Donating Shares To Charity Is An Option?

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Donating Shares To Charity Is An Option?

Postby davidlukewilcox » Tue Jul 02, 2013 10:56 am

Hi,

I give quite a bit to charity each year. I have realized that I can give appreciated securities to charity. When I do so, I get the full deduction for the market value of the securities, but nobody pays taxes on that market value. I do this when the shares rise. When shares fall in price, I can tax loss harvest those shares and get an income tax deduction.

Let's say that I will donate $11,000 no matter what this year. Let's say I have $20,000. I could hold this in one of two ways--in two separate stocks (tickers XXX and YYY), or in a diversified fund of those two separate stocks (ticker ZZZ). Let's assume that XXX increases by $1000 and YYY decreases in value by $1000. So, ZZZ has not changed in value from when I bought, but my position in XXX is worth $11,000 and my position in YYY is worth $9,000. If I held the diversified fund, it'd be worth $20,000.

If I hold my positions as separate securities, I can now donate my shares of XXX to charity and pay no taxes on the donation. I can also tax loss harvest YYY for a tax deduction of $1000. If I hold my position in a mutual fund, I get no tax loss harvesting since the mutual fund technically has not had a loss.

We are taught from time and time again as bogleheads to minimize alpha in a portfolio. However, that alpha is exactly what makes this portfolio great. We want that individual variation, since it's what gave us the power to not get taxed on gains and to tax loss harvest.

The crux of the issue is that this is an option. Options gain value when they have increased volatility. If we group our assets together to decrease volatility, we decrease the value of the "donating shares to charity" option.

I realize, however, that the only people that can really make this option work well for them are those that have many many different positions in different securities. To make this work economically, however, you have to have a lot of money, otherwise you'll be dwarfed in trading costs. Only rich people can make use of this system very well since they're the only ones that have this much money to not be dwarfed in trading costs for individual securities.

It would be great to bring this type of security to the common Joe Shmoe. That means that a common Joe Shmoe should be able to do something like buy a share in a mutual fund, hold the entire thing for a year, then donate the shares of the fund that have appreciated and tax loss harvest those that have not. If we could make this work, I think that this idea could take off since there are huge savings for the average person in this manner of donating to charities.

Does anyone have any advise? Has anyone heard of this type of system before? Is what I'm talking about not going to be possible? I'd love any thoughts that people have on the issue.
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Re: Donating Shares To Charity Is An Option?

Postby afan » Tue Jul 02, 2013 11:57 am

It is not so much trading costs as hassle. You could safely do this by sticking to very high cap stocks for your individual securities, and tilt slightly to small cap, if you wanted to bother, to stay at market weights. With these large cap stocks your purchases should be nearly free of transaction costs. Assume no commissions, for example from Vanguard, effectively no market impact at the size trades you would make, and use limit orders. Then you hold your own mini fund of large caps, and handle them exactly as you suggest.

The problem is that come tax time you have to account for all these sales or donations, and track cost basis. That is now easy, but for securities purchased a while ago it means looking it up.

We still have enough individual stocks left that we can do the TLH and donation maneuvers without having to buy new individual stocks. Once we run through them, I don't think we will add more. Not sure it is worth it.
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Re: Donating Shares To Charity Is An Option?

Postby MN Finance » Tue Jul 02, 2013 12:47 pm

I'm not sure I understand the strategy. You seem to be implying that this works only with individual stocks? It works the same with fund/etfs. I assume you're saying you are more likely to have gains in one stock and loses in another if you use individual securities vs funds? If that's the case, then I'll wager that all the other inherent problems with trying to build an individual stock portfolio (trading costs and tracking errors) far outweigh the net benefit of the charitable deduction. By net benefit I mean the potential "advantage" of having a stock that's up/down vs a fund.
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Re: Donating Shares To Charity Is An Option?

Postby davidlukewilcox » Tue Jul 02, 2013 1:18 pm

afan,

I do not want to do this myself since I'm a regular Joe Shmoe. Like I said, it's not economical for people like me myself to do this, just as a regular Joe Shmoe does not index by himself. He buys a fund.

MNFinance,

I don't want to do this myself. Like both you and I pointed out, it's not economical for a normal person to try to track an index, and thus, as I said, only rich people can do this economically. I was hoping to get some advise on if it's possible to create a fund where the holders of the fund can donate the winners for a win, and tax loss harvest the losers for a loss. Normally, when you buy a fund, you buy all of the constituent securities in the fund. What I'm looking for is more power to do what I want with the constituent securities that I own in the fund.
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Re: Donating Shares To Charity Is An Option?

Postby G-Money » Tue Jul 02, 2013 1:28 pm

davidlukewilcox wrote:I was hoping to get some advise on if it's possible to create a fund where the holders of the fund can donate the winners for a win, and tax loss harvest the losers for a loss. Normally, when you buy a fund, you buy all of the constituent securities in the fund. What I'm looking for is more power to do what I want with the constituent securities that I own in the fund.

Can't do it with a mutual fund. Could do it with a managed account, but those are typically much more expensive (AUM fees, etc.).
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Re: Donating Shares To Charity Is An Option?

Postby afan » Tue Jul 02, 2013 2:42 pm

MN,

That is why you would do this in addition to an indexed portfolio. You only need your individual stock portfolio to be large enough to generate the charitable donations, and perhaps enough losses to balance out capital gains distributions. No need to do this INSTEAD of an indexed portfolio. If you use mega cap stocks, perhaps spread across industries, or maybe just the 10 largest stocks in the S&P 500, then you know that a reasonable number (10-20) will track the index quite well. This will tilt you more towards mega caps, but get around that by adding a bit more small cap index to balance out. Or not worry about it.

If your portfolio is mainly indexed, then your total capital gains distributions should be relatively low, even in a good year. So you only have to wipe those out, and take enough losses to use up the amount you can take against ordinary income. In other words, you would not have to do this with a large portion of your portfolio.

The question is whether the minor tracking error, the minimal cost, and the significant hassle are worth it for a DIYer. If you pay someone to do your taxes, and the cost will be the same with a simple plan, or lots of capital losses realized and stock donations, then you could just pursue the strategy with no downside. You could probably do this effectively with no more than 100-150k in the individual stock portfolio, and all the rest indexed.

It just seems like a lot of work unless you derive moral satisfaction from minimizing your tax liability.
"We don't know how to beat the market on a risk-adjusted basis, and we don't know anyone that does know either." | | --Larry Swedroe
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Re: Donating Shares To Charity Is An Option?

Postby archbish99 » Tue Jul 02, 2013 3:20 pm

It sounds like what you really would want is something like exercise-and-sell orders for employee stock options.... You want to execute several actions at once involving intermediary securities that you never actually own except on paper. To be more specific, you're proposing that a mutual fund enable you to simultaneously perform the following actions on designated shares:
  • Redemption in-kind (shares of mutual fund become shares of underlying securities)
  • For all resulting shares which now have a capital gain, transfer them to the charitable recipient
  • For all resulting shares which now have a capital loss, sell them and transfer the proceeds to the charitable recipient

This makes the assumption that a redemption-in-kind inherits the holding period of the redeemed shares, which I don't know about. The problem with this is that redemption in kind creates a nightmare of paperwork for the fund, and for you. ETFs only permit redemptions in kind, and restrict it to exceptionally large batches of shares. Mutual funds don't offer it, but generally reserve the right to convert an exceptionally large redemption to being in-kind to shield the rest of the fundholders from the impact of your sale.

It's an interesting idea, but the paperwork and limited audience sounds like it would overwhelm any company that considered offering it.
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