Why might a financial advisor suggest donating securities to a charity?

• A. To allow the donor to avoid paying capital gains tax on appreciated securities
• B. To reduce the charity's tax liability
• C. To increase the market value of the donated securities
• D. To guarantee a fixed return on the donor's investment

Answer: (A)

Verified step by step guidance

1. Understand the concept of capital gains tax: Capital gains tax is a tax on the profit realized from the sale of an asset, such as securities, that has increased in value over time. Donating appreciated securities can help avoid this tax.
2. Recognize the tax benefit for the donor: When a donor gives appreciated securities directly to a charity, they can avoid paying capital gains tax on the appreciation, which would otherwise be due if the securities were sold.
3. Understand the charity's benefit: Charities, as tax-exempt organizations, do not pay taxes on the appreciated value of the securities they receive. This means the full value of the securities can be used for charitable purposes.
4. Clarify the incorrect options: Donating securities does not reduce the charity's tax liability (since they are already tax-exempt), does not increase the market value of the securities, and does not guarantee a fixed return on the donor's investment.
5. Conclude the reasoning: The primary reason a financial advisor might suggest donating securities to a charity is to allow the donor to avoid paying capital gains tax on appreciated securities, while also benefiting the charity.