For investors who are charitably inclined, one giving option is making their donations using shares of appreciated securities.
Whether using shares of individual stocks, ETFs or mutual funds, this can be a good strategy for financial advisers to discuss with their clients who hold appreciated securities inside taxable accounts.
Donating appreciated securities allows investors to contribute the market value of the security while eliminating any capital gains taxes that would be due if they were sold and the investor then donated the cash proceeds. This makes using appreciated securities a tax-efficient approach to charitable giving.
For investors who have positions with a low cost basis in securities like Apple (AAPL) – Get Report, Microsoft (MSFT) – Get Report, Amazon (AMZN) – Get Report or others that have seen significant amounts of appreciation in recent years, the embedded capital gains can be significant.
The market value of the appreciated securities on the day of donation is eligible for a charitable deduction for tax purposes for those who can itemize deductions.
If a client normally wouldn’t be able to itemize, it can make sense to bunch the contributions they might make over several years into a single year so they can itemize their donations in a given year. This strategy might be particularly useful for 2020.
Normally, charitable deductions are limited to 50%; 30% or 20% of an investor’s adjusted gross income. For 2020, the CARES Act allows charitable deduction of up to 100% of their AGI. For those clients who wish to make donations, who have one or more holdings where they are sitting on unrealized capital gains and who can afford to do so, 2020 might be a good year to donate more than they might ordinarily.
If their AGI is going to be higher than normal this year this option can be especially useful.
If the organization that an investor wants to donate to can accept contributions in the form of securities, advisers can show them how this can be an easy way to make their contributions. Most investment custodians make these types of donations a fairly easy process. Once the client completes the proper paperwork the custodian will transfer the shares to the charity.
Another option advisers can discuss with their clients is donating appreciated securities to charity via a donor-advised fund (DAF). A donor-advised fund is a charitable investment account. An investor can open an account with a DAR and contribute cash, securities or other assets. The money is professionally invested until the investor recommends grants to an IRS-qualified charity.
Donor-advised funds are offered by Fidelity, Vanguard, Schwab and other investment custodians. Generally the contributions to the fund are deductible in the year that they are made, and grant recommendations by your clients can be made over several years.
This can be a good route for your client if they would like to spread their donations to one or more charities over several years, or if they aren’t sure to which organizations they would like to contribute. Most DAFs have rules as to minimum transfers into the fund and for amounts donated. Also the recipient organization does have to be approved by the DAF.
A Rebalancing Tool
Donating appreciated securities directly or to a vehicle like a donor-advised fund can be a helpful tool as you rebalance client portfolios. When the stock market has done well, your client may have several securities that have shown tremendous appreciation. They may comprise an outsized portion of the client’s portfolio. Donating a portion of these shares to charity can help in the rebalancing process, saving your client from having to pay capital gains taxes and also providing a charitable deduction if they can itemize. This can be a tax-efficient way for clients to reduce a concentrated stock position if the shares have appreciated.
For clients who are charitably inclined, using appreciated securities can be a very tax-efficient way to make these contributions. It is a way for them to do good for others while doing good for their own financial situation.