A lack of time is the most common complaint I hear from executives. Balancing extended work hours with a strong family life often makes it difficult for executives to focus on what they are personally passionate about, such as engaging with their favorite charity.
I always try to assure my clients that they can do just as much good by supporting the charity financially. Every organization relies on financial support to continue their operations. Many executives make the mistake, however, of limiting their donation to cash. This is when I point them to a strategy they may not have even known was possible: donating stock instead of cash.
While I always recommend that you work with a trusted tax professional in conjunction with a seasoned wealth manager before making any large charitable donations, in my experience, I have yet to find a downside to donating stock to charity. If you don’t have a need for the income from the stock, bond, or mutual fund, and the charity has the ability to accept the asset and execute the sale of said asset, this strategy can offer many benefits to you and your favorite nonprofit organization. Below, let’s discuss those benefits and why you might consider donating stock instead of cash.
The Tax Benefit of Donating Stock Instead of Cash
Consider this: Your stock portfolio has performed significantly well over the past year, but you’re worried about the capital gains tax that will soon hit you. You could pay the 20% or so in capital gains tax on the money you made by selling the stock and then donating it. However, another option is to completely avoid the capital gains tax and take a tax deduction for the entire fair market value of the stock, bond, or mutual fund by donating the stock directly. Does this sound like a favorable financial strategy to you?
In my experience serving as a wealth manager to executives, I have found that nearly all of them share a desire to give charitably and avoid taxes. When we can accomplish both of these goals with one strategy, it’s an ideal scenario. However, this is just one of the reasons why you should consider donating stock instead of cash to the charity or organization of your choice.
Other Benefits of Donating Stock Instead of Cash
Avoiding capital gains tax is a big benefit for the executive clients I work with. However, there are other benefits that come with donating stock rather than cash to the charity of your choice. Let’s explore some of those other benefits in more detail.
You can give more. If there were no financial implications associated with it, of course we would all want to donate more to charity. Donating stock instead of cash allows you to do just that. By donating the stock in kind, before you execute the sale of the stock, you are completely avoiding the 20% or so in capital gains tax that you would face if you sold the stock and then donated the cash to charity, thus allowing you to maximize your donation. This also lowers your adjusted gross income and offsets capital gains tax.
You can rebalance your portfolio. This is a great benefit that many executives tend to overlook in regards to donating appreciated stock, bonds, or mutual funds. In the case of donating stock, you would likely look at a single equity or group of equities that have performed significantly well over the past year or so. The equity market overall has shown some impressive gains recently, so naturally, some individual stocks have outpaced the market.
If you happen to own a stock or two that has performed significantly well, it could be tilting your portfolio one way or the other, either among your equity holdings or between your equities and bonds. A great way to regain balance is to donate all or some of the stock holdings that happen to have outpaced the rest of your portfolio. This will allow you to give charitably, offset potential capital gains tax, and rebalance your portfolio—something that cannot be obtained by simply donating cash.
You can make the process simple. Many executives are hesitant to donate stock because they believe it will be a headache to report to both the charity of their choice and the IRS. One strategy to avoid the complexity of donating stock outright is to use a donor-advised fund to make your donation. A donor-advised fund is an account made of up of contributions from different donors. The donor (or a representative) keeps advisory status over the distribution of funds and over how the assets are invested in the account.
One of the benefits of the donor-advised fund is that you have one filing to submit to the IRS, rather than a separate filing for each individual charity you donate to. If you only support one charity, this may not be a pain point for you, but many executives that I work with choose to donate to multiple charities.
Another benefit of the donor-advised fund is that you can continue to hold those investments in the account, so if a stock continues to rise in value, the charity can benefit from this. However, you need to work with a trusted executive financial advisor to ensure that this account is watched and managed in case the stock or other holding begins to lose value, which should trigger a sale of the holding.
Overall, the donor-advised account does have its benefits, but one of the downsides is the fees associated with it. While these fees can vary, they will always be more costly than just donating the stock directly to the charity of your choice.
Should You Donate Stock Instead of Cash?
You have worked extremely hard for the assets you’ve accumulated, so you should be able to put them toward whatever causes you wish. After reviewing the benefits of donating stock instead of cash, you know that you can give more, rebalance your portfolio, and make things simple by using a donor-advised fund when you use this strategy.
It is important, however, to work with a trusted wealth manager that listens to what is most important to you before making any recommendations. Your manager should be able to help you discern the most effective charitable donation strategy for both you and the charity of your choice. As an executive, you should feel good about whatever decision you make and know that your contributions are making a difference.
K. Wade Carpenter, CFP®, AIF®, ChFC®, CLU®, is an innovative wealth manager serving corporate executives and entrepreneurs from coast to coast. Throughout his more than 25-year career, Wade’s focus on C-level clients has made him a top strategist for integrated asset allocation and equity compensation management. He can help you decide if donating stock instead of cash to the charity of your choice is the right strategy for you. For more information on how Wade and the Carpenter Team can advise you on charitable donation strategies, reach out today for a complimentary consultation.
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