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Gifting Appreciated Securities – Optimizing Your Charitable Gifts

Most Americans are familiar with the radio and television ads that appeal for donations of unneeded cars, boats, or real estate. Though the process seems quite simple, those who attempt such a donation know it’s not always as straightforward as it seems. Securities, however, can be gifted with relative ease and have significant advantages.

The simplest way to donate to charity is to write a check or to drop some bills into a collection basket. Naturally, all charities welcome donations of cash. What many people don’t realize is that most charities also gratefully accept any kind of publicly traded security, including stocks, bonds and mutual funds, in lieu of cash.

Choosing to gift appreciated securities can be infinitely preferable to gifting a car, boat, motor home, or even cash. What’s more, gifting securities is a straightforward process, particularly under the guidance of a wealth advisory team working to optimize your charitable inclinations.

Double Income Tax Benefit

When gifting an appreciated security to a qualified charity, you receive a double tax benefit. First, taxpayers who itemize their deductions can expect to receive the full market value of the security as a charitable deduction. What’s more, they don’t have to recognize the capital gain. Thanks to an IRS tax transfer rule, the cost basis of the gifted asset is reassigned to the recipient. Unlike for-profit organizations or individuals, a charity can preserve the full value of such a donation, tax-free. The charity can then receive and sell the securities without paying income tax on the gains, making it a win-win for both parties.

This strategy is more effective than choosing to sell an appreciated security yourself with the intention of gifting the cash proceeds. Should you elect to execute your gift in that manner, you would be taxed on the gain from the sale of the asset, regardless of your plan to donate the proceeds to a charitable organization.

Although gifting an appreciated security generates no more of a charitable deduction than gifting the equivalent amount of cash, because this strategy sidesteps the need to sell the security and then pay capital gain tax, the money you save (your tax rate times the value of the security) can subsequently be used for something other than a voluntary donation to Uncle Sam – even to rebuy the same security with a new, higher cost basis.

It’s important to note that not every appreciated security offers the same gifting benefit. Donations of short-term gain property, where assets have been held for less than a year, are subject to different rules. For these assets, the charitable gift deduction is limited to the lesser of fair market value or cost basis.

Timing Your Gift

Clearly, the first criteria for timing a gift of a security is to verify that the security qualifies as a long-term gain asset. If the asset has been in your possession for one year or more, it should meet the requirements for long-term gain.

Next, be sure the timing of the gift allows you to maximize the price of the stock, both for you as the donor to capture the most tax value, and to provide the most benefit to the recipient charity.
By closely working with your wealth advisor, you can feel confident that your specific income tax situation is taken into account and the full tax advantage of such a donation is achieved.

Which Securities, and How Much to Donate?

Identifying the correct security to gift from your portfolio should be a straightforward process. Your advisor is required to carefully track and account for the cost basis of all capital gain securities held in brokerage accounts, so it should be fairly routine to provide a summary of the cost basis by tax lot and then determine the tax lots with the highest percentage gain.

To determine the gift value of an individual stock, mutual fund, or other security, the charity will use the average of the high and low prices of the day or the closing price for that day, depending on the security. Ultimately, the charity might sell at a higher or lower price than what they identify as the “value,” and this is a risk the charity bears.

As a sidebar, if you are targeting a specific gift recognition level when donating securities, you may want to add a little extra to ensure you reach the desired donation amount. For example, if you intend to donate at the $10,000 level and the gift value turns out to be $9,950 based upon the final closing price, you might not receive the recognition you desire.

Unique Situations

Professionals who regularly advise on charitable gifting strategies can quickly identify situations most likely to cause delay or conflict. One such situation may occur when gifting stock held in certificate form. Here, fair market value cannot be determined until the charity receives the physical certificates in good order, meaning the certificates are accompanied by all the necessary paperwork required for the charity to gain ownership. If not negotiated well in advance, the need to physically deliver certificates or identify the correct number of shares in certificate form can drag out the process.

Fortunately, most people own their securities in some sort of brokerage account arrangement. This dramatically reduces the time it takes to actually transfer the necessary shares. It also becomes very easy to transfer the correct number of shares when they are held electronically. Of course, no job is complete without the correlating paperwork, and the requirements of that process can vary a bit from one broker to another.

It also helps to be aware that smaller charities may not be set up with an existing brokerage account and may require some initial set-up and cooperation in order to receive their first gift of a publicly traded security.

Donating a small value gift of securities to such a charitable organization may trigger a sale transaction cost for the charity that would be prohibitive, i.e. gifting $500 of securities with an $8 transaction fee amounts to a 1.6% cost, and a $25 fee could amount to 5% in cost. A great solution here would be to use a donor-advised fund, the subject of another SYM white paper.

Capital Losses

If the only securities you hold have declined in value since you purchased them, then you have a capital loss. In the case of a capital loss, the tax benefits of the above strategy do not apply. You will be better off selling the asset yourself, recognizing the loss, and then gifting the cash proceeds. Even if you cannot recognize all of the loss in the current income tax year, you can carry the remaining loss forward indefinitely to offset future capital gains.

But if you have a capital loss carryforward from prior years, would it be advisable to sell capital gain assets, have the loss offset the gain, and then gift the cash? SYM’s belief is no: the future use of capital loss is usually more valuable than applying it today.

Tax Limitations: 60% of AGI for Cash, 30% of AGI for Appreciated Assets

The tax deduction you are allowed to use is limited by your Adjusted Gross Income (AGI). In the case of cash gifts, you can deduct as much as 60% of your AGI. When you gift appreciated securities, the limitation becomes 30% of your AGI.

However, if you reach the 30% limit by gifting appreciated securities, you are still allowed to allot the remaining 30% of your AGI to cash donations.

If in spite of your best efforts you exceed the AGI-related limitation, the unused portion can be carried forward for up to five years. Be aware that if you cut it close (the limitation is in the following year; the carryforward amounts are only used after the current year’s contribution) for several years in a row you might end up forfeiting part of the carryforward amount. While this is a very infrequent occurrence, careful tax planning is in order.

In Conclusion

Once you’ve become familiar with the use of appreciated securities as tools in your charitable gifting strategy, you may wonder what your financial plan was like without them. Keep this tool in your back pocket. As with all topics concerning your money and your future, please feel welcome to bring questions to your SYM advisory team.

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