We all know the roller-coaster ride the markets have taken us on over the past two and a half years. After reaching an all-time high of over 14,000 in October 2007, the Dow shed some 55% of its value to reach its low point of just over 6,500 in March 2009. Then between March of last year and late February 2010, the Dow rebounded to the 10,400 range, a 60% increase.
For every seller, there’s a buyer
Keep in mind that whenever someone sells stock, someone else is always buying. Some investors bought securities as the market was on the way down and have continued to buy as stock values have gone back up. Such persons may own a number of stocks that have risen in value significantly since they bought them a year or more ago.
Those responsible for fund raising, particularly those whose duties include encouraging planned and major gifts, may be able to take advantage of this resurgence as an opportunity to promote gifts of appreciated stock. Keep in mind that securities and other qualified properties that have increased in value and been held for at least a year and a day can be deducted at full market value. Because a gift is not a sale, no capital gains tax is due on the increase in value.
For example, Jordan is in the 35% income tax bracket and would encounter a 15% capital gains tax rate if he sold appreciated stock. He would like to make a $10,000 gift to a charitable interest. Instead of cash, Jordan decides to give securities purchased last March at a cost of $6,000 that are now worth $10,000. The charitable organization sells the securities, pays no capital gains tax, and receives $10,000 from the sale, less expenses. Jordan receives a charitable income tax deduction in the amount of $10,000 and pays no capital gains tax on the sale of the securities, saving $600. The cost of the gift net of all tax savings has been reduced to $5,900 ($10,000 – $3,500 – $600), a savings of $600 over a comparable gift of cash. [To enter another variable to determine savings in a particular situation, visit www.sharpenet.aboutgiving.net and click “what to give.”]
In today’s more cost-conscious environment, many donors are discovering the benefits of making larger gifts in this way. In a recent Chronicle of Philanthropy article, Sarah Libbey, President of the Fidelity Gift Fund, relates that in November 2009, “gifts of securities were 275 percent greater in value than those received in November last year .” See www.philanthropy.com for the full article, “Emerging Forces: What the nonprofit world will face in a new year,” December 10, 2009.
Consider also that most gifts of appreciated securities are made by older donors. According to the IRS, in 2006 some 80% of the total value of gifts of securities came from persons over age 55 with 60% made by those over the age of 65. Donors who are retired and no longer giving from earned income are more likely to have securities that have appreciated in value over the longer term and may be looking for ways to complete gifts that also result in maximum tax savings. See the November 2009 issue of Give & Take for details.
Older donors may also be more interested in using appreciated but low-yielding securities and other appropriate property to fund gift annuities, charitable remainder trusts, and other gift plans that allow them to give and enjoy immediate tax savings, while also increasing their income in retirement.
Keep in mind also, as noted on page 4, that donors who are considering converting a traditional IRA to a Roth IRA may find that a gift of appreciated securities held outside their IRA may be an especially advantageous way to give while offsetting tax that would otherwise be due on the Roth conversion.
In some cases donors who believe that a security may increase in value in the future should consider using it to make charitable gifts while immediately repurchasing the security using cash they might have otherwise donated. When the dust settles, they will have made their gift, paid no capital gains tax, and will own the same number of shares with a new, higher cost basis. On the other hand, if a security has declined in value, a donor may wish to sell it, lock in the loss for tax purposes, and make a gift using the cash proceeds.
As always, donors should consult with their advisors before deciding the form and timing of their gifts. Keep in mind, however, that many donors are not aware of the best ways to make gifts, whether now or as part of their future financial plans, and will appreciate tips for ways they can continue to support your programs in light of their overall financial circumstances.
Note: Choosing the best properties to give is one of the topics covered in Sharpe’s popular upcoming seminar “Integrating Major and Planned Gifts.” See page 3 for details.