitable remainder trusts provide income to the donor, either for life or for a fixed period of no greater than 20 years. Afterward, a charity will receive what's left at the end of the term. Charitable lead trusts provide the charity an annual distribution from a trust, with the remainder going to the client's noncharitable beneficiaries, following a stated period of years.

Mr. Steffen noted that charitable lead trusts are popular right now, given that interest rates are very low.

Meanwhile, Mr. Morrissey observed that advisers have been working with charitable remainder trusts as a play that combines retirement income planning with charitable giving.

It works especially well if a client wants to use the trust to rebalance a portfolio that's heavy on appreciated stocks.

“We saw people creating charitable remainder trusts, funding them with low-basis, highly appreciated assets, and then they get an income tax deduction on the front end and a stream of income,” Mr. Morrissey said. “You can also defer income to a later date.”


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