One of the first tools to put in your Current Giving Toolbox are appreciated stocks. These are stocks that are held in your “regular” account–as opposed to retirement accounts, or other special accounts. Generally, when you sell it you would be required to report the gain or loss on your personal tax return. Gifting stock is an incredibly powerful strategy. For example…
A TRUE STORY
Randy was a farmer. His father was a farmer. His grandpa was a farmer. But, grandpa had done something a little different. In addition to farming, he purchased $10,000 of what was then Phillip Morris stock. As the years progressed, he occasionally bought more … and he reinvested the dividends.
When he passed away, his son inherited the stock, along with the instructions to “never sell it.” He, too, reinvested the dividends and purchased more and more over the years. Finally, his son, Randy, inherited the stock when his father passed away. He also reinvested the dividends and accumulated more and more over the years.
Randy became my client when he was in his mid 70s. The stock had split numerous times while the family owned it, and the family had now held the stock for more than 60 years. It was worth over $10 million. The stock was trading at over $70 per share, and Randy’s cost basis was about $2. Every year Randy gave $125,000 to his church. He gave it all in Phillip Morris stock. Why? Well, if Randy sold the stock outright, and then gave the proceeds to the church, he would have realized over $120,000 of capital gains on his $125,000 gift. At that time, capital gains tax rates were 25%, which means he would have owed about $30,000 in capital gains taxes. By directly gifting the stock to the church, he avoided the capital gains tax.
But what about the church? Did the fact that they received appreciated stock instead of cash make a difference to them? The answer is “no”. The capital gain is not attached to the stock. It is calculated as the difference between what Randy paid for the stock, and what he receives when he sells it. If he gives the stock away, he receives $0, which means there is no capital gain. And therefore, he owes no tax. This is regardless of the fact that he DOES receive a benefit in the form of a charitable tax deduction.
The bottom line is this: IF YOU HAVE APPRECIATED STOCK, YOU SHOULD PROBABLY NEVER WRITE ANOTHER CHECK TO A NON-PROFIT ORGANIZATION AGAIN. Gift them stock instead. The money from the check you write is coming from tax-paid assets. If you gift appreciated stock, you will avoid the capital gain the is embedded in the appreciated stock, and still receive a charitable deduction.
By the way, you could take this strategy one step further. You could use the cash you “normally” give to your favorite charity to replace the stock you give away instead. By doing this you will be able to 1) maintain the same level of investment in the stock and… 2) raise your cost basis.
WHAT SHOULD YOU DO???
Before up you write another check to your favorite charity be sure to talk with your financial/legal advisor about the possibility of gifting stock instead. The charity will receive the same benefit whether you gift cash or stock. But, if you gift stock it may help reduce your tax bill.