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Sharing your Shares: Giving Securities to Charity

Sharing your Shares: Giving Securities to Charity

| April 22, 2021

2020 was a rough year, but the stock market came out ahead in a big way. Indeed, the S&P 500 index has returned nearly 40% from March 1, 2019 to March 1, 2021, despite the turmoil of the intervening two years. In non-retirement accounts, that kind of growth generates unrealized capital gains, and selling an appreciated investment creates realized capital gains, which are taxable. Many investors have found themselves with large gains against the backdrop of year in which many individuals and institutions struggled greatly. Fortunately, there is a way to turn those gains into impactful charitable gifts and share some of this investment success. The IRS smiles upon gifts of appreciated securities—the transaction is tax free and results in a charitable deduction equal to fair market value of the securities donated. You generally can’t get a deduction that exceeds 50% of your adjusted gross income, though certain kinds of gifts are subject to higher and lower limits. If your giving is that generous, consulting with a CPA is a very good idea.

Many charities have the infrastructure in place to accept gifts of securities, but some smaller organizations don’t, or are hesitant. Resist the urge to sell your appreciated securities and just give cash, you’ll owe taxes on that sale. In this situation, a Donor Advised Fund is a great option. Donor Advised Funds are themselves run by charities, and gifts of securities to them are treated like any similar charitable gift. However, instead of using the gift for their own needs or endowment savings, the charities that operate DAFs hold onto your gift in account that you can direct, and can even invest for you, allowing it grow even larger. Funds in a DAF can then be given to the charities of your choice, at your leisure, without regard to the tax year. The tax deduction will be taken in the year the securities are transferred to the DAF, and not when you make donations from your DAF. This means that a year with big investment gains, of the kind that might call for a portfolio rebalance, is a great year to transfer shares to a DAF. “Because donor-advised funds separate the timing of their tax-deductible contributions (gifts), from the donations (grants) to nonprofits, the assets in the fund are invested and grow tax-free, which means donors can give more than their original gifts, and they can take their time determining where and when they’ll distribute their charitable dollars,” Chris Rigsby, Relationship Manager at the Greater Kansas City Community Foundation, explained.

One advantage of DAFs is that the funds are on hand and ready to be donated at short notice. Chris Rigsby noted: “We often see donors immediately respond with support for communities in need after natural or man-made disasters, and donors responded with increased donations to COVID-19 relief efforts, giving more and more often. In fact, when we compared our donors’ grants to nonprofits during April 2019 and April 2020, when the effects of the pandemic were becoming more evident, we found donors gave 170% more over the previous year, which means in just that month alone, $39 million more went to support nonprofits who needed it more than ever.” In time of crisis that could call for increased giving, markets and your own income might be down, making coming up with the funds for a charitable gift on short notice more challenging as opposed to giving funds already in a DAF. Most DAFs give the donor website access that allows them to request gifts from the fund at a moment’s notice.

Remember, however, that gifts to donor advised funds are irrevocable and cannot be returned to you. If you think you may need to use the investments for a purpose other than charitable giving in future, a DAF is not the right vehicle. If you choose not to use a DAF, a direct gift of appreciated securities is still a great option. Since you need not sell the securities, you create no realized capital gains. The charity that receives the securities will usually sell them, but since they are tax exempt organization, they pay no taxes on the sale. The top long-term capital gains tax rate if 20% so a gift of securities is up to 20% more impactful than selling the same amount of your holdings and gifting cash.

Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly.

Thank you to the Greater Kansas City Community Foundation for their insight: