After several years of a bull investment market, appreciated securities are at their highest market value in recent times. With year-end giving season approaching, savvy investors are finding that now is the perfect time to leverage their long-term appreciated securities for making charitable gifts.
Securities can be much more tax-beneficial than donating cash and can be processed as quickly and easily if given to the right charity.
Smart Business spoke with Dale Koblenzer, a financial consultant at Merrill Lynch, to learn about options for charitable giving.
What is the investing climate like today?
Investment for stocks has not been better in 30 years. Investors are working in an environment with low interest rates, low inflation and strong corporate earnings.
Corporations in this country have never been stronger — they’re in the best position in decades. They’re highly productive, their workers are productive and their profit margins are high.
Why donate appreciated securities?
A gift of an appreciated security is very cost efficient. Also, by giving away noncash assets, donors won’t hurt their cash position. They’re giving away gains and avoiding the subsequent tax. Simply put, it costs little to give away and has a value that’s very high.
When it comes to big gifts of securities with substantial gains, donors can carry over the tax benefit up to five consecutive years. This often makes sense for executives who are compensated with stock. They can sell their older holdings to take advantage of greater gains.
It also makes sense for executives with personal investments. By donating stock, they can use their cash to reinvest in their business.
Who should consider this type of donation?
Individuals who have owned or purchased stocks that have achieved gains, those who own stocks that have gone through legacy change, or those who have received stocks after the sale or acquisition of a company — really anyone who has securities will have very high gains after a bull market and should consider donating stocks. Some company executives have concentrated holdings that tie up a high percentage of their net worth in securities. Gifting all or some of those holdings helps them do good for their community while diversifying their portfolio.
What options exist for donating stocks?
One option is to give directly to a favorite charity to gain an immediate tax benefit. However, not all charities can easily or readily accept appreciated securities. Recent financial regulations have made it harder for them to maintain contribution accounts with banks and brokerages, especially if they don’t have frequent transactions.
In lieu of donating to one specific charity, some choose to give shares to a community foundation. These organizations keep donors’ options open, allowing donors to make a gift to start their own charitable vehicle like a donor-advised fund, get a tax deduction for themselves now, and have time to allocate money to charities later. This can lead to a legacy of giving, something that involves the input of their families and children, and keeps their gifting options open.
Comparatively, a donation to a single charity is done once and it’s over. By donating to a community foundation, a donor can create a fund that pays out to multiple charities over many years.
Some people with significant wealth desire to own a charitable foundation. But the IRS casts a critical eye on those, meaning reporting can be difficult, expensive and time consuming. Donor-advised funds offer all the tax benefits of a charitable foundation without the heightened government scrutiny. They are relatively inexpensive, more flexible and simple, and confer a legacy onto the next generation.
Is now a good time to donate stock?
It’s always a good time to be philanthropic. But more specifically, valuations today are high in relation to where they’ve been. The wealth effect that’s been created during the past five years is significant. Further, tax laws are still beneficial for giving and creating charitable funds. There’s always a chance that could change in the future depending on the mood of the federal government.
Insights Philanthropy is brought to you by Akron Community Foundation