Recently, we had a meeting with a client who was in the process of doing their Estate Planning with us. They were looking to donate to a very worthwhile charity they had been involved with for many years. The problem was that they were not donating cash, but rather Australian shares that they had owned for several years.

The initial and obvious thought at the time of death was that the Estate would look to sell the asset and donate the proceeds, and that would be that.

When we took the time to look closer and work through the transaction, it wasn’t the best solution. To make the donation, the Estate would sell an asset worth $200,000 that had a $50,000 capital gain baked into it. This was also after we applied the 50% discount, given that the asset had been held for more than 12 months. The proceeds from the sale would then be donated to charity.

Unfortunately, using this approach, donations made by an Estate don’t qualify for a tax deduction. Therefore, the Estate would still owe $15,000 in taxes on the $50,000 profit, excluding the Medicare levy, which estates are exempt from.

So, it was back to the drawing board.

The second option was donating the asset directly to the Charity rather than selling it.

Instead of selling the shares, the Estate would donate the shares to the charity. By donating the shares directly, the Estate doesn’t have to pay tax on the $50,000 profit. This means the Estate would save $15,000 in taxes, leaving more money to go to the other beneficiaries.

The issue we encountered was that the donation of the shares created a problem in itself, as many charities don’t wish to accept donations of shares themselves, and we could see the Estate becoming embroiled in an administrative nightmare.

The third option we considered was giving with a warm hand, which is a theme we have encouraged over many years. As we often say, ‘there are no pockets in shrouds’, so you can’t take it with you. This option involves the client donating while they are still alive, and it ticks a lot of boxes.

Suppose the client sells the shares and donates the full $200,000 from the sale. Our client gets a full tax deduction for the entire amount.

This could then reduce their tax bill by:

• Offsetting the $50,000 gain from selling the asset
• Allowing the client to use the remaining $150,000 deduction to reduce other taxable income for the current or future years.

In total, this option saved the client $63,000 in taxes compared to waiting until after their death.

As you can see, each situation is different, but there are vastly different consequences if you don’t think it through.