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Gifts of Appreciated Stock: Watching Your Money Work

Gifts of Appreciated Stock: Watching Your Money Work

Charitable giving is a commendable action, one that enriches communities and brings personal fulfillment for donors. For financial advisors, attorneys, and accountants, guiding clients on the most beneficial ways to support their favorite causes is an essential part of the job.

But many donors traditionally opt for cash donations, even when you know there is a more tax-efficient strategy that is often overlooked: donating appreciated stock.

If you struggle to make clients see this as a viable option, let us help with a simple guide and some impactful examples* of how these gifts can go a long way.

Why Choose Appreciated Stock Over Cash?

When it comes to charitable giving, the method of donation can significantly impact both the donor and the recipient. Giving cash is straightforward but not always the most tax-savvy method. Donating long-term appreciated assets, like stocks that have increased in value, offers notable tax benefits that can enhance the effectiveness of your generosity.

The Tax Advantages: Donating appreciated stock that you have held for more than a year can provide you with a double tax benefit:
Avoiding Capital Gains Tax: When you sell an asset that has appreciated in value, you typically pay capital gains tax on the profit. However, if you donate the stock directly to a charity, you avoid this tax entirely.

Income Tax Deduction: You can claim the full fair market value of the stock at the time of the donation as a charitable deduction on your income tax return, reducing your taxable income.

For clients who are still hesitant, here are some more concrete versions of this information.

Example 1: Sally and Bob Jones Give $100,000

Sally and Bob Jones are generous donors, and intend to give $100,000 to a donor-advised fund at the community foundation. Let’s say Sally and Bob have a combined adjusted gross income of $600,000, which lands them in the 35% federal income tax bracket. If they gave $100,000 in cash to their donor-advised fund, Sally and Bob could realize an income tax savings, potentially, of $35,000.

But now let’s say that Sally and Bob are advised to skip the cash and give gave highly-appreciated, publicly-traded stock, valued currently at $100,000, to the donor-advised fund. Let’s say they’ve had the stock for many years and the shares have a cost basis of $20,000.

With this donation, Sally and Bob are able to get up to $35,000 worth of income tax dedications, which is worth it on its own. But Sally and Bob can also avoid $12,000 of capital gains tax that would have been owed if they sold the stock under the long-term capital gains tax rate. This double savings means Sally and Bob made the same generous gift without the cost.

Example 2: Jenny and Joe Smith’s $1 Million Donation

This year, Jenny and Joe Smith have decided to give $1 million to community causes: half through their donor-advised fund at the Athens Area Community Foundation to support their favorite charities and half to an unrestricted fund that can be used to address the Athens area’s greatest needs in the future.
Jenny and Joe are in the highest federal income tax bracket thanks to both having seven-figure incomes. Giving $1 million in cash could get them up to $370,000 in savings on their income tax, which is certainly a good savings. But if Jenny and Joe had instead given publicly traded stock on a $200,000 cost basis, they would have also avoided up to $160,000 in capital gains taxes with a long-term capital gains tax rate of 20%. All of this while still supporting the community foundation for generations to come!

Example 3: $5 Million from Tiffany and Brett Thomas

Tiffany and Brett Thomas have a comprehensive philanthropy plan, the cornerstone of which is giving a target amount of $5 million to charity. They plan to use publicly-traded stock that they’ve held for many years, valued currently at $5 million. Their goal is to receive a lifetime income stream from these assets, so that the remaining assets can flow to their fund at the community foundation after their deaths.

In this case, the best thing to do is to explore setting up a charitable remainder trust, which can pay out an income stream to Tiffany and Brett while they are both living and then to the survivor for the survivor’s lifetime.

Tiffany and Brett are both 55, and their stock has a very low-cost basis–just $500,000–because the Thomases have held it for so long. Depending on the IRS’s applicable rates and assuming a 5% annual payout rate paid at the end of each quarter, here’s an idea of what the tax result could look like when working with the community foundation:

  • $1,042,550 approximate potential income tax deduction based on the present value of the gift of the remainder interest to charity
  • $4,500,000 in capital gains that may not be subject to tax
  • $250,000 in total payments during the first year
  • Annual payments of 5% of the value of the assets in the trust, which means the income stream will fluctuate depending on the value of the assets

When any survivor of the Browns passes away, their remaining assets will flow to the Thomas Family Fund at the community foundation, which Tiffany and Brett have already established and which, upon their deaths, will split equally into two funds. The first fund will be a donor-advised fund for which their children will serve as advisors, and the second fund is an unrestricted endowment fund to support the community foundation’s priority initiatives in perpetuity.

Making a Difference with Appreciated Stocks

These examples are, of course, examples – they are likely much cleaner than a real client’s finances, and things like tax rates change often. But the underlying point is the same: appreciated stocks make for donations that benefit everyone, from the community foundation to the donors themselves.

The Athens Area Community Foundation is committed to helping donors maximize their impact through intelligent giving strategies. We offer a variety of fund options to meet every charitable goal and take a long-term view of community support. Whether you wish to create a legacy that lasts generations or support immediate community needs, we are here to facilitate meaningful contributions.

If you or your clients are considering charitable donations and are interested in exploring more tax-efficient strategies, please reach out to us. Together, we can find the best way to make a lasting impact.

*These examples are for illustration purposes only. Every client’s situation is different, and therefore, the tax strategy and tax impact will be different for each client. For example, these illustrations are based on federal income tax rates only, and you’ll need to evaluate, among many other factors, the impact of state taxes.

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