Charitable Giving: Pen a Check or Gift Stock?

If your charitable giving plan consists of making substantial cash donations to certain charities, there are alternative approaches to consider that could provide significant benefits to you over and above the achievement of your charitable goals.

Why Not Just Donate Cash?

A check or cash donation is often best for spur of the moment charitable requests, but for more substantial gifts that are part of your giving plan, cash can present disadvantages. Obviously, the most immediate is a reduction in your cash; a longer term and more substantial disadvantage is missing out on tax savings.

If Not Cash, What?

Instead of cash, we often advise affluent individuals to consider donating an appreciated portfolio position.

Consider a hypothetical client named Margaret, who bought $1,000 of Apple Computer stock as a young investor in 1980. That stock, which is now worth over $250,000, will generate a substantial taxable liability of almost $50,000 should she sell it. If instead, she gives some or all of the stock to her charity of choice, the gains on the donated stock become a charitable contribution and trigger no federal capital gains tax.

Margaret’s contribution of the Apple stock must be a qualified donation, meaning that the donee is recognized by the IRS as a nonprofit. But her contribution of the stock to a qualified organization allows her to avoid the tax on the gain and take the fair market value of the donation as the deduction, subject to limits.

Alternatively, Margaret could gift the stock to one of three types of charitable giving “vehicles” that would be responsible for allocating the donation to qualified nonprofits that meet Margaret’s giving goals. The three types of vehicles are:

• Private Foundations
• Community Foundations
• Donor Advised Funds

In this case, funds generated from Margaret’s stocks can be distributed to qualified charities for the rest of her life and beyond by the foundation or fund itself.

In either case, gifting stock can bring a substantial tax benefit and has the added bonus of providing a concrete paper trail for tax time.

Which Planned Giving Approach is Right for You?

While there are a multitude of ways to accomplish your philanthropic goals, we’ll focus on the three charitable vehicles mentioned above: private foundations, community foundations and donor advised funds. Please bear in mind that every family’s situation is different; it is important to discuss your goals with your financial advisor before making any decisions about a charitable giving strategy.

With each of these options, you can take advantages of swings in the stock market by making a well-timed gift of stock, taking the tax deduction in the current year, and then distributing contributions over subsequent years.

Private Foundations can be started with a relatively small gift of appreciated investment holdings and all contributions are tax deductible, subject to limitations. A private foundation allows you to build a family legacy and engage family members and others in the business of running the foundation.  It gives donors more control over granting and investment decisions and can be funded with almost any kind of asset, including real estate, stocks, mutual funds, ETFs, tangible assets, and even intangible personal property, although these are much more complex and may have complications.

A disadvantage of a private foundation is that it’s expensive. There can be significant management fees, administrative and reporting burdens, excise taxes, and a required minimum annual payout.

We generally advise this approach to families with higher net worth who are focused on establishing a family legacy and to those for whom passing funds on to the next generation is less of a concern.

Community Foundations function similarly to private foundations but are operated by a group of like-minded donors focused on identifying and solving problems in a defined local geographic area. These foundations are directed by an advisory board which controls how, when and to whom donations are made.

For that reason, you have less control over how your gift is used. Donors usually have some degree of influence but the board makes the final decision. Those donors who sit on the board will have more influence than those who do not.

Like a private foundation, a community foundation requires filing tax returns and paying management and administrative fees, which can be expensive. It’s usually best for families of lower net worth than those at the private foundation level and for those who would like to establish endowments that serve their local community.

Donor Advised Funds (DAF) provide a charitable giving vehicle for those with lower initial contributions than the typical Private or Community Foundation.

DAFs are similar to private and community foundations in that you can make a gift of almost any type of asset. While the ultimate decision on how the donation is used is in the hands of the custodian, the donee does have more power to suggest how the donation is used than they would through a Community Foundation. It is also significantly less expensive alternative to Community and Private Foundations.

And in a departure from our usual argument against market timing, this is one area where we consider timing a strategic advantage. For instance, if as part of your charitable giving plan, we know that you want to make a contribution to an undetermined organization in 2017 and we see that a specific stock in your taxable portfolio has reached a high mark, we may advise you to establish and make the stock transfer to your DAF immediately. In a DAF, the donee can be determined at a later date but you can take advantage of the tax savings of the transfer immediately. Unlike a community or private foundation, however, the IRS considers the stock liquidated upon transfer to the DAF.

An example of a simple but smart use of a Donor Advised Fund comes from another hypothetical client, Richard. Richard considers tithing to this church an important part of his charitable giving plan. For years, he has regularly written checks to his church as part of his tithing commitment. At the same time, Richard owns a variety of stocks in his portfolio. After a review of his financial plan and a discussion about his charitable giving goals, we helped Richard establish a Donor Advised Fund strictly for the purposes of donations to his church to achieve his tithing goals. This allowed Richard to use existing stock that had appreciated significantly to fund his DAF, fulfill his financial commitment to his church and as a bonus, receive a tax deduction and save his cash to buy stock in his portfolio with higher basis.

While Richard was using his DAF for a specific and acknowledged nonprofit, gifts can be completely anonymous. No tax returns are required to be filed from the DAF and when it’s tax time, donors have a statement from the firm (SHWM in Richard’s case), showing the gift of to the DAF.

While the DAF does allow the charitable dollars to remain for one to two generations, it doesn’t allow donors to leave a named legacy, but it is a good solution for many investors who have or would like to develop an annual gifting plan.

When to Donate Stock Directly to the Charity

Turning your stock over to a charity may be the best option in some situations, particularly with larger donations that are a one-time gift. This approach however requires more planning than making a gift of stock to a private foundation, community foundation or DAF.

If you want to take the deduction this year, for example, you’d need to complete the process of donating on or before December 31. You will also need to find out from the charity as well as the bank or investment firm what is required to transfer shares and any additional requirements for a direct stock donation. In addition, donors must allow ample time to complete the transfer before December 31. It is not necessarily a quick process. This approach also complicates timing the donation of stock to take advantage of swings in the market.

Let Smith and Howard Wealth Management Help You 

We can guide you to develop the charitable giving approach that best suits your financial needs and charitable goals. Our investment and tax professionals coordinate directly with wealth planners to stay on top of your goals, market values and the best time to take action.

Your Family’s CFO

Whether it’s advice on the best way to plan for your future, minimize your tax bill, optimize the performance of your investment portfolio, or all of these, Smith and Howard Wealth Management serves as your family’s CFO. We strive to support you in making the financial decisions designed to serve your family’s situation and goals and bring you financial peace of mind.

If you have any questions about charitable giving vehicles– or any other aspect of your family’s financial life, please contact me, Michael Mueller, via email 

Unless stated otherwise, any estimates or projections (including performance and risk) given in this presentation are intended to be forward-looking statements. Such estimates are subject to actual known and unknown risks, uncertainties, and other factors that could cause actual results to differ materially from those projected. The securities described within this presentation do not represent all of the securities purchased, sold or recommended for client accounts. The reader should not assume that an investment in such securities was or will be profitable. Past performance does not indicate future results.