For many clients who are charitably minded, donating appreciated stock is a fantastic way to give to an important cause while creating additional tax flexibility within the giver’s portfolio. Unfortunately, many are not aware of this option or only think of it after gifting is already done. As year-end approaches, here is a refresher on the process and things to know.
The Process
Stock positions with long-term unrealized gains can be donated to qualified philanthropic organizations and the donor will receive the same tax deduction as if they had given a cash donation. The receiving institution is not hampered in any way by the donation or the unrealized gains associated with the gift, and the donor is free from the gains within their own portfolio.
As an example: Rather than writing a check for $3,500, someone could just as easily donate 20 shares of Apple stock (which is trading at around $175 per share). The tax deduction would remain the same for the donor at $3,500, but if the Apple stock had a low cost basis (purchase price), the portfolio could “drop” the burden of capital gains on the 20 shares without repercussion to the donor or the charity. If the account is still intended for long-term appreciation, the $3,500 check that would have been used to make the donation could be deposited into the brokerage account to replace the positions removed from the portfolio and could be diversified with a new cost basis.
Things to Know:
- In order to get the full deduction, the position must have a long-term holding period (meaning: the stock must have been held for at least one year).
- The receiving institution must be qualified to offer tax deductions (which is also true for cash donations).
- The receiving institution must have a brokerage account to which the positions can be sent (though most large organizations are well-equipped to receive such donations).
- Although we primarily donate individual stocks, you can also donate bonds, mutual funds and ETFs with long-term holding periods.
What We Need to Know:
If you are interested in making a charitable donation out of your portfolio, we need to know:
- The name and details of the receiving institution. Typically, eligible organizations that receive brokerage donations will have specific instructions on how to send the gift on their website, but you may need to reach out to a contact at the organization directly.
- The amount you desire to donate.
What We Look For:
When selecting positions to donate, we typically focus on:
- Positions that have grown large in size within the portfolio but are too straddled with potential taxable gains to sell. Donating these positions gives us an opportunity to reduce the position size without an adverse tax event for the client.
- Positions that are close to our “sell” price targets for the position. We’d just as soon donate the position with no taxable impact than sell it and realize a gain.
- Positions that were inherited within the portfolio – this could be a literal inheritance or a position that was held prior to our management of the account. Donating such positions allows us to increase our conviction across the holdings within the portfolio.
If you have an interest in donating stock, we recommend making such moves prior to December to ensure timely execution for the tax year. If you can provide details on how much you want to donate and where it is going, our Investment Committee will curate a list of positions to donate and our Client Service Team will take the lead on drafting paperwork.
