Charitable Gifting Using Appreciated Assets

‘Tis the season for giving and a familiar conversation we have with clients involves year-end charitable gifting strategies using appreciated assets. The tax code allows for favorable treatment of appreciated securities, however, there are a few details one must get right to increase the impact of a gift while also maximizing the gift’s tax efficiency.

First, the gift of appreciated securities (stocks, bonds, ETFs, etc.) allows the tax liability on unrealized capital gains to be eliminated.  In other words, rather than liquidating an appreciated asset to raise money for a cash gift, investors can donate an appreciated security “in-kind” to a charity of their choice.  Assuming the charity is a 501(c)(3) organization, neither the investor nor the charity will have any tax liability relative to unrealized capital gains on the gifted security.

Second, the gifting strategy should focus on securities with long-term gains which are those the investor has held one year or longer.  This allows the donor to claim a federal income tax charitable deduction for the full market value of the security.  This same deduction for securities with short-term capital gains is limited to the cost basis of the donor.  With these short-term gain securities, the capital gain tax liability still “goes away” however the tax benefit to the donor is diminished.

The illustration above compares the impact of donating $500,000 using an appreciated security versus liquidating that same security to complete the gift as cash.  For purpose of this example, we are showing an appreciated security having a cost basis of $125,000. To keep the math simple, this illustration assumes a top 23.8% federal long-term capital gains tax rate (including Medicare surtax) and a top federal ordinary Income tax rate of 37% (short-term capital gains are taxed as ordinary income).  No state tax assumptions are included.

In this example, we see that a charitable contribution of an appreciated security (with long-term capital gains) directly to the charity, produces the most favorable outcome for both the charity and the investor.

Clearwater Capital Partners is well-versed in philanthropic strategies and stands ready to assist clients with the execution of tax efficient gift strategies including private foundations, donor advised funds, private equity holdings, and the gifting of qualified plan assets.

James F. Chapman, AWMA is a Wealth Advisor for Clearwater Capital Partners and is the Executive Director of the Clearwater Capital Foundation.