Make a Bigger Difference in the World
Todd Sherman (Senior Partner with SSG) and his playing partner John Smith (name withheld for privacy) attended and co-sponsored a local charity golf tournament. After spending time together and appreciating each other’s profession, the following conversation took place, ultimately leading to a more meaningful relationship.
Todd: “May I ask how you made your donation to support this event? “
John: “I wrote a check, of course.”
Todd: (Knowing John was an investor) “Do you have appreciated stock in your portfolio? If you gave stock rather than cash, were you aware you could deduct the amount of the donation while also avoiding the capital gains tax on any appreciation? ”.
John: “I had no idea. Tell me more!”
Think Beyond Writing a Check - Appreciated Stock
After the event, the advantages of giving appreciated stock rather than cash were shared. The donor has the opportunity to achieve his or her philanthropic goal to support the organization, deduct the full market value of the stock donated without having to sell the stock. Subsequently, the charity, being a 501(c)3 charitable organization can subsequently sell the stock and diversify without having to pay tax. In this particular circumstance, Mr. Smith could increase his donations to charity calculating the tax he avoided and adding that to his grant. He shared, “I am adding the government’s share to my donation”.
Weigh Your Options – Create a Charitable Giving Strategy
The following year, the discussion was based around a strategy to give appreciated stock to charity, without reducing John’s desired position in the particular investment holdings. The decision was made to gift shares of the appreciated stock positions and immediately buy new shares with cash. In the end, John could benefit by the income tax deduction, increase his tax basis in the positions (decreasing future tax exposure) and maintain his desired investment in the company’s stock.
Leverage Additional Options - Donor-Advised Fund (DAF)
As the market performed over the last two years and John’s portfolio appreciated, he wanted to take advantage of the Charitable Giving strategy. However, he did not have targeted charities in mind at the time. John’s plan was to retire within the year and it was known that he would have significant deferred compensation payouts in his early retirement years. Todd suggested a Donor-Advised Fund (DAF) as a solution. A DAF provides a donor the opportunity to contribute the appreciated stock today with a custodian, diversifying the position without tax liability while realizing the full income tax deduction upon gift.
Working with Todd and his team, individuals can work to identify worthy charities to which they can direct contributes be made from the Fund. More, sons and daughters can be brought into the planning to share the responsibility for possibly making future grants.
Donors are urged to consult their attorneys, accountants or tax advisors with respect to questions relating to the deductibility of various types of contributions to a Donor-Advised Fund for federal and state tax purposes.
To learn more about the potential risks and benefits of Donor Advised Funds, please contact us.
Please note, changes in tax laws may occur at any time and could have a substantial impact upon each person's situation. While we are familiar with the tax provisions of the issues presented herein, as Financial Advisors of RJFS, we are not qualified to render advice on tax or legal matters. You should discuss tax or legal matters with the appropriate professional.
This case study is for illustrative purposes only. Individual cases will vary. Any information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation. Prior to making any investment decision, you should consult with your financial advisor about your individual situation.