Gifts of Appreciated Stock: Picking favorites

You may be well aware that donating highly-appreciated stock to a fund at the Community Foundation offers significant advantages for your clients over making cash gifts. Communicating this benefit, however, can be challenging when clients have emotional attachments to their shares. 

How can you overcome this hurdle and help optimize your clients' charitable giving strategies?

Start by understanding the reasons a client might be reluctant to part with certain stocks in the first place:

– Legacy: "These shares have been in my family for generations."

– Professional: "I worked at this company for decades; it's the source of my wealth."

– Simple preference: “I just love this stock.” 

Emotional ties like these can create psychological barriers to effective charitable planning. There is, however, a potential solution that can satisfy both your clients' emotional needs and their philanthropic goals: The client donates shares of the highly-appreciated, emotionally significant stock to their fund with us, and then the client purchases shares of the same stock in their personal investment portfolio. 

Here’s why this can be such an effective strategy:

– Maximize tax deductions: Publicly traded securities are typically deductible at fair market value (and the tax savings could potentially help fund the repurchase).

– Reset cost basis: This transaction effectively resets the cost basis of the stock in the client’s personal portfolio to its current market price, potentially reducing future capital gains taxes.

– Emotional satisfaction: Clients can support charities while maintaining their shareholder status in the company they like.

– Community impact: We can sell the donated shares tax-free, thereby maximizing the proceeds flowing into the client’s fund, and the fund in turn can be used to support the client’s favorite causes.

As you share this strategy with a client, be sure to acknowledge the emotional value of the stock and emphasize the client’s opportunity to maintain ownership in the company. Building on this, you can show the client how the tax benefits of giving stock allow the client to make an even bigger difference than if they’d given cash instead. 

As always, we can help you assist your clients with selecting the best assets to give to charity, evaluate tax implications of various giving strategies, and structure gifts to achieve strong community benefit. We look forward to a conversation! 

Planning for a sunset: Lock in a higher exemption, unlock a legacy

Without legislation to prevent it, the sunsetting of current estate tax laws at the end of 2025 will dramatically reduce the federal estate tax exemption from $13.61 million per person in 2024 to approximately $7 million in 2026 (this includes adjustments for inflation). This change would affect many high-net-worth individuals and families, likely exposing many more estates to federal estate taxes.

It is impossible to predict whether or not legislation will prevent the sunset. Even so, advisors need to prepare for client discussions and consider estate planning strategies now, especially techniques that incorporate multi-generational gifts and charitable planning.

Indeed, for a charitably inclined client, making larger lifetime gifts to charity and arranging for charitable bequests will help reduce the client’s taxable estate because of the charitable estate and gift tax deduction. Donor-advised, field-of-interest, designated, unrestricted, and endowment funds at the Community Foundation are flexible and effective charitable recipients of both lifetime and estate gifts. 

For some clients, you may wish to begin exploring a comprehensive, multi-generational wealth transfer plan, potentially using key tax-planning vehicles: 

Charitable lead trust

Charitable lead trusts (CLTs) may be particularly effective in the current environment. These trusts can provide income to your client’s fund at the Community Foundation for a set period, with the remaining assets passing to family members. Right now, the higher exemption allows for potentially significant initial funding of such trusts. This is because the value of the remainder interest counts toward the client’s estate and gift tax exemption.

Generation-skipping trust

‍A generation-skipping trust is an irrevocable trust that can benefit a client’s grandchildren and later generations. This trust utilizes a client’s generation-skipping transfer (GST) tax exemption (which parallels the estate and gift tax exemption). This type of trust could allow a client to take advantage of the higher exemption before it potentially decreases in 2026. It is possible under some states’ laws for these trusts to go on for many generations in a “dynasty” format, such that each generation benefits from the trust’s income (and potentially principal for health and education) without the trust’s assets being included in the beneficiaries’ estates for estate tax purposes. 

Multi-generational fund at the Community Foundation

Alongside a charitable lead trust or generation-skipping trust, or as a standalone, a client can establish a donor-advised fund at the Community Foundation that can function much like a family foundation, with successive generations serving as advisors, or the Community Foundation stepping in after the first or second generation, to recommend grants from the fund to carry on a tradition of supporting the causes that have been most important to the client during the client’s lifetime. 

We look forward to working with you to achieve your clients’ long-term charitable goals, even amid uncertainty concerning estate tax laws.

The team at the Community Foundation is a resource and sounding board as you serve your philanthropic clients. We understand the charitable side of the equation and are happy to serve as a secondary source as you manage the primary relationship with your clients. This newsletter is provided for informational purposes only. It is not intended as legal, accounting, or financial planning advice.

‍