52 RI Bar J., No. 4, Pg. 29 (January, 2004). A Cost Approach to Charitable Gifting.

• Author: PAUL A. BRULE, ESQ.

Rhode Island Bar Journal

Volume 52.

52 RI Bar J., No. 4, Pg. 29 (January, 2004).

A Cost Approach to Charitable Gifting

A Cost Approach to Charitable GiftingPAUL A. BRULE, ESQ.Paul A. Brule is a partner in Walsh, Brule & Associates Attorneys PC with offices in Cumberland and Providence, RIThis article reviews a simple charitable gift transaction, the outright gift of $10,000 worth of appreciated assets such as stock or other securities to a charity qualified under §501 (c) (3) of the Internal Revenue Code, to determine the true cost to the donor. While more complex gifting arrangements are certainly possible, such as the use of split interest gifts, or gifts of life insurance and the like, all of which might give even more beneficial results, the goal here is to analyze a very simple transaction to determine the true costs. The article is divided into four parts. Part I consists of the assumptions made regarding the donor, specifically as regarding the donor's portfolio, its unrealized capital gains and the donor's income tax status. Part II reviews the unrealized capital gains tax effect of a $10,000 gift on the donor's portfolio. Part III examines the income tax savings as a result of the gift. Part IV, we review the different results that could be realized from just a small change in the assumptions made at the onset of the article.

Part I: The AssumptionsAssuming the donor has a $100,000 portfolio of capital assets such as securities and further assuming the donor's cost basis in such portfolio is $20,000, we arrive at an unrealized capital gain in the portfolio of $80,000. Assuming a 15% maximum federal capital gains tax coupled with an approximate 5% state income tax burden arising therefrom, we find the unrealized capital gain tax to be 20% of the $80,000 of the unrealized capital gain, or in other words, a potential tax expense of $16,000. Therefore, though this individual sees their portfolio as being worth $100,000, in reality, should they liquidate that portfolio and pay the taxes that would be due on such sale, it would only have a net real value of $84,000 ($100,000 - $16,000 = $84,000).

There are a few other assumptions we must make before proceeding. Assume this portfolio is held separate and apart from this donor's other assets. In particular, assume that the donor has income and expenses that they manage out of other, rather significant resources. Also, assume that this individual is in a 35% federal income tax bracket and that the donor's income is also subject to an additional tax for state income tax purposes, which may be as high as 9.9% to be added to the 35%, for state income tax purposes, for a total 44.9% effective overall marginal income tax rate.

Clearly, these assumptions are not of your average taxpayer...