Posted By: CFP&WM On: Nov 11th, 2013 In: Estate planning Financial planning Investing Money Matters

Gifting Appreciated Securities: A Win-Win-Win Scenario

With the holidays and year-end quickly approaching, now would be a good time to discuss an alternative to a cash charitable donation.

While it’s certainly worthwhile when you drop your loose change into the Salvation Army kettles, there can be more tax beneficial ways to gift larger amounts.

I recently had the opportunity to speak with Laura Scharr-Bykowsky, CFP®, MBA, the principal of Ascend Financial Planning, LLC about effective gifting strategies.

Mike: I know that most people will simply write a check to their charity of choice but for many, there is a more tax efficient way to gift, right?

Laura: It’s true that a check is the easiest way, but if an investor wants to make a gift and help themself to a bigger tax break, there is a better option. If an investor has held an appreciated stock or mutual fund for more than one year, they can donate those securities to a charity and receive a tax deduction for the fair market value of the securities, and eliminate any capital gains assessments on the future sale of the securities. In some cases that could be as much as 23.8% in addition to a savings on State income tax.

Mike Chamberlain: Well that sounds good, but can you give us an example?

Laura Scharr-Bykowsky: Sure! Let’s say Mr. Benevolent, who happens to be in the 25% Federal tax bracket (or 32% bracket when you factor in State income tax rates), wants to give $10,000 to his favorite charity and writes a check to it. That’s a simple tax deduction of $10,000 less $3,200 (the Federal and State taxes he avoided) for a net cost to him of $6,800.

But what if Mr. Benevolent decided instead to contribute $10,000 in appreciated securities, say the mutual fund he bought a few years back for $2,000? He still gets a tax reduction of $3,200, but additionally, he no longer has to pay long-term capital gains taxes on the appreciated amount of the mutual funds, which in his case is $1,200 or equivalent to 15% of the $8,000 in what would be long-term gains (plus any State income tax). That means that a total of $4,400 taxes were avoided; the $3,200 initial deduction plus $1,200 in capital gains taxes, making the net cost of the gift $5,600, down from the $6,800 with a straight check donation (not including State income tax).

MC: Well that sounds like a good deal, but what if Mr. Benevolent really liked that particular mutual fund or stock?

LSB: If Mr. Benevolent then buys more of the the mutual fund or stock he gifted at the current market value, going forward, his adjusted cost basis is higher, meaning that his tax bill will be lower when he sells sometime in the future.

MC: It seems pretty clear that that’s a good deal, but is there ever a time when gifting appreciated securities isn’t the best idea?

LSB: There are a few reasons when it does not make sense.

  • • If you don’t itemize your deductions then this type of gift doesn’t make much sense.
  • • If you didn’t own the securities for a minimum of 12 months because the tax deduction will be limited to the original purchase price or your cost basis.
  • • If you are in a lower tax bracket with little or no exposure to capital gains taxes.
  • • If there is a fairly short period of time before a step up in basis following a death.

MC: But there are times when gifting appreciated securities does make good sense, right?

LSB: Definitely!

  • • If you’re unable to exactly establish when you bought a security or not able to easily determine the security’s cash basis then it makes sense to donate the security.
  • • If you’ve got a large allocation of appreciated stock then gifting some of it is a very good way to lower your risk exposure as well as further diversify your portfolio.
  • • If you can’t wait for “step up in basis” which occurs at death then gifting the security is one viable option.

MC: I appreciate your time today. Is there anything else you’d like to add?

LSB: Yes two things:

  1. The end of the year is quickly approaching and ownership transfer has to be done before then. If an investor wants to take advantage of the tax deduction next year, he or she should start moving forward with the transfer sooner rather than later.
  2. The second is to discuss the gifting strategy with your tax professional prior to making the gift so that you are certain of the benefits in you particular situation.

MC: Thanks so much.

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