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Marc Hoffman

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Don't Forget About the Simplest Planned Gift

Note: The following discussion is provided for informational purposes only and is not intended to serve as financial or tax advice. For specific information about charitable donations of stocks and securities, consult your accountant, financial adviser, or tax adviser.
A few years ago, the CEO of a large medical center foundation was meeting with a grateful patient who wanted to help fund a significant medical research project at the center. During the meeting, the donor told the CEO that she was planning to sell some stock and write a check. "If the stock is appreciated, there's a better way," the CEO said. The CEO then explained that by donating appreciated stock instead of selling it, the donor would avoid capital gains tax. "Is that legal?" the donor asked. "Absolutely!" the CEO replied. "In fact, you can take the cash you were going to donate and purchase new securities with a brand new cost basis!"

Over the next week, the donor worked with her investment advisor and foundation to identify and transfer 33 different stocks from her portfolio with a total value of $2.7 million. In addition to receiving a $2.7 million income tax charitable deduction, the donor avoided an additional $250,000 in potential capital gains taxes. Everyone won. In fact, the donor has since made a larger contribution.

What is most interesting about this story is that as professional fundraisers, we often presume our major donors understand the basic tax rules of charitable giving and run prospective gifts by their professional advisers in advance. That, however, is not always the case.

Why It's Important to Ask for Securities

Although this gift involved several million dollars, the average gift of stock or mutual fund is a more modest $3,000. This means more donors are getting the message that giving appreciated securities makes "cents" at tax time. In fact, many are learning they can give more. Consider the following example:

John would like to make a $10,000 gift. Assuming he is in the 35 percent ordinary income tax bracket, the after-tax cost of his cash gift would be $6,500 ($10,000 - $3,500). As an alternative, if John gives $10,000 worth of stock in which he has a $2,000 cost basis, the net cost of his gift (including the capital gains he will avoid) will be only $4,900—a further savings of $1,600.

Now, here's a question John probably hasn't heard. "Would you like to know how much more stock you can give for the same after-tax cost as giving cash?" The answer is significant. If John donates $13,256 of appreciated stock, the net cost of his gift (including the capital gains tax he will avoid) will be the same $6,500 as giving cash. That's nearly 33 percent more!

Aside from the added tax benefits and being able to give more, there is another important dynamic at work when donors consider noncash gifts such as securities. Most donors consider cash gifts as being made from their discretionary income. Conversely, donors who are asked to give securities are making gifts of principal or capital. Put another way, instead of giving the fruit of the tree, they are giving the tree. Furthermore, they can use the fruit they would have given to buy a new and better tree.

Since a planned gift is defined as any gift, current or outright, that considers the tax economics of the transfer, donors who make gifts of securities may be making their first planned gifts. In so doing, they are now thinking about their philanthropy and the charities they support in the context of their financial and estate planning.

Donors who become comfortable with making strategic gifts of securities are ideal candidates to learn about more sophisticated and larger contributions via split-interest gift planning vehicles such as charitable gift annuities, charitable remainder trusts, and charitable lead trusts.

In summary, where gifts of securities can help donors give more and give more efficiently, they also offer an important stepping-stone in helping them explore and fulfill their philanthropic potential.

More Information

Marc Hoffman, September 2008
© 2008, Planned Giving Design Center

Marc Hoffman is a co-founder and editor-in-chief of the Planned Giving Design Center and a principal in AssetStream, LLC. He has been a platform speaker at National Committee on Planned Giving (NCPG) and Association of Fundraising Professionals (AFP) national conferences; is a founding board member and past president of the Orange County and Inland Empire Planned Giving Roundtables; and is a founding and current faculty member of the American Institute for Philanthropic Studies' Certified Specialist in Planned Giving program at California State University Long Beach.