Somewhere nestled amid the shuffle of Thanksgiving and New Year’s Eve is a day that reminds us to consider giving back during the holiday season—Giving Tuesday, the Tuesday after Black Friday and Cyber Monday.

So in the spirit of Giving Tuesday and, of course, my passion for helping others to make smart financial decisions, I’d like to share a recent personal experience that illustrates how you and your clients can give smart with your hearts.

When giving with our hearts, I’m sure many of us first think of giving by cash, check, or credit card, but there might be smarter ways that you and your clients can have a philanthropic impact.

Like many, my family and I have a few causes that we help support. One weekend I was reviewing the family’s investment portfolio, and it occurred to me that it was a good time to make a donation. I had the opportunity to donate shares of an equity ETF to a local charity to which I’d been intending to give, rather than to make a cash donation at a different time.

Why did this strike me as a good time to donate? Well, the following three benefits immediately came to mind:

  1. Tax efficiency. Even with this year’s stock market downturn, equity markets over the last five-plus years had boosted the value of these shares (and of equities more broadly) in the form of unrealized capital gains. Donating the shares rather than selling them and donating the cash proceeds would not only allow me to take a tax deduction on the full donation, but also spare me from realizing gains, so I wouldn’t owe capital gains tax.
  2. Rebalancing. The same run-up by stocks had increased the level of risk in my portfolio, because the overall stock weighting had drifted higher than my intended asset allocation. The removal of equity shares from the portfolio would lower the allocation to stocks relative to bonds and at least partially rebalance the portfolio, lowering its risk profile.
  3. Cost-effectiveness. Simply transferring the shares would avoid transaction costs that might otherwise be incurred by selling the shares.

Here’s a hypothetical example of these three benefits in action. Let’s say a client bought $8,000 worth of a stock (or an ETF) more than a year ago that increased in value by $2,000 and is now worth $10,000. Gifting the shares means the client gets a $10,000 tax deduction while the charity receives the full $10,000 donation because the client owes neither federal income tax (a savings of $400—the $2,000 capital gain multiplied by the 20% tax rate on long-term capital gains) nor incurs transaction costs (any amount over $0 represents savings!) that would have reduced the amount of the gift. In addition, by reducing the amount invested in stocks, the investor’s portfolio has to some extent been rebalanced.

It should be noted that not all charities accept shares of stock, so keep in mind there are other means for clients to donate to charity in a monetary way and also, importantly, with their time. I recognize the choice to give or not is a very personal decision. We all have different causes that are important to us and different capacities to donate time or money.¹ For some, a gifting strategy could be part of a broader estate planning process, so it may be wise for clients to consult a tax advisor about their individual situations.

For this piece, I’ve tried to provide just one means by which you and your clients can not only give with your hearts but also give smart with your hearts.

 


1 This blog was inspired by one of my causes, Main Line Animal Rescue, located in Chester County, Pennsylvania.