Charitable Giving: Stock Donations, Donor Advised Funds and Qualified Charitable Distributions

As the end of the year approaches, many people decide to make donations to local charities. If this is something that you typically do, consider making your donation via stock rather than cash. Depending on your goals, you may consider a direct stock donation, donor-advised fund or qualified charitable distribution this year instead of giving cash.

Gifting stock to charity rather than cash can be a great option if you are charitably inclined and have highly appreciated stock in your brokerage account. If you donate this highly appreciated stock to a charity, you do not have to sell the stock and realize capital gains before doing so. In addition, the charity can sell the stock and does not have to realize the gains if they are recognized by the IRS as a qualified charity. This has the added benefit of donating an asset to charity that could appreciate.

Keep in mind that among other requirements, in order to qualify for the full tax deduction for your donation you must have owned the stock for at least a year and has to have appreciated in value. In addition, there are limitations on how much can be deducted in one year.

In talking with your financial advisor or tax professional, you may find that a donor-advised fund is a better option for you. A donor-advised fund allows you to contribute several years of future charitable gifts in one year to the account and dole them out in future years. While the funds may not be going to the charity in the year you contribute the stock to your donor advised fund, you get the benefit of the tax deduction in the same year the funds are contributed to your account. For example, say you typically donate $10,000 to a handful of charities every year. Instead of giving the charities cash or stock directly, you may decide to donate $50,000 to your donor advised fund this year dole out the regular $10,000 annually to the same charities for the next five years. By doing this you will receive the deduction for the full $50,000 in the year the funds are contributed to the donor-advised fund. In addition, that $50,000, ideally highly appreciated stock, is out of your estate and grows tax deferred until the time you are ready to donate it. This is a great strategy in years where you are expecting large capital gains from a transaction like a business sale, for example.

Something to consider about a donor-advised fund is that you cannot take those funds back in the event you change your mind. Putting the stock in the account is considered a completed gift. However, you are still in control of providing recommendations on where the money is donated while you are living. Some people decide to treat this as a family foundation of sorts and will leave the account to their adult children as successor owners. Others choose to designate charitable beneficiaries of the accounts whereby upon their passing, the funds are distributed to the charities they designate. However, you also have the option to donate anonymously if via a donor-advised fund. This can be an added benefit to help reduce the amount of unwanted mail you may receive requesting donations.

As an alternative to donating stock to charities, if you are over the age of 70.5, you may consider making a qualified charitable distribution (QCD) from your Individual Retirement Account (IRA). This process allows you to essentially have a check cut from your IRA directly to a qualified charity. This is a great option to complete your annual giving as it can be used to meet up to $105,000 of your required minimum distribution which in turn helps to reduce the ordinary income tax owed from an IRA distribution.

If you are charitably inclined, donating stock, completing a qualified charitable distribution from your IRA, or opening and contributing to a donor-advised fund can be a great alternative to donating cash. If you are interested in learning more about any of these options and which may be right for you, please reach out to a member of our Heritage Wealth Architects team.

Sources:

Charitable Donations: The Basics of Giving | Charles Schwab

Is It Better to Give Stock or Cash to a Charity? | Charles Schwab