With stock market indices reaching record highs in 2017, ironically some donors may feel somewhat insecure and could benefit from considering ways to “give out of the market.”
What a difference 10 years can make. In 2007, the real estate and stock markets were booming and the Dow Jones Industrial Average peaked at over 14,000. Then came the Great Recession, followed by the financial crisis. By March 2009, the stock market had bottomed out as the Dow had fallen more than 50 percent to its low point of 6,547. Since then, the general economy and stock market have enjoyed an extended recovery, and the Dow has more than tripled, topping 20,000 and for the first time reaching the 21,000 mark in early 2017.
Instead of euphoria or exuberance, some who have benefitted from the run-up in the stock market may actually be feeling nervous about prospects going forward and might be open to tax-efficient ways to diversify positions, minimize taxes, increase income, reposition assets for retirement or a combination of all these strategies.
After an eight-year bull market, a growing number of investors expect a correction or cooling-off period at some point. Some are apprehensive about ongoing corporate earnings and relatively high price/earnings ratios for many popular stocks. Others are concerned about the possible impact of higher interest rates on the stock market. As a result, many individuals feel the “cost of selling” is locking them in to their current investment positions.
Overview of tax treatment
Gifts of publicly traded securities held for longer than a year are generally deductible at their full fair market value—not just their original cost basis—and capital gains tax is not owed because a gift is not considered a “sale” that would otherwise result in the taxation of the gain.
Taxpayers who itemize also enjoy additional tax savings when deducting the full value of the donated security against their regular income. Note that the capital gains savings occurs regardless of whether the donor itemizes deductions, so those who do not itemize or have reached their deduction limits may still wish to give in this way.
When funding a charitable remainder trust or gift annuity, the charitable deduction is once again based upon the full fair market value, and the capital gains is bypassed when the gift is funded. The entire amount used to fund the gift will be available to generate income, and part of the payments from the gift plan may be taxed at lower capital gains rates in the future instead of ordinary income tax rates.
Meanwhile, relatively high capital gains tax rates await high-income earners or others who decide to sell large amounts of appreciated assets.
For the charitably engaged individual, combining personal and philanthropic goals may provide solutions to their hold/sell dilemma, but only if they are informed, educated and motivated to give. While they may be knowledgeable about buying and selling securities, they may need to be reminded how they can best use appreciated assets to make a number of tax-efficient gifts, while simultaneously reducing or rebalancing their portfolios.
By making charitable gifts from securities, donors can:
- Conserve cash and instead make gifts using appreciated stocks
- Fulfill outstanding pledges while trimming a position
- Reduce future capital gains tax liability by giving stock and repurchasing the security using cash that might otherwise have been given
- Create donor advised fund gifts to result in a deduction and lock in value when the market is high Fund a qualified charitable gift for life or a term of years to generate a fixed or variable income stream without incurring capital gains tax at the time of the gift
Know your market and timing
The donors most likely to consider giving in this way will normally be high net worth individuals over the age of 55. According to IRS data, the majority of donors of securities are age 65 and over and almost 90 percent are over 55.
While gifts of stock often occur during the final months of the year, sophisticated donors may wish to use one or more of the philanthropic planning techniques mentioned here to take advantage of high stock values at any point during the year. By doing so, they can create income tax deductions and capital gains tax savings against today’s ordinary and capital gains tax rates of as much as 39.6 percent and 23.8 percent, respectively. They may enjoy state income and capital gains tax savings as well.
Editor’s note: The key to finding donors with an interest in making gifts of securities is to know as much as you can about your constituents. Sharpe’s Donor Data Enhancement Services can help you pinpoint your donors’ ages, income levels, marital status and more. Click here or email info@SHARPEnet.com for more information.