Maximizing Philanthropy: Leveraging Capital Gains for Greater Impact
Summary
If you consistently contribute to charitable causes and hold a concentrated stock position, consider utilizing a donor-advised fund to help enhance the impact of your giving while optimizing your financial plan.
In the realm of charitable giving, many of us engage in what can be termed as “drive-by philanthropy” – spontaneous contributions without much consideration of the cumulative impact. However, for those consistently contributing to causes, a fresh perspective on giving may be in order. An often-overlooked opportunity in financial planning emerges at the crossroads of philanthropy and managing capital gains from concentrated stock positions. Rather than making impromptu decisions, strategically leveraging your stock position can open avenues for both enhanced giving and optimized after-tax returns on your portfolio.
Aligning giving goals with investment decisions
Investors who hold concentrated positions often delay diversification due to potential tax implications. However, channeling these concentrated equity holdings into a donor-advised fund (DAF) can synchronize these assets with your philanthropic objectives. By donating concentrated positions held for over a year to initiate a DAF, you can sidestep capital gains tax. Not only do you gain a tax deduction at the point of contribution, but you also witness an immediate impact on your taxes. Subsequently, the DAF becomes a flexible tool, allowing you to support causes on a timeline that suits you. A DAF functions as a stream-lined giving vehicle, akin to having a private foundation without the administrative burden. With a minimum contribution as low as $5,000, you can direct donations to qualified charities.
Diversifying portfolios through strategic giving, a hypothetical scenario
Consider Melissa who owns $100,000 in Amazon stock initially purchased for $20,000. Wanting to diversify her portfolio and support environmental causes, Melissa annually contributes $15,000 to various charities. If Melissa sold her Amazon holding, she would have to pay capital gains tax on the $80,000 of stock appreciation. Assuming a capital gains tax rate of 15% plus the Medicare surcharge tax of 3.8% on investment income, Melissa would have to pay $15,040 in capital gains tax, leaving her with $84,960. Melissa opts for a different path by donating her Amazon holding to establish a DAF. The DAF sells the stock, providing her with a full $100,000 earmarked for future charitable gifts. This strategy allows Melissa to utilize the larger tax deduction to offset increased income from selling other concentrated positions, creating a more tax-efficient investment portfolio.
Navigating tax changes: Leveraging Donor-Advised Funds
Post the Tax Cuts and Jobs Act of 2017, changes in standard deductions pose challenges for traditional itemized deductions, affecting the tax benefits of charitable giving. A strategic approach to this challenge involves “bunching” donations over multiple years, potentially exceeding standard deduction thresholds. For anyone who gives more than $15,000 annually, it may be worth considering “bunching” your donations, and a DAF may be a valuable vehicle for executing giving intentions while maximizing potential tax benefits.
If you are a consistent donor to charitable causes and find yourself holding a concentrated position, exploring the option of a donor advised fund could be a strategic move. We recommend consulting with your wealth advisor to explore how a donor advised fund can help align with your philanthropic goals while optimizing your potential investment returns. Your advisor can also provide insights into potential impacts on your taxes and overall wealth plan.
Mercer Advisors Inc. is a parent company of Mercer Global Advisors Inc. and is not involved with investment services. Mercer Global Advisors Inc. (“Mercer Advisors”) is registered as an investment advisor with the SEC. The firm only transacts business in states where it is properly registered or is excluded or exempted from registration requirements.
All expressions of opinion reflect the judgment of the author as of the date of publication and are subject to change. The information is believed to be accurate, but is not guaranteed or warranted by Mercer Advisors. Content, research, tools, and stock or option symbols are for educational and illustrative purposes only and do not imply a recommendation or solicitation to buy or sell a particular security or to engage in any particular investment strategy. All investment strategies have the potential for profit or loss. Different types of investments involve varying degrees of risk, and there can be no assurance that any specific investment will either be suitable or profitable for a client’s investment portfolio. Hypothetical examples are for illustration purposes only. Actual investor results will vary. For financial planning advice specific to your circumstances, talk to a qualified professional at Mercer Advisors. Certified Financial Planner Board of Standards, Inc. (CFP Board) owns the CFP® certification mark, the CERTIFIED FINANCIAL PLANNER™ certification mark, and the CFP® certification mark (with plaque design) logo in the United States, which it authorizes use of by individuals who successfully complete CFP Board’s initial and ongoing certification requirements.
