Is it a no brainier to donate appreciated shares to a charity?

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Good Listener
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Is it a no brainier to donate appreciated shares to a charity?

Post by Good Listener » Mon Apr 15, 2019 3:58 pm

I have received help on a separate thread about procedural aspects of gifting shares. This is a different question and applies whether I use a donor-advised fund or a direct gift of shares from my vanguard mutual fund account to a charity.

I have a Vanguard money market fund and a stock fund (TSM) with a highly appreciated shares. I never intend to sell the stock shares or at least I never will need to sell the stock shares. Therefore it will be inherited by my daughter and charities, mostly my daughter. Given this situation and the step-up in cost basis upon death, is it still a no-brainer to donate the appreciated shares as opposed to just using cash? Does the fact that we don't know what the estate tax exemption will be down the road effect this especially if you think you will be above the exemption level? Or for matter we have no idea what the estate tax law will be at all?

Any thoughts will be very much appreciated as I need to make the donation soon. Thank you.

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WoodSpinner
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Re: Is it a no brainier to donate appreciated shares to a charity?

Post by WoodSpinner » Mon Apr 15, 2019 6:15 pm

Donating appreciated stock is exactly what I did last year and plan to do in the future.

Of course I am married and my estate is well under the approx $22MM limit. Biggest concerns where making sure I had enough and how I can bunch the donations to take advantage of itemizing.

WoodSpinner

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grabiner
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Re: Is it a no brainier to donate appreciated shares to a charity?

Post by grabiner » Mon Apr 15, 2019 7:57 pm

Even if you never plan to sell the shares, you are better off making the donation with the stock fund.

Suppose that you donate $10,000 worth of stock with a $5000 basis to the charity, and then spend $10,000 from your money-market fund to buy more stock. If you eventually sell those shares, you save $750. But even if you don't plan to sell, suppose that the stock market drops by 20%; you now have a $2000 capital loss to harvest.

One exception: if you are donating more than 30% of your adjusted gross income to charity, you need to make donations of cash rather than appreciated securities, or else you will have to postpone some of the deduction to the following year.
Wiki David Grabiner

Iridium
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Re: Is it a no brainier to donate appreciated shares to a charity?

Post by Iridium » Mon Apr 15, 2019 10:34 pm

Good Listener wrote:
Mon Apr 15, 2019 3:58 pm
Does the fact that we don't know what the estate tax exemption will be down the road effect this especially if you think you will be above the exemption level? Or for matter we have no idea what the estate tax law will be at all?
Yes, the estate tax does matter for this situation. If you might have to pay estate tax, time and charitable contributions are two major assets for dealing with it. I'm not sure I would go overboard if you are talking about exceeding the old $5.5M exemption by a little bit. However, if you think you want to give your daughter more than the $11M exemption ($22M for the couple), you probably ought to start doing some estate planning with an expert and have him/her figure out the best way to go.

To give a possible example, one trick, which may or may not be applicable is the CLAT (Charitable Lead Annuity Trust). By putting in the funds you were planning on donating to charity, you can create a plan that will gradually donate that sum to charity but then at the end give the leftover to your daughter estate tax free. To put numbers on it, say you have $5M to donate to charity. You can instead put that money into a CLAT that donates $270K per year for 25 years and gives the remainder to your daughter. The IRS treats the value of getting the leftover at roughly 0, yet, the remainder has a good chance of being able to make the payments while maintaining or even growing the principle. However, while such a shelter protects from estate tax, it is disfavorable from a capital gains and income tax perspective. So, an expert would have to advise you. If you donate the securities now, you obviously won't be able to fund the CLAT with them.

ivk5
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Re: Is it a no brainier to donate appreciated shares to a charity?

Post by ivk5 » Tue Apr 16, 2019 1:40 am

What do you have to lose? Reducing your unrealized gains a bit is a bird in the hand and hedge against future uncertainty.

Once DAF is setup, it’s pretty frictionless if you’re just using it as a pass-through for immediately gifting shares.

IowaFarmBoy
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Re: Is it a no brainier to donate appreciated shares to a charity?

Post by IowaFarmBoy » Tue Apr 16, 2019 5:13 am

If things play out as you present, it is a wash. Say you intend to make a $10000 donation. If you itemize, you get to deduct $10000 either way. If you donate stock, you avoid the capital gains now. If you donate cash and retain the stock, your stepped up basis means your heirs avoid capital gains. It's a wash.

But if things change, I think there may be a lot to be said for the "bird in the hand" of donating the stock. There may be an unanticipated need prior to your passing that would require selling the stock and realizing the gains. It's always possible that laws could change and the stepped up basis could be eliminated or reduced. Things can change.

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Re: Is it a no brainier to donate appreciated shares to a charity?

Post by inbox788 » Tue Apr 16, 2019 6:35 am

Good Listener wrote:
Mon Apr 15, 2019 3:58 pm
I have received help on a separate thread about procedural aspects of gifting shares. This is a different question and applies whether I use a donor-advised fund or a direct gift of shares from my vanguard mutual fund account to a charity.

I have a Vanguard money market fund and a stock fund (TSM) with a highly appreciated shares. I never intend to sell the stock shares or at least I never will need to sell the stock shares. Therefore it will be inherited by my daughter and charities, mostly my daughter. Given this situation and the step-up in cost basis upon death, is it still a no-brainer to donate the appreciated shares as opposed to just using cash? Does the fact that we don't know what the estate tax exemption will be down the road effect this especially if you think you will be above the exemption level? Or for matter we have no idea what the estate tax law will be at all?
Yes I believe there are some differences. It all depends specifically on what you're donating and when as well as what alternative is missed. One example. If you donate $100k now, you may get a tax deduction, so your heirs might get an additional $20k or so from somewhere. If you simply wait till you pass and donate the same $100k, I don't think you can get any deductions. If only you knew the day before, that seems like the optimal time to allow maximal potential growth in the market to maximize the donation as well as the tax deduction for the year.

You might want to track the donation and the cash and see how the results vary if any. Where does the cash come from? Where are the accounts these funds are coming from going to go after you go?

ivk5
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Re: Is it a no brainier to donate appreciated shares to a charity?

Post by ivk5 » Tue Apr 16, 2019 7:54 am

inbox788 wrote:
Tue Apr 16, 2019 6:35 am
If you donate $100k now, you may get a tax deduction, so your heirs might get an additional $20k or so from somewhere. If you simply wait till you pass and donate the same $100k, I don't think you can get any deductions.
I don't think the OP is asking whether to donate now or later. I think the OP is saying, assuming I plan to donate $X this year regardless, am I better off donating $X in appreciated shares vs $X in cash. ("is it still a no-brainer to donate the appreciated shares as opposed to just using cash?")

Answer: yes, it's a no-brainer to use appreciated shares (and can choose to use the cash to immediately repurchase the same shares with reset basis, or not- if not, it's the equivalent of selling the shares tax-free).

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Watty
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Re: Is it a no brainier to donate appreciated shares to a charity?

Post by Watty » Tue Apr 16, 2019 8:17 am

Some things to keep in mind;

1) The step up in capital gains for your estate might not always exist so you cannot really count on that.

2) The estate tax limits have changed many times and might be lower in the future.

3) The stock mutual fund generates dividends and capital gains distributions each year.

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Re: Is it a no brainier to donate appreciated shares to a charity?

Post by JackoC » Tue Apr 16, 2019 9:28 am

Watty wrote:
Tue Apr 16, 2019 8:17 am
Some things to keep in mind;

1) The step up in capital gains for your estate might not always exist so you cannot really count on that.
The other two points you made are relevant in certain cases but this one is relevant for everyone and the most key IMO, along with

4) up to now the capital gains tax has only been assessed once you sell an asset, but it's not guaranteed that unrealized capital gains will never be taxed.

Assuming you've a) decided to make a given $ donation and b) decided to make it now, I would say yes, it's a no brainer to use your most appreciated shares if share donation is operationally feasible for the size of the donation and recipient. It's only a 'wash' against future non-taxation of unrealized gains and basis step up if those things remain features of the tax code, with no upside I can see from taking the risk that they don't. It might further clarify the point to consider if you'd ever want to donate your least appreciated shares rather than your most appreciated ones, since sometimes the option of cash donation introduces extraneous elements to the question. It's hard to think of a case where you would, if similar shares risk-wise.

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Re: Is it a no brainier to donate appreciated shares to a charity?

Post by StealthRabbit » Tue Apr 16, 2019 10:58 am

ivk5 wrote:
Tue Apr 16, 2019 1:40 am
What do you have to lose? Reducing your unrealized gains a bit is a bird in the hand and hedge against future uncertainty.

Once DAF is setup, it’s pretty frictionless if you’re just using it as a pass-through for immediately gifting shares.
Donating appreciated securities...
I found this to be best handled using DAF (Donor Advised Fund), especially with new tax code.
Fidelity and Vanguard have DAF's (as well as others + Community Foundations)

Very handy tax planning tool, can build a fund and allocate gifting in future yrs (such as when you are retired / have no income). Can make 'perpetuity-fund' and have heirs distribute to charities.

inbox788
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Re: Is it a no brainier to donate appreciated shares to a charity?

Post by inbox788 » Tue Apr 16, 2019 1:34 pm

ivk5 wrote:
Tue Apr 16, 2019 7:54 am
inbox788 wrote:
Tue Apr 16, 2019 6:35 am
If you donate $100k now, you may get a tax deduction, so your heirs might get an additional $20k or so from somewhere. If you simply wait till you pass and donate the same $100k, I don't think you can get any deductions.
I don't think the OP is asking whether to donate now or later. I think the OP is saying, assuming I plan to donate $X this year regardless, am I better off donating $X in appreciated shares vs $X in cash. ("is it still a no-brainer to donate the appreciated shares as opposed to just using cash?")

Answer: yes, it's a no-brainer to use appreciated shares (and can choose to use the cash to immediately repurchase the same shares with reset basis, or not- if not, it's the equivalent of selling the shares tax-free).
I don't think OPs question is so simple. To get back to square 1, you have to use the cash to buy back the stock at a higher cost basis in a taxable account. Otherwise, you're in a different situation, which may be similar, but not identical. Even after buying back stock, you have a higher cost basis, which is generally considered a good thing (any time it's not?), but if the stocks are being passed on for the step up basis, then it's not really a factor. So while there isn't a downside, there isn't an upside either, and you're spinning wheels.

I guess one downside is donating Disney stock one day before announcing a credible competitor to Netflix and leaving behind $100k cash instead of $110k disney stock, unless you timed all your trades perfectly. For index stocks it's probably on at most a 2% day on a really good day or maybe 5% in week. Basically, depending on how you do it, you may be exposing yourself to a little volatility.

People treat cash and stock differently, so choices made may depend on how it's held. The you inherited $1M in IBM stock, what do you do question always has some folks keeping some. You can use AAPL, GOOG, AMZN, BRK or any other and some people make inconsistent decisions. So you may not be getting the same outcome as a bunch of $1M cash holders.
Good Listener wrote:
Mon Apr 15, 2019 3:58 pm
Any thoughts will be very much appreciated as I need to make the donation soon.
What's the urgency? The charity needs the cash or some other reason?

ivk5
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Re: Is it a no brainier to donate appreciated shares to a charity?

Post by ivk5 » Tue Apr 16, 2019 2:44 pm

inbox788 wrote:
Tue Apr 16, 2019 1:34 pm
Even after buying back stock, you have a higher cost basis, which is generally considered a good thing (any time it's not?), but if the stocks are being passed on for the step up basis, then it's not really a factor. So while there isn't a downside, there isn't an upside either, and you're spinning wheels.
This reasoning only works in the rear-view mirror. We don't know the future. The effort required is minimal, there's no downside, and you won't know if you benefited or not until you're dead. To each his own, but to me it's a no-brainer.

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Re: Is it a no brainier to donate appreciated shares to a charity?

Post by FederalFIRE » Tue Apr 16, 2019 3:11 pm

This is something I haven't previously considered with donations, as we've only recently gotten to the point of making 4-figure charitable donations where the hassle would be worth it. I'm now considering this as a way to rebalance out of a few single stocks I have in my taxable account and, over a few years, change all of those to index funds tax-free by donating the stocks and repurchasing the same amounts in index funds. Appreciate all the discussion here that has helped me think about this more directly!

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