Bonds Offer Excellent Gift Opportunities

Bonds are interest-paying I.O.U.s that corporations and government agencies offer to people who are looking for fixed-income investments.  Bonds also represent an opportunity for tax-wise philanthropy.  Let’s look briefly at different types of bonds and how you might consider them in your plans to benefit worthwhile causes and organizations.

Corporate bonds.  Generally, you can deduct the full fair market value of any corporate bonds you give to qualified organizations.  You pay no capital gains tax on your paper profit and gifts are deductible up to 30% of your adjusted gross income.  (Deductions may be reduced if a sale or redemption of the bond would result in ordinary income.)  Like other appreciated assets, gifts of bonds generally are deductible up to 30% of adjusted gross income, with a five-year carryover for excess deductions.

Municipal bonds.  State and municipal bonds that pay tax-exempt interest can be contributed to charity in the same manner as corporate bonds.  Donors sometimes use tax-free bonds in special giving arrangements that provide them with income for life (that generally remains tax exempt) plus substantial income tax charitable deductions.

Tax-exempt bonds can also be used in a special gift technique called a charitable lead trust that provides income temporarily to organizations you select.  The bonds would be returned to you when the trust ends, but you would be entitled to an income tax charitable deduction in the year the trust is established.  Note:  If desired, you could arrange for the bonds to pass to children or others when the trust ends, with gift tax savings added to your income tax benefits.

U.S. savings bonds.  Savings bonds cannot be contributed to charity during life; however, U.S. savings bonds are an excellent asset for a tax-favored bequest to charity at death.  Savings bonds are a category of “tax-burdened” property (technically called “income in respect of a decedent”) that donors should bequeath to charity and thereby avoid tax problems for other beneficiaries.   Any buildup of interest in the bonds is includable both in the donor’s gross estate and in the estate’s taxable income (or in the income of the heir who receives the bonds).  Charities usually do not pay income taxes and therefore would keep every dollar of such tax-burdened bequests. Furthermore, a bequest of bonds can create both an estate tax charitable deduction and an income tax charitable deduction for the estate.

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