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Gifts of Appreciated Stock: Let the Numbers do the Talking
No matter how frequently you remind clients to pause before they automatically reach for the checkbook to make their charitable gifts, many clients still give cash! As an attorney, accountant, or financial advisor, you are well aware that giving long-term appreciated assets is often one of the most tax-savvy ways your clients can support their favorite charities. Nevertheless, it’s sometimes hard to convey that message to clients with words that stick. Next time, consider using illustrations to help clients see the benefits.
Below are three simple examples* to help you show your clients the benefits of giving appreciated stock.
Sherry-Ann and Eric Miller give $100,000
Sherry-Ann and Eric Miller plan to give $100,000 to their donor-advised fund at the Hawai‘i Community Foundation (HCF) to organize all of their giving for the calendar year. Let’s assume Sherry-Ann and Eric have a combined adjusted gross income of $600,000, which lands them in the 35 percent federal income tax bracket. If they gave $100,000 in cash to their donor-advised fund, they could realize an income tax savings, potentially, of $35,000.
What if instead of giving cash, the Millers gave highly-appreciated, publicly-traded stock, valued currently at $100,000, to their donor-advised fund? Let’s assume they’ve been holding the stock for many years, and the shares have a cost basis of $20,000. Not only are Sherry-Ann and Eric eligible for a potential income tax deduction that will save them up to $35,000, but they have also potentially avoided $12,000 of capital gains tax that they would have owed if they’d sold the stock (using a long-term capital gains tax rate of 15 percent). So, it’s easy to see why the Millers should consider giving highly-appreciated stock instead of cash.
Lori and Lindsay Nakamura give $1 million
Lori and Lindsay Nakamura plan to give $1 million to community causes this year. They’ll do that by adding $500,000 to their donor-advised fund at HCF, which in turn they will use to support their favorite charities. They’ll also be making a $500,000 gift to the Catalyst fund at HCF to help address Hawai‘i’s systemic challenges. Let’s assume that Lori and Lindsay are in the highest federal income tax bracket because they earn multiple seven figures. If they were to give $1 million in cash, they could save, potentially, up to $370,000 in income tax. If they gave publicly-traded stock instead of cash, assuming a $200,000 cost basis in stock valued currently at $1 million, they would still potentially save up to $370,000 in income tax, and they would also potentially avoid $160,000 in capital gains tax (based on a long-term capital gains tax rate of 20 percent).
Robert and Sue Lee give $5 million
Robert and Sue Lee plan to give a target amount of $5 million to charity as the cornerstone of their overall philanthropy plan. They would like to use publicly-traded stock that they’ve held for many years, valued currently at $5 million. They would love to receive a lifetime income stream from these assets, so that the remaining assets will flow to their fund at HCF after their deaths. In this case, you’ll explore setting up a charitable remainder trust that pays out an income stream to Robert and Sue while they are both living and then to the survivor for the survivor’s lifetime.
Let’s assume that Robert and Sue are both 55 years old. And let’s assume that the stock has a very low cost basis–just $500,000–because the Lees have held it for so long. Depending on the IRS’s applicable rates, and assuming a 5 percent annual payout rate paid at the end of each quarter, here’s an approximate tax result if you worked with HCF to help Robert and Sue establish a charitable remainder trust:
- $1,042,550 approximate potential income tax deduction based on the present value of the gift of the remainder interest to charity
- $4,500,000 in capital gains that may not be subject to tax
- $250,000 in total payments during the first year
- Annual payments of 5 percent of the value of the assets in the trust, which means the income stream will fluctuate depending on the value of the assets
Following the death of the survivor of Robert and Sue, the remaining assets will flow to the Lee Family Fund of the Hawai‘i Community Foundation, which Robert and Sue have already established and which, upon their deaths, will split equally into two funds. The first fund will be a donor-advised fund for which their children will serve as advisors, and the second fund is an unrestricted endowment fund to support HCF’s priority initiatives in perpetuity.
Of course, no client’s circumstances will exactly match those of Sherry-Ann and Eric, Lori and Lindsay, or Robert and Sue. The net-net here, though, is that HCF is happy to discuss the various tax-savvy options for charitable giving in any client situation. Please reach out. We’re here for you! It is our honor to help you serve your charitable clients.
*The names used in this article are entirely fictional and not intended to depict or represent any real individuals, living or deceased.
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