During the holiday season, families often engage in familiar traditions such as decorating trees and preparing for gatherings. However, this season also presents an opportunity for charitable giving, which can be approached more strategically. Many households may find that donating cash is not the most effective method to support their preferred causes. Instead, donating appreciated securities can provide significant financial benefits for both the donor and the recipient organization.
Why Rethink Charitable Giving?
Americans are known for their generosity, especially during the holiday period. According to the latest Bank of America Study of Philanthropy, approximately 87% of affluent donors report that charitable giving brings them joy. Yet, the impact of inflation and increased demand for services from nonprofits emphasizes the importance of thoughtful giving strategies. Financial advisers encourage their clients to not only give but to do so in a way that maximizes their contributions.
One of the most overlooked yet powerful strategies is donating appreciated assets such as stocks, exchange-traded funds (ETFs), and mutual funds instead of cash. This approach not only benefits the charities but also provides tax advantages for the donor.
Understanding the Tax Advantages
When individuals donate long-term appreciated assets—those held for over one year—they can enjoy two significant benefits. First, they receive a charitable deduction based on the full market value of the asset. Second, they avoid capital gains taxes on the appreciation of the asset.
For instance, consider a scenario where an individual purchased shares worth $10,000 fifteen years ago, and those shares are now valued at $50,000. If the individual sells the shares, they would incur capital gains taxes on the $40,000 increase in value. However, if they choose to donate the shares directly, they eliminate the capital gains tax and can claim a deduction for the full value of $50,000.
Keith Spencer, founder of Spencer Financial Planning in Spokane, Washington, highlights this strategy as a means to enhance the donor’s financial position. “If the client wants to maintain the position,” he explains, “they can donate the shares and immediately repurchase them,” allowing for a reset of the cost basis, which can lead to reduced tax liabilities in the future.
Many families already possess ideal candidates for gifting, including old mutual funds with significant gains, company stock accumulated over careers, and shares acquired through automatic dividend reinvestment.
The act of donating appreciated securities not only increases the charity’s received value but also aids in portfolio rebalancing. By donating an overweight position, donors can trim their holdings without incurring capital gains taxes.
Exploring Donor-Advised Funds (DAFs)
For families looking to combine tax benefits with flexibility and long-term planning, donor-advised funds (DAFs) offer an effective solution. A DAF functions like a “giving account,” where individuals contribute cash or appreciated securities, receive an immediate tax deduction, and recommend grants to charities over time. Major players in the DAF space include Fidelity Charitable, DAFgiving360, and Vanguard Charitable.
According to Ted Hart, author of “The DAF Revolution,” the advantages of DAFs are numerous. They provide strategic flexibility, enabling donors to time their contributions to coincide with high-income years, simplify the donation process, and offer low or no minimum contributions, making them accessible to a broader range of donors.
David Johnston, a wealth management adviser at One Point BFG Wealth Partners in Parsippany, New Jersey, notes that DAFs have transformed family philanthropy. “They are a very powerful tool for those who want the tax deduction today but also want to control the assets over time,” he says, emphasizing the potential for families to engage in meaningful philanthropy discussions.
The Bottom Line: Smarter Giving
As the holiday season approaches, it can be easy to rush charitable contributions amidst other preparations. However, taking time to consider the benefits of donating appreciated securities and utilizing DAFs can lead to more impactful and meaningful giving.
While the urge to give generously is a fundamental aspect of many individuals’ lives, employing smarter strategies can enhance the support provided to various causes, foster family discussions around philanthropy, and mitigate long-term tax burdens. Retirees, in particular, may find renewed purpose in their giving, as they aim to deepen their impact and establish a philanthropic legacy.
In conclusion, with simple strategies like donating appreciated securities and leveraging DAFs, individuals can ensure their generosity makes a significant difference, both for themselves and the charities they support.
