Should You Donate Appreciated Stock This Christmas?

If the end of the year finds you in a charitable mood, you are not alone. Nearly one of every three dollars (31%) in online donations to charitable causes is given in December, and one dollar in eight (12%) flows in a three-day torrent just before New Year’s, according to online giving portal Network for Good.

Holiday warm-and-fuzzies are not the only reason for the year-end donation splurge, of course. Tax considerations also loom large in the timing of charitable contributions for many givers. And, just as you want to be careful not to be taken in by holiday charity scams, it’s also important to make the most of the tax donation from your giving. Two year-end giving techniques -- donating appreciated stock and setting up a donor-advised fund -- can help make sure that a gift given in December still looks smart come January.

One of the most widely recommended ways to give is by donating appreciated stock. For clients who have stock acquired years ago that has appreciated significantly, this is way smarter than selling the stock and then writing a check to the charity, said Sandra Kingsley, a financial planner with FBB Capital Partners of Bethesda, Md. “It’s a really big deal,” Kingsley said.

The reason financial planners are so keen on donating appreciated stock is that tax law allows donors to write off the full current market value of the shares as a charitable donation, while avoiding having to pay capital gains taxes on the shares’ gain in value. In addition to reducing or eliminating capital gains taxes, this maximizes the donation to the charity, which in turn maximizes the donors’ charitable write-off.

Donating appreciated stock often allows donors to provide significantly more support to their chosen charity than they would if they sold stock and wrote a check, according to Paul Tarins, president of Sovereign Retirement Solutions in Winter Park, Florida. “There’s no downside to that strategy,” he said.

A donation of stock to a charity can be readily handled by the financial institution that is acting as custodian of the shares for the owner. “They’ll have the proper form to fill out and they’ll transfer the amount of securities you indicate to the charity of your choice,” Tarins says. “It’s very, very easy.”

While it may be easy, trying to take advantage of tax write-offs before the Decemer 31 deadline can put pressure on would-be benefactors to quickly select a charity. That can lead to poorly thought-out donations that may not really represent what a donor would like to achieve with a gift. Donor-advised funds can help.

Setting up a donor-advised fund allows a donor to get a tax write-off this year, while postponing the decision about which charity will get the gift. “You don’t have to spend that money all in the year you donate it,” Kingsley said “You can spend it five or ten years from now.”

Having a donor-advised fund also simplifies recordkeeping. After the first of the year, the fund’s administrator will send the donor a statement of all grants made from the fund, including amounts and names of charities. This can make preparing a tax return significantly more straightforward.

Administrators of donor advised funds are themselves non-profits. One of the largest is Fidelity Charitable, a non-profit the mutual fund company of the same name set up in 1991. Most large brokerages can set up a donor-advised fund with an initial starting contribution as low as $5,000.

There are some drawbacks to donor-advised funds. For instance, the administrators charge fees for overseeing the fund. And transfers to a donor-advised are irrevocable. Donors can’t decide later that they want the money back.

Donor-advised funds also provide a workaround for one of the few disadvantages of the other widely recommended year- end giving strategy. Small charities may not have brokerage accounts, and so it can be difficult for them to convert gifts of stock into cash they can use, notes Kingsley. When appreciated stock is given to a donor-advised fund, however, the fund’s administrator can sell the shares and write a check, preserving tax write-offs for the giver while making it easier for the charity to put the gift to work.

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