Donating long-term appreciated securities to charity can be a strategic move for individuals holding concentrated stock positions. This can benefit both the donor and the charitable organization. Here are the details:
Why Consider Donating Securities?
Tax Deduction: You may qualify for a tax deduction based on the full fair market value of the securities when you donate long-term appreciated assets (like stocks, bonds, or mutual funds) to a qualified charitable organization. This deduction can significantly reduce your overall tax liability.
How It Works
Choose Your Securities: Identify the highly appreciated positions in your portfolio that you’re comfortable donating. These are the ones that have seen substantial growth over time.
Skip the Cash: Notify the charity that you intend to donate securities instead of making a cash gift. This step is crucial because it allows you to maximize the tax benefits.
Advisor Connection: Connect your financial advisor with the charity. Your advisor will facilitate the transfer of securities directly to the charity at their current market value.
The Win-Win Scenario
Donor Perspective: By giving away stock with a low tax basis, you effectively transfer the future capital gains tax liability to the charity. This means you won’t face a tax bill down the road.
Charity Perspective: Charities are exempt from capital gains tax. When they receive your appreciated securities, they can sell them without incurring any tax liability. As a result, the charity benefits from the full value of your gift.
Example Scenario
Let’s meet George and Katherine, a couple with successful investments and a single stock position with low basis. They wanted to support a wildlife rescue group. Initially, they considered selling their appreciated stock and donating the proceeds. However, their advisor introduced them to the concept of gifting long-term appreciated securities. Here’s why it made sense:
Higher Tax Deduction: By donating securities directly, George and Katherine can avoid recognizing a taxable gain on the donated securities.
Impactful Giving: By avoiding the capital gain their contribution could be increased by over 20%, benefiting the wildlife rescue group depending on their tax rate. Alternatively, they could give the same amount and retain additional wealth either way they have meaningfully impacted their charity of choice.
By following this approach, George and Katherine made a meaningful impact while strategically managing their concentrated stock position and reducing their future tax liability. Remember to consult your financial and tax advisors for personalized guidance tailored to your specific situation.
Important disclaimers.