Publicly traded securities

Case study: making a larger gift while increasing tax savings

To illustrate the benefits of donating appreciated securities, consider Jane, who purchased 1,000 shares of publicly traded stock XYZ five years ago at $5 per share. This gives her a cost basis of $5,000 in the stock.

Jane plans to sell her entire position in XYZ and donate the net cash proceeds to a donor-advised fund or other public charity, as shown in Option 1. Assuming a 15% federal capital gains tax rate based on Jane’s income level, if Jane sold the stock she would realize appreciation of $45,000 and owe an estimated $6,750 in federal capital gains taxes ($45,000 x 15% = $6,750). After paying the federal capital gains taxes, Jane’s estimated net cash available for charitable giving is $43,250.

Now let’s review Jane’s benefits from gifting her stock directly to a donor-advised fund or other public charity, as shown in Option 2. In this scenario, Jane may be able to eliminate capital gains taxes ($6,750) while potentially claiming a current year income tax deduction for the fair market value of her stock ($50,000)*, assuming she itemizes her deductions.

Additional considerations 

In addition to the potential tax benefits described above, the following considerations may apply. 

1. Donate before selling.

In order to maximize the potential tax benefits described above, generally you should transfer your appreciated securities, held for more than one year, directly to a donor-advised fund or other public charity and should not sell the securities first.

2. Avoid prearranged sales.

You should not enter into any arrangement that would legally compel a donor-advised fund or other public charity to dispose of the securities upon receipt. This kind of “prearranged sale” could reduce or eliminate the tax benefits of making your donation. Upon receipt of the securities, the donor-advised fund or other public charity controls the asset. For most public charities, the general policy is to promptly sell contributed securities, but a charity may reserve the right to sell at any time.

3. Restricted stock rules may apply.

Executives with concentrated and/or restricted positions in a public company stock may be able to donate shares to help reduce tax exposure in their portfolios. 

There are unique considerations for gifts of restricted stock that you will want to consider. For example, if your stock is restricted by legend or is “control” stock owned by an affiliate of the issuer (i.e., you are an officer, director, or 10% shareholder), then your company’s general counsel must give you permission to transfer the stock to charity. As a general rule, restricted stock must be sold in accordance with Rule 144 resale restrictions.^†

Contributions of long-term held restricted stock to a public charity, including a donor-advised fund, may be deductible at fair market value as of the date of contribution, but valuation discounts may apply if restrictions are not lifted prior to gifting. A qualified appraisal may be required to substantiate the fair market value. 

To learn more about gifts of restricted stock, click here.

4. Master Limited Partnerships have unique rules.

Master Limited Partnerships (MLPs) are an important exception to the typical fair market value deduction for publicly traded securities held for more than one year. If you have an investment in a MLP and itemize deductions, a qualified appraisal may be required to substantiate the fair market value, and your charitable deduction must be reduced by the amount of ordinary income that would have been realized if the asset had been sold at fair market value on the date contributed. For MLPs with substantial accumulated depreciation, this can greatly reduce the charitable deduction. In addition, if the partnership carries debt (as is often the case with MLPs), you may be liable for taxes. 

5. Annual limits apply to charitable deductions.

Overall deductions for donations to donor-advised funds are generally limited to 50% of your adjusted gross income (AGI). The limit increases to 60% of AGI for cash gifts, while the limit on donating appreciated non-cash assets held more than one year is 30% of AGI. The IRS permits a carryover for five tax years, should your charitable deduction exceed AGI limits in a given tax year. 

Interested in learning more? 

• The Charitable Strategies Group at DAFgiving360 is a team of professionals with specialized knowledge about non-cash asset contributions to charities. Our team stands ready to support donors and advisors, from initial consultation through asset evaluation, receipt, processing, and sale. We strive to provide unbiased guidance and frequent communication at every step of the process to help donors and advisors make informed decisions and stay aware of the time required for your transaction.
• For more information about the advantages of contributing appreciated non-cash assets, you can read an overview article or call us at 800-746-6216.
• If you would like to learn more about donor-advised fund accounts from DAFgiving360, click here.