Financial advisor Judith Lu routinely discusses tax strategies with her clients to minimize the impact on their portfolios. And of late, one strategy that she has been urging charitably inclined clients to consider is to donate highly appreciated stocks instead of writing a check.
Lu, founder and CEO of Blue Zone Wealth Advisors in Los Angeles, said that when investors donate cash, it is likely that they have paid taxes on it. But if they donate highly appreciated stocks in their investment portfolios to qualified charities, they can avoid long-term capital gains tax.
Lu explained that investors who want to cash out those appreciated stocks at some point will be subjected to the current 20% capital gains tax. However, if they donate those stocks to a charity, which is a tax-free entity, the charity can take those shares and sell them and there is no capital gains tax. “So, effectively, you are giving a gift that’s worth 20% more than otherwise,” she explained.
As Lu noted, this strategy is of particular interest now because of President Biden’s proposal to raise taxes across the board, and capital gains are one of the most likely targets.
Gifting shares instead of cash is a strategy for everybody, not just for wealthy individuals, Lu said. “It’s either you pay that tax out of your pocket and you give the net amount to the charity, or you give the entire amount to the charity, and you give them a bigger gift,” she said, noting that some charities hold on to the stocks. “So then it becomes the gift that keeps on giving if you give them a stock that appreciates.”
Another layer to this charitable donation strategy that some wealthy individuals will set up is the donor-advised fund, a receptacle that allows them to make tax-deductible donations to their favorite causes, Lu said. For example, she explained that if you donate $10,000, you have given yourself a $10,000 tax deduction, which reduces your taxable income, and on top of it, you would have avoided the 20% capital gains tax. “So, really what you have done is you reduce your tax bill by a significant amount by avoiding two taxes, so it’s like a double whammy,” Lu said.
She said the shares can be kept in that account as if it were another investment portfolio, and as the funds grow, you can continually give more and more grants.
Lu said that while donating shares is an effective way for clients to mitigate taxes and to support causes they believe in, she does not believe her fellow advisors are proactively talking to clients about this strategy.