Cecily O'Connor
RedwoodAge.com

As 2007 winds down, charities are hoping baby boomers in their peak earning years will be in a giving mood this holiday season.

The boomers are prime candidates as charitable organizations ratchet up fundraising drives near the end of the year, said Eileen Heisman, president and chief executive officer of the National Philanthropic Trust. "After Thanksgiving, it's open season for charitable giving," she said.

While most boomers are focused on saving money for their retirement, many could find it advantageous to donate some of their wealth.

Between 10 million and 20 million US households (of all ages) have the potential to reap significant tax savings by donating appreciated securities such as stocks, bonds or mutual funds instead of cash, according to a new report by Fidelity Investments. The firm estimates that the additional median federal tax savings from donating $10,000 in appreciated securities is $4,491.

"Although stocks and mutual funds have become a common investment vehicle for most Americans, only a small fraction ever factor in their investment gains for the purposes of charitable giving," said Steve Feinschreiber, senior vice president of research at Fidelity.

That's because investors often want to keep securities that are doing well or fear the paperwork associated with a securities donation, the giant brokerage found. They also are largely unfamiliar with vehicles such as donor-advised funds.

The boomers, now aged 43-61, are leading a mammoth transfer of wealth. Boston College's Center on Wealth and Philanthropy has estimated boomers and their parents will transfer assets worth at least $41 trillion to family members and charities over the next 40-plus years.

Overall, about 83 percent of Americans give to charity annually. However, cash donations make up the lion's share of total giving, representing $123 billion of the total $166 billion donated in 2004, according to Internal Revenue Service data.

But Fidelity warns that cash donations may cost some individuals important tax savings. Consider a hypothetical donation worth $10,000. Assuming a 28 percent personal income tax rate, a donation of $10,000, in either cash or appreciated securities, would result in a federal ordinary income tax savings of $2,800. But in the case of appreciated securities, additional savings can be realized by avoiding the capital gains taxes on the appreciation of the stock or mutual fund.

For example, if the $10,000 donated stock or mutual fund was bought initially at $7,000, an additional $450 savings would be realized by not having to pay the 15 percent federal capital gains tax on the $3,000 of appreciation. Donating Individual Retirement Account assets may appeal to more retirees down the road, too. A proposal introduced in March known as the "Public Good IRA Rollover Act of 2007," seeks to expand the tax break for IRA charitable rollovers. It would permanently remove the $100,000 annual limit on donations, and donors aged 59 ½ would be able to make distributions directly from traditional or Roth IRAs to create a "life-income gift" to charity. Currently, donors need to be 70 and older to make distributions to charity.

The bill remains in the first step of legislative process, and has yet to go to committees for deliberation, investigation or revision.

Considerations
Any appreciated security purchased over a year ago that has a current value greater than its original cost may be donated to a charity with a tax deduction taken for the full market value of the security. The only limit on the deduction is up to a limit of 30 percent of the donor's adjusted annual gross income (AGI). And since the security was donated to charity rather than sold, capital gains taxes from selling that security are no longer applicable, Fidelity said.

To be sure, everyone's situation is different, so it's wise to speak with a tax professional or financial planner before taking action.

Joyce Franklin, a certified financial planner in Larkspur, Calif., said some of her clients choose to contribute securities when they need to rebalance their portfolio and are looking to offset a high position in a given security. She also recommends that some of her clients donate through a donor advised fund that enables individuals to contribute securities and receive a fair market value deduction in the year of transfer.

Once an investment is received by the sponsoring organization, it is liquidated and placed into one or more pooled accounts selected by the donor, according to Franklin. The donor can then use these funds to make cash gifts to one or more charitable organizations over the course of one year or several years. When a donor wants to make a donation to a charity, he or she informs the sponsoring organization which, after verifying the charity’s tax-exempt status, sends a check directly to the charity indicating that it is from the donor’s account.

Gifts to charities with donor-advised fund programs accounted for just $6 billion of the almost-$300 billion of charitable contributions in the US in 2006, according to Fidelity.

But overall, it's important to make sure you are donating securities to a charity that knows how to handle that type of asset, Heisman advised. All charities can accept securities, but some fundraising offices "are more sophisticated" in handling the transaction than others. About 60 to 70 percent of the National Philanthropic Trust's gifts are in the form of appreciated securities, she said.

Heisman also recommended that boomers interested in donating securities act sooner rather than later because executing the transfer of mutual funds or stock assets can take a week or more.

"You don't want to do this on Dec. 30," Franklin said, adding that she recommends her clients hash out their plans during November.