5 ms·

Another benefit, it sounds like, is that you don't have to pay capital gains on selling those shares. Like, let's say your intent is to donate $10k to some cha

Another benefit, it sounds like, is that you don't have to pay capital gains on selling those shares. Like, let's say your intent is to donate $10k to some charity, out of the goodness of your heart and/or as a tax write off. You don't have that in cash, but do in stock. You could liquidate $10k of stock, pay capital gains on it (if it appreciated since acquisition), then donate it. So you're out the capital gains tax. The method you describe seems more efficient, since you don't need to sell; you simply transfer ownership of the asset. Or is there still capital gains to be paid? I wonder if billionaires are setting up charities as trusts for their kids, then "donating their shares to charity?"

palmtree3000 5y ago
You indeed don't have to pay long term capital gains tax, although you do have to pay short term capital gains tax.
- loeg 5y ago
  No? Donations of stock to DAFs are not taxed and the full amount is deducted.
AlbertCory 5y ago
You're exactly right, you don't pay capital gains tax, and DAFs really are the poor man's "tax-exempt foundation." Billionaires have access to much fancier schemes than this, and I won't even attempt to describe all those. But yeah, I imagine "donating their shares without capital gains taxes" figures into them. I just noticed you said "trusts for their kids" -- that's something different. If the children can access it, it's not a DAF. But trusts are much more complicated, and someone who understands them (which I don't) can hold forth here.
- jonas21 5y ago
  Yeah, I didn't realize what an enormous difference this made until I ran the numbers. In your example above, let's say the person purchased those 10 Meta shares for $38 each at the IPO and they're worth $322 each now. That's $3220 in proceeds and a $2840 capital gain. The taxes on this depend on income level and state of residence, but let's say they're in CA making $300K/year. They'll pay 20% federal capital gains tax + 3.8% net investment tax + 10.3% CA income tax, or $968 in taxes, and they're left with $2252. On the other hand if they donate the shares to a charity (or DAF), they get a tax deduction for the appreciated amount ($3220), which can be taken against 35% federal income tax + 10.3% CA income tax = $1459. So in the scenario where they just sell the shares, the proceeds after taking taxes into account are: Donor $2252 Charity $0 And in the scenario where they donate the shares, they are: Donor $1459 Charity $3220 In other words, for an effective cost to the donor of $793, the charity gets $3220.
  - overeater 5y ago
    Isn't that double counting? In the first scenario, $2252 is the amount that they get in their bank account post-tax (marginal). In the second scenario, they get $0 in their bank account post-tax (marginal), and there is a deduction but that occurs on the amount donated so they don't really gain $1459 but rather avoided paying those taxes.
    - CRConrad 5y ago
      Avoiding paying taxes leaves more in your bank account than if you had to pay them, so it's still a gain, isn't it?
  - xvector 5y ago
    HN needs a way to save comments.
    - grzm 5y ago
      That's what the "favorite" link is for.
      - lgats 5y ago
        To clarify, you click the timestamp on the comment to get to the comment-specific "favorite" link
  - AlbertCory 5y ago
    Right. If you just sell, you can spend some of the money (that you don't donate). If you donate to a DAF, it's 100% gone to charity, *someday."
  - loeg 5y ago
    To be clear, this is exactly the same for any gift of appreciated stock -- a DAF is not required to donate appreciated stock in-kind and deduct the full (unrealized) price without paying capital gains. But the vast majority of charities are not equipped to accept in-kind stock donations, which a DAF facilitates by taking stock in-kind and cutting the charity a check. (Also, DAFs allow claiming the deduction during high-income years and deferring distribution to charities over a longer period of time.)
- BayAreaEscapee 5y ago
  There is at least one intermediate step: it's not prohibitively expensive to set up a charitable remainder trust. You have more control than with a DAF. But you have a fixed cost to set up the trust and some annual administration and tax compliance costs. It can make sense if you plan to donate more than, say, a million dollars.
bo1024 5y ago
I think this is what the rich do with art, yes.
- AlbertCory 5y ago
  I don't have this problem, but getting a "fair" appraisal of your art can be tough. Maybe they auction it off, and the proceeds go to their foundations?
dublinben 5y ago
This is more or less what billionaires do to pass their wealth to their children. Here's a recent article that goes into detail about one particular family's setup. https://archive.md/yN7M7 https://archive.md/yN7M7 https://www.bloomberg.com/features/how-billionaires-pass-wealth-to-heirs-tax-free-2021/ https://www.bloomberg.com/features/how-billionaires-pass-wea...
- loeg 5y ago
  DAFs and GRATs are completely different vehicles. DAFs are beneficially owned by some 501(c)(3) and withdrawals can only go to arms-length, 3rd party 501(c)(3)s, with no reciprocity attached to the gift. DAFs are a convenient way to gift appreciated stock (which is already a nice tax gift to the charitable wealthy), but fundamentally not a vehicle for passing money to your heirs. Your article is about GRATs, which should be illegal.

palmtree3000 5y ago

You indeed don't have to pay long term capital gains tax, although you do have to pay short term capital gains tax.

loeg 5y ago
No? Donations of stock to DAFs are not taxed and the full amount is deducted.

AlbertCory 5y ago

You're exactly right, you don't pay capital gains tax, and DAFs really are the poor man's "tax-exempt foundation." Billionaires have access to much fancier schemes than this, and I won't even attempt to describe all those. But yeah, I imagine "donating their shares without capital gains taxes" figures into them. I just noticed you said "trusts for their kids" -- that's something different. If the children can access it, it's not a DAF. But trusts are much more complicated, and someone who understands them (which I don't) can hold forth here.

jonas21 5y ago
Yeah, I didn't realize what an enormous difference this made until I ran the numbers. In your example above, let's say the person purchased those 10 Meta shares for $38 each at the IPO and they're worth $322 each now. That's $3220 in proceeds and a $2840 capital gain. The taxes on this depend on income level and state of residence, but let's say they're in CA making $300K/year. They'll pay 20% federal capital gains tax + 3.8% net investment tax + 10.3% CA income tax, or $968 in taxes, and they're left with $2252. On the other hand if they donate the shares to a charity (or DAF), they get a tax deduction for the appreciated amount ($3220), which can be taken against 35% federal income tax + 10.3% CA income tax = $1459. So in the scenario where they just sell the shares, the proceeds after taking taxes into account are: Donor $2252 Charity $0 And in the scenario where they donate the shares, they are: Donor $1459 Charity $3220 In other words, for an effective cost to the donor of $793, the charity gets $3220.
- overeater 5y ago
  Isn't that double counting? In the first scenario, $2252 is the amount that they get in their bank account post-tax (marginal). In the second scenario, they get $0 in their bank account post-tax (marginal), and there is a deduction but that occurs on the amount donated so they don't really gain $1459 but rather avoided paying those taxes.
  - CRConrad 5y ago
    Avoiding paying taxes leaves more in your bank account than if you had to pay them, so it's still a gain, isn't it?
- xvector 5y ago
  HN needs a way to save comments.
  - grzm 5y ago
    That's what the "favorite" link is for.
    - lgats 5y ago
      To clarify, you click the timestamp on the comment to get to the comment-specific "favorite" link
- AlbertCory 5y ago
  Right. If you just sell, you can spend some of the money (that you don't donate). If you donate to a DAF, it's 100% gone to charity, *someday."
- loeg 5y ago
  To be clear, this is exactly the same for any gift of appreciated stock -- a DAF is not required to donate appreciated stock in-kind and deduct the full (unrealized) price without paying capital gains. But the vast majority of charities are not equipped to accept in-kind stock donations, which a DAF facilitates by taking stock in-kind and cutting the charity a check. (Also, DAFs allow claiming the deduction during high-income years and deferring distribution to charities over a longer period of time.)
BayAreaEscapee 5y ago
There is at least one intermediate step: it's not prohibitively expensive to set up a charitable remainder trust. You have more control than with a DAF. But you have a fixed cost to set up the trust and some annual administration and tax compliance costs. It can make sense if you plan to donate more than, say, a million dollars.

bo1024 5y ago

I think this is what the rich do with art, yes.

AlbertCory 5y ago
I don't have this problem, but getting a "fair" appraisal of your art can be tough. Maybe they auction it off, and the proceeds go to their foundations?

dublinben 5y ago

This is more or less what billionaires do to pass their wealth to their children. Here's a recent article that goes into detail about one particular family's setup. https://archive.md/yN7M7 https://archive.md/yN7M7 https://www.bloomberg.com/features/how-billionaires-pass-wealth-to-heirs-tax-free-2021/ https://www.bloomberg.com/features/how-billionaires-pass-wea...

loeg 5y ago
DAFs and GRATs are completely different vehicles. DAFs are beneficially owned by some 501(c)(3) and withdrawals can only go to arms-length, 3rd party 501(c)(3)s, with no reciprocity attached to the gift. DAFs are a convenient way to gift appreciated stock (which is already a nice tax gift to the charitable wealthy), but fundamentally not a vehicle for passing money to your heirs. Your article is about GRATs, which should be illegal.