Case of the Week

Case:

Karl Hendricks has been a loyal donor to Favorite Charity for many years. Favorite Charity is in the process of building a new center for the underserved individuals. Karl has a big heart and would like to make a major gift for that center. He bought development land 15 years ago for $400,000. Karl wants to know if it would be a good idea to make the gift of the property to charity. The property has increased in value, is debt-free and is presently worth $2 million. Karl discussed his options with the Director of Development at Favorite Charity and mentioned that he wanted to honor his late wife Clara through a gift.

Question:

Is an outright gift of the development land a good way for Karl to honor his wife?

Solution:

The Favorite Charity Director of Development explained there was a $2 million naming opportunity gift available for the new center. Karl decided to give the land to Favorite Charity in honor of his late wife Clara. He transferred the property by deed to charity and obtained a valuation from an appraiser who is qualified to value commercial real estate. Based upon comparable sales, the appraiser valued the property at $2 million. With a $2 million gift of an appreciated asset, Karl is able to deduct up to 30% of his adjusted gross income each year for up to six years. Fortunately, he has an annual income of $1.2 million and can deduct $360,000 per year. Over six years, Karl will report this deduction and save $160,000 each year in federal and state income taxes. The total income tax savings over six years will be about $900,000. In addition, because Karl bypassed the gain on the taxes, there is an additional $450,000 saved in federal and state capital gains tax. The total tax savings are over $1.3 million.

Karl was delighted. He invested $400,000 in the property 15 years ago, benefited Favorite Charity with a $2 million naming gift and received more than $1.3 million in total tax benefits. Because this was a large gift, the new center was named for Karl's late wife, Clara Hendricks. Karl attended the dedication dinner and was visibly touched by the appreciation of all of the loyal donor friends of favorite charity.