When Giving Means Getting Back
When Community Foundation Silicon Valley holds a networking party to pull rich, young Internet entrepreneurs into philanthropy, a kind of gee-whiz moment often occurs, says venture capitalist Kevin Fong, managing partner of the Mayfield Fund. "One of the questions that always comes up," says Fong, "is, `How do you contribute stock? What are the advantages?' It's amazing, when you talk to these people, that many of them are not that sophisticated when it comes to their own finances."
Yet William H. Davidow, a founding partner of Mohr, Davidow Ventures in Menlo Park, Calif., predicts a flood of giving of appreciated stock by Internet billionaires in years to come. Indeed, both Davidow and Fong are already multimillion-dollar stock donors. And they have learned that gifting stock, as the practice is called, is important both for the good it does for the world and the good it does for your taxes and estate planning. Gifting, says Martin Greif, managing director of American Express Tax & Business Services in New York, is "one of the simplest and greatest things in the tax law." So if you're sitting on capital gains you'd like to turn over to charity, here are some key points:
TAKE A DEDUCTION. The Internal Revenue Service allows you to take a tax deduction on the full fair-market value of a gift stock. IRS rules direct you to calculate its value by figuring the mean between the high and low on the day you transfer it. That means lots of charitable mileage out of shares you may have bought at rock-bottom prices. Lawrence Rapoport, manager of client accounting at Rockefeller & Co., explains it this way: Say you bought stock for $1,000 that's now worth $10,000. If you sold those shares, you would pay 20%, or $1,800, in capital gains taxes on that $9,000 profit. Instead of having $10,000 to give to charity, you'd have only $8,200. Yet if you gift the $10,000 in stock, you can claim the full amount as a deduction. Remember to hold the stock 12 months or more. Otherwise, you may deduct only your original cost basis.
GIFT INSIDER STOCK. You can donate restricted stock or "locked-up" shares held by initial public offering insiders. Community Foundation, for instance, is holding on to pre-IPO shares of AltaVista, the search engine and Net portal, and Snowball.com, a Web site aimed at 13- to 30-year-olds. To value restricted stock, you will need an independent appraiser, according to IRS rules. Although you are not required to engage an appraiser for stock worth $10,000 or less that is not traded on any securities market, in practical terms, you will need help to value the stock, says Greif.
KNOW THE LIMITS. The IRS allows you to donate stock worth up to 30% of your adjusted gross income and still get a current valuation. The limit for donating to a family foundation is 20% of AGI. The overall ceiling on donations is 50%, so you can augment that 30% in stock with an additional 20% of your AGI in cash. If you exceed the limit, you can carry over the excess for five years.
GIFT MUTUAL FUND SHARES. "You don't see this as much," says Morgan Stanley Dean Witter Senior Vice-President Matthew Ives, "because a mutual fund makes a distribution every year." That means fund shares tend to have smaller capital gains.
WATCH THE CALENDAR. Although you won't know your exact AGI until at least yearend, don't donate stock on Dec. 31. It might not transfer in time for current-year tax benefits. And be sure to ask your recipient charity for a donor acknowledgement letter for the IRS.
TRY A TRUST. You deposit appreciated stock in a charitable remainder annuity trust and collect annual income of, say, 6%. Upon your death, the charity receives the principal. Using a trust avoids taxes on the stock's gains and gets you a deduction, dependent on your age and the value of the annuity interest.
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