The why, how and who of gifts of appreciated securities.
Would you be surprised to learn that about a third of the $249 billion claimed as itemized charitable contributions on individual tax returns in 2016 came from noncash contributions? That equates to roughly $80 billion donated from sources other than cash!
And did you know that each year about half of such gifts typically are contributions of corporate stock, mutual funds and other investments? Gifts of securities are a vitally important source of charitable gifts—actually surpassing the total realized from charitable bequests in many years, including 2016—yet few nonprofits devote more than cursory attention to encouraging these gifts.
Why now is the time
Stock gifts have risen along with the value of directly and indirectly held corporate stock in recent years. As the economy has recovered, so has the net worth of U.S. households, which grew 70% between 2008 and 2018, rising from $58.9 to $109 trillion. The improved economic situation of many donors has translated into increased charitable giving, including gifts of stock and other noncash gifts.
Despite market volatility over the past year, 2019 has seen many popular stock market indices recover to near all-time-record highs. Nonetheless uncertainty surrounds us, and many are anticipating a possible economic contraction, recession or stock market correction at some point in the future. In other words, while the stock market is high at the moment, some worry that these highs may be short lived and are looking for ways to capitalize on their stocks’ current values while they last. Using these stocks to fund outright or deferred gifts such as charitable remainder trusts and gift annuities can be one of the ways to accomplish this goal.
For those considering larger gifts, there are smart strategies that may enhance the personal and philanthropic benefits of their gifts in 2019. By using appreciated stocks and other securities to fund charitable gifts, donors can reserve their cash to take advantage of future opportunities. Noncash gifts can also provide tax and other benefits to donors that can enhance their personal gift, estate, retirement and financial plans. Combining personal and philanthropic plans in such a way can yield surprising results.
Noncash giving: The “why”
First, let’s examine some specific reasons why certain donors may want to make gifts of appreciated securities.
Some investors may have one or two stocks that have outperformed their other investment holdings and would like to rebalance their portfolio or reduce their exposure to a particular asset class. They might fund gifts with those stocks or combine sales and gifts from those holdings to reduce capital gains taxes.
Others have odd lots or spin-offs from long-term investments and may choose to contribute these holdings to simplify their taxes and other personal accounting matters. Like other transfers of securities for charitable use, these gifts will be deducted at their full fair market value, even if the donor does not know their basis for tax purposes.
Another group that formerly itemized deductions may no longer do so given larger standard deductions and other reduced or eliminated deductions ushered in by 2017 tax law changes. They may benefit from “bunching” gifts into alternate years or perhaps paying a multi-year pledge in a single year when a particular stock hits a target price, thereby reclaiming the right to itemize their gifts and other deductions for one or more years.
Those who are concerned about the future performance of a highly appreciated stock or mutual fund may find it advantageous to “give out of the market.” They might give that security to a donor advised fund to lock in the value, generate deductions large enough to itemize and then recommend gifts over time to their favorite charitable interests.
Noncash giving: The “how”
Now let’s explore a few more specific gift planning strategies that may appeal to donors.
Many people own stock indirectly in retirement plans like 401(k)s, 403(b)s and IRAs. Those with a traditional IRA may find it beneficial to make qualified charitable distributions of up to $100,000 if they are age 70½ or older. This is true whether they itemize deductions or not. These distributions can be funded by selling appreciated securities inside the plan free of tax at the time of the sale. If they instead took distributions of the proceeds of that sale, they would owe ordinary income tax rather than capital gains that would be due on the sale of long-term securities outside the plan.
Similarly, those who are planning on including a charitable provision in their estate plans should consider using beneficiary designations or various defined contribution retirement plans that often include stock investments to make their charitable bequest because of the income tax exposure and possible impact of estate taxes if those balances are left to individuals.
Speaking of retirement planning, many Baby Boomers are now beginning to retire, and others are making plans to do so. Those who own highly appreciated stock or other investments may wish to use a portion of those assets to fund a charitable remainder trust that will result in a significant gift while also providing them with a fixed or variable income for life or other time period they can choose. Depending on the size of the trust, such a gift may provide “instant itemizer” status for up to six years.
Those who are older and already retired may find that highly appreciated growth stocks that pay little or no dividend may also be ideal assets to fund a charitable gift annuity and, depending on their income, the capital gains portion of payments may be taxed at as low as 0%.
Noncash giving: The “who”
Those who are most likely to make larger noncash gifts, including stock, mutual funds and other investments, tend to have six-figure incomes and be 65 and older. The next best age group is those who are between 55 and 65. More than half of these donors have incomes between $100,000 and $500,000. As might be expected, the largest gifts often come from those with even higher reported incomes.
Be sure not to overlook opportunities with business founders and corporate insiders who may have already become or may soon become instant millionaires as a result of an IPO, merger or acquisition. The timing and structuring of gifts of appreciated stocks and/or cash can be used to minimize income and capital gains tax over time.
With a little effort directed at the “how” of major gifts in addition to researching the “who” and “why”, you may find that you will see a major boost to your gift income in 2019 and beyond. ■