Donating publicly traded securities to charity

by the Charitable Strategies Group at DAFgiving360™

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Publicly traded securities held for more than one year—such as stocks, bonds, exchange-traded funds (ETFs), and mutual funds—are the non-cash assets most frequently donated to charities. Why is this? It’s probably because these assets are widely owned by donors and easily transferred to charities.

Donating these assets can unlock additional funds for charity in two ways. First, you potentially eliminate the capital gains tax you would incur if you sold the assets yourself and donated the proceeds, which may increase the amount available for charity by up to 20%. Second, you may claim a fair market value charitable deduction for the tax year in which the gift is made and may choose to pass on that savings in the form of more giving.

Donor-advised funds, which are 501(c)(3) public charities, provide an excellent gifting option for donations of publicly traded securities, as the funds typically have the resources and expertise for evaluating, receiving, processing, and liquidating the assets.

To illustrate the benefits of donating appreciated securities, consider Jane, who is considering donating her shares of stock to a donor-advised fund or other public charity.

• Jane purchased 1,000 shares of publicly traded stock XYZ at $5 per share five years ago.
• The stock has since grown $45,000 in value for a total fair market value of $50,000.*
• Jane’s adjusted gross income (AGI) is $300,000. Assume a 15% federal capital gains tax rate based on Jane’s income level.
• Note: Based on the latest tax laws, charitable donations only qualify for a tax deduction once they exceed 0.5% of AGI. In this case, Jane’s contributions over $1,500 will be deductible ($300,000 x 0.5% = $1,500), assuming she itemizes her deductions.

Option 1: Jane sells her entire position in XYZ stock first and then donates the net cash proceeds to charity. If Jane sold the stock, she would owe an estimated $6,750 in long-term 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. After Jane donates the cash, Jane is eligible for a $41,750 tax deduction ($43,250 - $1,500 = $41,750).

Option 2: Jane donates stock directly to a donor-advised fund or other public charity. In this scenario, Jane may be able to eliminate capital gains taxes of $6,750. This increases Jane's charitable contribution to the full $50,000 value of XYZ stock. After Jane donates the stock, Jane is eligible for a $48,500 tax deduction ($50,000 - $1,500 = $48,500).  In this option, Jane potentially has an additional $6,750 to grant to charities and an additional $6,750 estimated deductible amount.

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.

• 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.