RSM Resources

In 1984, Raymond and Eleanor Devereaux purchased 11 acres of land for $100,000. Located about 35 miles outside San Diego, the property —with its log home and mountaintop views of Cleveland National Forest —grew in value to $1.3 million by 2005.

That’s when Mr. Devereaux, 90, and Mrs. Devereaux, 84, developed their estate plan and decided to donate the property to charity. The couple selected Consumers Union, the not-for-profit publisher of Consumer Reports,as their beneficiary. In exchange for donating the property, the Devereauxs received a $60,000-a-year annuity, a federal income-tax deduction and the right to live on the property for the rest of their lives. They also avoided some capital gains taxes and all estate taxes on the property.

Mr. Devereaux, who retired from a career in construction and engineering at age 57, told The Wall Street Journal, "We get quite a good income from it and a tax break. I knew about Consumers Union and always thought well of them."

According to the National Committee on Planned Giving, altruism — or concern for the general welfare of others — and, to a lesser degree, tax savings,drive those making charitable donations. In a recent survey, 97 percent of donors reported that a desire to support a charity motivated them to give. Just 35 percent of respondents said they were also hoping to reduce their taxes.

There are a number of ways to combine altruism with tax savings. The methods currently experiencing a growth surge are donations of appreciated real estate or marketable securities, gifts from IRAs, and contributions through donor-advised funds.

Real estate. The recent run-up in real estate values has motivated an increasing number of philanthropists —particularly baby boomers with second homes — to avoid a tax bite by donating properties to charitable organizations. Even with the more recent market slowdown, many real estate investors still may have realized significant gains.

Selling a home that has significantly appreciated in value can result in federal capital gains taxes of up to 15 percent for the owners. Most married couples can exclude just $500,000 ($250,000 for singles) of the gain on the sale of their primary residence. The exclusion doesn’t apply to second homes or vacation homes.

With a written independent appraisal, real estate donors can often deduct the fair-market value of their property— up to 30 percent of adjusted gross income — as an itemized deduction on federal income-tax returns.

Besides the tax deduction, several tools for donating real estate generate income. Two of the most frequently used tools are:

• Charitable remainder unitrust. With this type of transaction, the donor gives real estate to an organization that sells the property and places the proceeds in a trust. The donor receives a variable income payment of up to 20 years or the life of the donor and spouse, whichever occurs first.
• Charitable gift annuities. The donor contributes real estate to a qualified not-for-profit organization that sells the property and holds the proceeds. The donor receives a fixed annuity payment for life.

Not-for-profit groups are responding to the interest in real estate donations with new marketing programs. For example, in September 2006, Long Island University began a direct-mail campaign seeking real estate donations.

Charitable organizations do not accept every property, particularly if the property is unlikely to sell quickly. Long Island University didn’t accept one real estate donation after engineers determined the property wasn’t suitable for home building — a finding that diminished the land’s resale potential.

Marketable securities. If you’re holding securities or stocks that have significantly increased in value, you’ll likely take a capital gains tax hit when you sell them. However, if you donate the securities to an IRS-qualified charitable organization, you can avoid the tax penalty and receive a tax deduction equal to the current value of the stock.

You can make this form of charitable gift outright; it’s not necessary to establish a trust. Depending on the size and sophistication of the receiving organization, the charity may need to set up a brokerage account in order to receive the gift. The sale, when conducted by the organization, is tax-free, and the only cost is the trading fee.

Gifts from an IRA. The Pension Protection Act of 2006 included a provision allowing taxpayers aged 70-1/2 and older to donate up to $100,000 tax-free each year from an individual retirement account (IRA) to a not-for-profit organization.

IRA owners in this age group are required each year to take taxable minimum distributions. Donating the required minimum distribution could reduce the donor’s income to the point where Social Security income isn’t taxable.

The United Way of America estimates the IRA rollover provision could generate $400 million in new giving to the charitable sector, mostly from donors with well-funded IRAs who have more than enough money to live on or leave to their heirs. Universities, colleges and other organizations that attract older, high-income donors are most likely to benefit, says Patrick Lester, director of public policy at United Way.

Christopher Hoyt with the University of Missouri-Kansas City School of Law told The Wall Street Journal the provision will be useful for people who are among the two-thirds of taxpayers who don’t itemize their deductions and who live in states with no charitable deduction. Experts say it’s also a useful technique to contribute highly appreciated stock tax-free.

The IRA rollover donations carry restrictions. Contributors must make the donations to an IRS-qualified not-for-profit and go directly to the charity — not through a donor-advised fund.

Donor-advised funds. These funds — run by many financial services firms, including Fidelity Investments, Charles Schwab and Vanguard Group — are intermediary vehicles that grant money to charities which donors select. To seed the funds, donors often contribute $10,000 to $25,000 in stock or cash —frequently after receiving a large bonus or inheritance, or upon the sale of a business.

The donors receive a tax deduction upon making the contribution, but they can make donations at a later time,even in another calendar year.

Assets in the largest donor-advised funds grew by more than 20 percent from 2004 to 2005, according to the Chronicle of Philanthropy, climbing to $15.5 billion in 2005 from $12.7 billion in 2004. The funds distributed $3.3 billion to charity in 2005, up nearly 21 percent over2004.

In response to growing popularity of donor-advised funds,the largest providers have cut fees as they compete to attract more clients. Fees on the first $500,000 deposited can be as low as 0.6 percent. Providers are also improving the usability of their Web sites and simplifying the selection of investment options.

Whether your annual financial planning process includes charitable donations or you’re incorporating gifts into your estate plan, a number of tools can benefit the organization of your choice and reduce your taxbill. Consulting a financial professional is the first step toward establishing a plan that will maximize the effects of your contributions.