Every day, the Community Foundation of Anne Arundel County (CFAAC) works with attorneys, CPAs, and financial advisors to help clients support the charities and causes they care about. Many of those conversations involve gifts of appreciated noncash assets, which can carry real tax benefits when they are structured well. Appreciated stock is usually the first noncash asset that comes to mind, but a client’s portfolio can include many other types of investments that deserve a closer look when charitable giving is part of the plan.

Government securities are a good example. Although clients may think of these investments as a single asset category, “government securities” actually encompasses a broad range of holdings, including Treasury bills (T-bills), Treasury notes, Treasury bonds, Treasury Inflation-Protected Securities (TIPS), Series EE and Series I savings bonds, and securities issued by federal agencies and government-sponsored enterprises.

That range matters because not all government securities are created equal where charitable giving is concerned. Here are a few points to keep in mind:

• Government securities can differ significantly in how they generate income, whether they are marketable or transferable, how they are valued, and how their interest or appreciation is taxed. A charitable strategy that works for one type of government security may not work for another, and even when a government security can be transferred directly to charity, the tax results may be quite different from those associated with the more familiar gift of appreciated stock.
• This is especially striking when comparing marketable Treasury securities, which may be transferable to charity, with savings bonds, which present very different transfer and income tax issues and may be more interesting in estate planning than as lifetime charitable gifts.
• Marketable Treasury securities may be used for charitable giving, but advisors will want to look carefully at the particular security before recommending a strategy. Transfer and charitable acceptance considerations come into play, as do valuation and tax considerations. The security’s holding period, basis, fair market value, and the character of its return can all be relevant because Treasury securities may generate interest or original issue discount rather than the long-term capital appreciation that makes gifts of highly appreciated stock such a familiar charitable planning technique.
• Savings bonds present an even more distinctive situation. Unlike appreciated stock, they generally are not well suited to a straightforward lifetime charitable gift because transferring the bonds may trigger recognition of previously deferred interest. Series EE and Series I savings bonds accumulate interest that is subject to federal income tax, and many owners defer reporting that interest until the bonds are redeemed or mature. If a client simply cashes in savings bonds during life and then contributes the proceeds to charity, the client generally recognizes the accumulated interest. In other words, the strategy does not offer the same tax advantage that may be available when a client contributes appreciated publicly traded stock directly to charity.
• Savings bonds still have a place in charitable planning, but they tend to work better in an estate plan rather than as a lifetime gift. Accumulated interest on savings bonds can constitute income in respect of a decedent (IRD), which means leaving those savings bonds to individual heirs can carry an income tax bill on top of the transfer itself. A qualified charitable organization generally does not pay federal income tax on income it receives for its exempt purposes. For a client who has held savings bonds for many years, that’s a good reason to take a second look at those assets during the estate planning process and consider whether they would do more good to the charity than to the family.

The larger lesson is one advisors encounter frequently in charitable planning: The asset matters! Two investments that look similar on a client’s balance sheet can produce very different tax and charitable planning results.

For all of these reasons and more, the CFAAC team welcomes a call early in the process. If your client owns Treasury securities, savings bonds, or other noncash assets and has charitable intentions, please reach out before the client takes action. We are happy to work alongside you to explore whether CFAAC can accept the asset, how a potential gift might be structured, and how it fits into your client's larger tax and financial picture.

Get in touch
Contact Thomas Perkins, Director of Gift Planning, at thomas@cfaac.org or 410.280.1102.