An Example of Why to Give Appreciated Securities Rather than Cash

In their piece on end of year tax tips for the generous, Kiplinger gives an example why it's better to give appreciated securities (assuming you do not want to hold on to them any longer) rather than cash. Their thoughts:

When you give $1,000 in cash, you get to deduct $1,000, and that saves you $250 in the 25% bracket. (Any state-income-tax savings are gravy.) But let's say you have $1,000 worth of mutual fund shares that you bought more than a year ago for $500. If you sell the shares, you'll owe $75 in tax on the profit, even at the preferential 15% capital-gains rate. But if you donate the shares, the charity gets the full $1,000 (it doesn't have to pay tax on the profit when it sells), you avoid the $75 tax bill, and you still get to deduct the full grand. It's a win-win-win situation.

I used this strategy several years ago (before the market melt-down -- when I still had big gains on almost every fund) to consolidate funds/accounts. I knew I wanted to give a certain amount over the course of the year, so instead of taking it out of cash flow, I gave securities. After doing this for a few years, I had drastically decreased the number of investment accounts and funds I had to follow/track.

A word to the wise: giving this way can throw the charity for a loop since many aren’t used to receiving donations in this manner. I had to do some research (find the right person at the charity who knew how to receive the securities on their end) as well as fill out some specific paperwork from the mutual fund company to make these transactions work, but it was worth the effort.

Just wanted to give you a heads-up -- if you're thinking of giving this way, be sure to allow a few extra days to take the extra steps required. This is certainly not a strategy you can use at 11:59 pm on December 31st! ;-)

Comments

[Account Deleted]

One downside to this for charities: it has to incur the transaction costs for converting the securities to cash. Thus, it doesn't receive the full amount of the donation.

[Paul]

This is one of the most interesting posts I've seen in personal finance blogs in a long time. Good idea FMF!

@Jason, even if the charity pays a brokerage fee, it comes out ahead vs your original cash input (the $500 in the example).

[MelMoitzen]

It is a downside, but it's no different than accepting credit card donations or hiring a firm to cage donations--all incur transaction costs.

A larger charity is probably well-equipped to handle a donation of securities without incurring too much in the way of transaction costs.

If a smaller charity receives $10,000 in securities and it costs them $500 to convert the donation, I'm sure they'll be quite pleased with the $9,500--especially since it's likely the donor would have given less than that amount in cash.

[JM]

Yeah, I'm an auditor of non-profits and more and more of our clients have donors who donate this way. It's more of a pain for us, but it's a win-win for our clients (more donations) and their donors (more tax savings). ;)

[Jim]

I think this is a great way to give. Both parties come out ahead this way.

I would hope that selling the securities wouldn't cost a charity all that much. Its not hard to get a brokerage account with $7-$10 commissions.