Last week we discussed efficient giving by utilizing a Qualified Charitable Distribution which is extremely tax efficient, but sadly is limited to individuals who are 70 ½ or older. So, with this week’s blog, we wanted to focus on another giving strategy that can be very efficient for everyone else. This strategy is Gifting Appreciated Stock.
What IS Appreciated Stock?
For investors who have accumulated a healthy investment portfolio, they may now find that they have individual holdings within it that have grown significantly in value over time, or appreciated. In tax and investment parlance, this is referred to as unrealized gain. It simply means that it is worth more than what you paid for it.
This concept of appreciated stock also applies to other types of investment assets such as mutual funds and ETF’s or exchange traded funds. We have even encountered some rare folks who are still in possession of those old-style stock certificates- the paper kind that some keep in safe deposit boxes.
Why Does Appreciated Stock Matter?
The reason that it is so important to you tax wise, is that when appreciated stock, mutual funds, etc. are sold, you will pay capital gains taxes on your profits- the difference between what you paid and what you sold it for. Capital gains are typically taxed at 15%, but can be as high as 20%. We love to make money on our investments, but don’t love the fact that we have to pay taxes when we do. So, what if there was another option?
Gifting Appreciated Stock:
Once you identify assets that you own that have risen significantly in value, and where you might have to pay significant capital gains taxes if they were sold, you can instead choose to gift those specific assets to a charity of your choosing, and thereby avoid paying taxes on it altogether. You also get to deduct the current value of the gift on your tax return, when your original cost was much lower.
You purchased 1000 shares of Apple when it was $98 per share in 2016 for total cost of $98,000. Earlier this year (2019), it was valued at $200 per share. Let’s say you wanted to gift $25,000 to your favorite charity. Instead of gifting cash out of your pocket, you could instead choose to donate 125 shares of Apple stock. You would be able to deduct the $25,000 as a charitable contribution, but it only “cost” you $12,250! As one of my favorite Food Network stars would say: “Winner, Winner, Chicken Dinner”!
How Does It Work?
- Identify the Appreciated Assets, whether it is stock or some other type of asset. The asset needs to be in the correct type of investment account, whether it is an individual, joint, trust, etc. It must be a non-qualified account, meaning NOT tax-sheltered. This means it cannot be an IRA, 401k, etc. Those are referred to as qualified accounts. Check with your advisor or tax preparer if you are unsure about this.
- Contact the charity and let them know that you want to give them some appreciated stock. In some cases, charities will already have a form ready to send you to complete, but if not, you will need to obtain the following information:
- The Receiving Institution Account Number at their bank, etc. that they have set up to receive charitable contributions of this type.
- The Account Title/Registration on the account
- Contact name and telephone number for the charity.
- Name of the Receiving Institution: Fidelity, Wells Fargo, etc.
- DTC Number: this is what enables the charity to actually receive and process the assets that you want to transfer.
Note: In order for charities to receive this type of donation, they MUST set up the particular type of account noted above to receive it and process the gift. Most larger charities will already have this as an option, but the smaller ones will be motivated to make these arrangements in order to receive your gift.
- Once you have all of this information from the charity, you will need to contact the custodian of your assets and inform them of what you wish to transfer to the charity, providing them with all of the information above. Sometimes you will send the completed form to the charity, and at others you will send it to the institution that holds your investment account. The charity should be able to tell you where to send it.
- Keep track of ALL of this information to give to your tax preparer: What you gave, to whom, the date, how much it was worth on that date, and what your original cost basis was: what you originally paid for the assets that you transferred to the charity.
For individuals who have a heart to give to others and are fortunate enough to have accumulated a larger nest egg, giving appreciated stock can be such a powerful tool for enriching others, while providing you with additional tax benefits. It is truly a compounding of benefits, and well worth a bit of extra time and effort on your part to pursue this option.