Over the past 10 years, the way Americans earn and save has changed. As baby boomers reach middle age, their earnings have grown and they are increasingly beginning to consider their future financial needs for retirement. The specter of a faltering Social Security system and the broad availability of qualified retirement plans combined with increased sophistication are causing many individuals to save more for those future needs. As a result, today the single largest asset category in household wealth has changed from money held in banks to money held in securities.
Today’s investors are different from yesterday’s. Instead of buying shares of individual stocks, they increasingly own shares of mutual funds. Mutual funds are attractive because they boast superior performance based on professional management and diversification. In fact, the majority of appreciated assets that often make the most sense to donate from a tax planning perspective are now held by many donors in the form of mutual funds.
As a result, over the last several years we have seen increasing numbers of gifts, or attempted gifts, of mutual funds. Unfortunately, unlike gifts of appreciated securities that have well established and widely understood procedures for their completion, there is currently no uniform method of transferring mutual funds to charitable recipients. Each fund has slightly different procedures for handling charitable gifts. This lack of uniformity can sometimes create unnecessary delays and frustration. For example, we have seen situations where a donor was mistakenly advised to sell the shares in his or her account and transfer the proceeds to the charitable entity. This can be very bad advice from a tax planning standpoint as a sale prior to a gift of cash proceeds can trigger unwelcome capital gains for a donor.
In other instances, mutual fund gifts have been impossible to complete at year end because of processing delays. To avoid these problems, the gift planner should be prepared to take a more active role in shepherding such gifts from inception through completion. Much of this can be accomplished by communicating directly with the mutual fund and ascertaining what procedures are necessary to complete the gift on behalf of their customer and your donor.
The donor can be very helpful in facilitating the communication process by informing both the charity and the mutual fund of his or her intention to make a gift. Once appropriate contacts have been identified, the donor should provide written instructions concerning the intended gift. The charity should be prepared to supply its taxpayer identification number and proper mailing address so that an account can be opened to receive the gift. Once the transfer is completed the charity may then sell the securities with no tax impact on the donor.
With their growing popularity, mutual funds will continue to offer a very important avenue through which a donor may choose to make a charitable gift. The role of the development executive in the gift planning process may mean the difference between a timely, well-executed gift and no gift at all!