Step three of the Tactical Philanthropy process is Asset Analysis. Most of the charitable giving in this country takes the form of cash gifts. In most cases, cash is a bad gift. The IRS gives you an income tax deduction when you make a gift to charity. They also forgive you any capital gains tax you might owe on an appreciated asset if you use it to make a gift.

If you are a top tax bracket donor in California (the state with the highest combined state and federal taxes, and the place I call home), a $10,000 gift of cash will have an after-tax cost of $5,570. However, if you were to make a $10,000 gift using a theoretical asset with a zero cost basis, your after-tax cost would be just $3,140. Taking advantage of the capital gains tax reduction in addition to the income tax deduction allows the donor in this example to either increase their giving by 77% without increasing their cost of giving or reduce the cost of their giving by 44% without decreasing the amount they give each year. Now clearly, most people do not have zero cost basis assets sitting around. But, this example highlight the dramatic impact using the right assets to fund your giving can have.

During the long bull market of the 80’s and 90’s, many people became familiar with the concept of gifting shares of stock to the nonprofits they supported. However, the golden rule of the asset analysis process is “Gift with your most highly appreciated asset.” During the 80’s and 90’s, common stock often represented donors most highly appreciated asset. Today with the market still below where it was in 2000 and other assets (like real estate) perched at the top of their own rally from 2000 through today, donors need to look beyond common stock when thinking about how to fund their charitable giving.

The Asset Analysis process reviews a donor’s complete financial holdings and identifies those assets that present the best opportunity to fund the donor’s giving.

Some examples:

• Real Estate: The great real estate boom seems to have come to a halt. Donors with holdings in investment properties should think about using these assets to fund their giving. Both complete and partial gifts of real estate to nonprofits should be considered. If multiple nonprofits are contemplated as recipients, or if endowing future years’ giving is desired, real estate can be used to fund a donor advised fund.

• Privately held business interests: If you are a partner in a privately held business or the owner of a family firm, you can use this asset in your giving. One obvious time to consider this option is when a family seeks to sell a family business that they have built up over the years. The sale of the business will trigger a large tax bill. By gifting a partial interest to a nonprofit or donor advised fund, the family can offset part of the tax from the sale. Recently the rules regarding gifts of assets held inside of an S-Corporation were changed. These assets had been an ineffective choice for giving in the past, but at least until December 31, 2007 these assets can be a tax efficient choice.

• Odds & Ends: Artwork, life insurance, coin collections, intellectual property, The Minnesota Vikings… Almost any asset can be gifted to a nonprofit. The structure of the gift and the nonprofit receiving the gift both play into the tax ramifications. The last time the Minnesota Vikings were sold, my friend Bryan Clontz was involved in handling a gift of a partial share of the team into a donor advised fund.

Many people regard the charitable gift portion of the IRS code to be the most complex part of the code. The point of the Asset Analysis is to take a step back and reconsider what you view as your available resources. Two financial assets with the same fair market value may have very different gifting capacity. Simply choosing the right assets to fund you giving with can allow you to dramatically increase your ability to give without increasing your cost of giving or decrease your cost of giving without reducing the amount you give.

The second stage of Tactical Philanthropy looks at how you want to distribute your personal and social capital upon your death. Subject to the rules of the estate tax, you can distribute the capital you accumulated during life to the government (as social capital), to nonprofits (as social capital) and to your heirs (as either personal or social capital).

There are numerous competent estate planners and bequests are the number one form of planned gift. Therefore, I think that the distribution of personal capital to your heirs and social capital to the government and nonprofits is pretty well understood by individuals and their advisors. But, don’t overlook the distribution of social capital to your heirs.

Here is a simple example:

Situation:

Susan is an 86-year-old widow with an adult daughter named Jill, who is financially secure. Susan’s assets are large enough that she expects the bulk of her estate to be subject to the estate tax. She plans to leave Jill her entire estate. While talking to her estate planner Susan learns that $1,000,000 of her estate is held in an IRA. If she leaves this account to Jill, both income tax and the estate tax will be levied on the assets and almost 75% of the account will be due in taxes. While Susan has never given very much to nonprofits, she knows that philanthropy is very important to Jill. Susan wants to make sure that Jill has the money she needs, but both of them would like to see the money used for social good if possible.

Tactical Solution:

Jill will inherit about $250,000 from the $1 million IRA after the estate pays taxes. Since Jill is financially secure, she may not “need” the $250,000 and might rather be named as an advisor to a donor advised fund with $1 million in assets. Susan can accomplish this by naming Jill as the heir to the IRA and a donor advised fund as a contingent beneficiary. In this way, Jill can decide which option is better at the time the inheritance takes place. If she wishes to take the $250,000, she can do so. If she would rather be named as advisor to a donor advised fund, she can disclaim – or refuse to inherit – the IRA assets. The $1 million would then flow into the donor advised fund and no income or estate tax would be due. She will have created this meaningful account for a cost to her of one fourth of the account value. Jill would then be able to use the donor advised fund assets either to increase the amount of her giving or to offset the cost of her personal giving, thereby increasing her personal capital.

Looking only at the IRA, we can see that Susan can either leave $750,000 as social capital to the government and $250,000 as personal capital to Jill, or the full $1,000,000 as social capital for Jill to distribute to nonprofits. Another important point is the fungiblity of personal and social capital. Since Jill already engages in charitable giving, she can use the donor advised fund assets to replace her own giving or to enhance her giving. By replacing her giving she frees up personal capital, by enhancing her giving she distributes more social capital.