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Why Donating Appreciated Stock Makes Financial Sense

Sep 16, 2024

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As a professional advisor, you know that donating long-term appreciated assets is often one of the most tax-savvy ways your clients can support their favorite charities. But sometimes it’s hard to convey this message to clients in a way that resonates.

That’s why we’ve put together three simple examples to help illustrate the benefits of giving appreciated stock.

Molly & Jacob Wilder: $100,000

Molly and Jacob plan to give $100,000 to their donor advised fund at Greater Houston Community Foundation (Foundation) to organize their giving for the calendar year. Let’s assume Molly and Jacob have a combined adjusted gross income of $600,000, which lands them in the 35% federal income tax bracket. If they gave $100,000 in cash to their donor advised fund, they could potentially realize an income tax savings of $35,000.

What if instead of a cash donation, they have held appreciated, publicly-traded stock valued at $100,000, with a cost basis of $20,000. By donating this stock instead of cash, Molly and Jacob may save up to $35,000 in income tax and potentially avoid $19,040. in capital gains tax that they would have owed if they sold the stock (using a long-term capital gains tax rate of 23.8%). So, it’s easy to see why Molly and Jacob should consider giving highly appreciated stock instead of cash.

Sophia & Ethan Smith: $1 Million

Sophia and Ethan Smith plan to give $1 million towards early childhood education this year. They will accomplish that by adding $500,000 to their donor advised fund at the Foundation, which they will use to support their favorite charities. They will also make a $500,000 gift to the High-Impact Grantmaking initiative at the Foundation to help address the region’s greatest needs today.

Let’s assume that Sophia and Ethan are in the highest federal income tax bracket because they earn over $1,000,000. If they give $1 million in cash, they could save up to $370,000 in income tax this year or carry the excess deduction forward to take advantage of amounts more than the AGI limits. If they donate appreciated 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 may also avoid $190,400 in capital gains tax (based on a long-term capital gains tax rate of 23.8%).

Alex & Blake Thomas: $5 Million

Alex and Blake Thomas, both 65 years old in the 35% tax bracket, 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 have held for many years, valued currently at $5 million. They would love to explore establishing a charitable remainder trust which could potentially allow them to receive an income stream for life from these assets and avoid capital gains tax and the remaining assets would flow into their donor advised fund.

In this case, we will explore a charitable remainder trust that pays out an income stream to Alex and Blake while they are both living and then to the survivor for the survivor’s lifetime. 

If the stock has a very low-cost basis–just $500,000–because the Thomases have held it for so long. Depending on the IRS’s applicable rates, and assuming a 5% annual payout rate paid at the end of each quarter, an approximate tax result that may help Alex and Blake establish a charitable remainder trust includes:

  • $1,491,350 in approximate potential income tax deduction based on the present value of the gift of the remainder interest to charity, saving approximately $571.292 in income taxes this year.
  • $4,500,000 in gains. This could save capital gains taxes of $1,071,000.
  • Annual payments of 5% of the value of the assets in the trust, which means the income stream will fluctuate depending on the value of the trust assets.
  • Based on the Thomases’ life expectancy, they would receive $9,717,252 over their lifetime.
  • An anticipated trust balance of $6,943,450 would ultimately be split between the two funds based on the Thomases life expectancy and the growth of the value of the trust assets.

Following the death of the survivor beneficiary of Alex and Blake, the remaining assets will flow to the Thomas Family Fund at the Foundation, which Alex and Blake have already established and, 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 the Foundation’s priority initiatives in perpetuity. 

*These examples are for illustration purposes only. Every client’s situation is different, and therefore the tax strategy and tax impact will be different for each client. For example, these illustrations are based on federal income tax rates only, and you’ll need to evaluate, among many other factors, the impact of state taxes. We recommend always consulting with a qualified tax professional who can offer guidance tailored to your specific circumstances and objectives. 

Your Trusted Partner for Effective Giving

Of course, no client’s circumstances will exactly match those of Molly and Jacob, Sophia and Ethan, or Alex and Blake. Greater Houston Community Foundation is happy to discuss the various tax-efficient options for charitable giving in any client situation.

By partnering with Greater Houston Community Foundation, you can provide your clients with expert guidance and resources that can help them make the most of their charitable giving. Our team of philanthropic advisors is dedicated to helping you serve your client’s philanthropic goals, and we’re here to help you navigate the complex landscape of charitable giving. Whether you’re working with individuals who want to make a one-time gift or those who want to create a legacy through their philanthropy, we’re here to support you every step of the way.

Contact Kevin Pickett today to learn more about how we can help you make a difference in the lives of your clients and in the community we serve.

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