Question

Marcel and Clio are considering making a sizable charitable gift to a local university using assets held in their joint mutual fund accounts. The primary purpose of their gifting strategy is to reduce the taxable estate while providing a benefit for the university. Which of the following strategies will maximize the effectiveness of this estate planning strategy?

a.Give the mutual funds first to their oldest child, who can then sell them with a stepped-up basis and use the proceeds as a donation to the university.

b.Donate the mutual funds directly to the university and allow the university to sell the mutual funds.

c.Sell the mutual funds first and then donate the cash proceeds to the university.

d.Transfer the mutual funds to a non-charitable irrevocable trust and then donate the trust income to the university.

Answer 1

The best option is to transfer the mutual funds directly to the university and allow them to sell & keep the proceeds. The advantages with this option are:

• the amount transferred is before tax and hence the donation is of a higher amount
• since the mutual funds have been transferred to the university, there's no tax liability in the hands of Marcel & Clio.
• there's a deduction on donation available upto full amount if the amount realised is upto 50% of AGI.

Selling the mutual funds directly will attract taxes in the hands of Marcel & Clio.

Transferring the mutual funds to their oldest child will require revaluation on a stepped up basis thus increasing the tax liability.

If the mutual funds are transferred to non-charitable irrevocable trust, they'll be taxed thereon and only the net realisable gains can be transferred to the university.

The amount transferred to the university will be highest if mutual funds are transferred to them directly.