DOING GOOD WHILE REPOSITIONING YOUR PORTFOLIO FOR FUTURE GROWTH
Charitable giving presents the opportunity for investors to support causes or organizations important to them. For some investors, donating shares of publicly traded stock could be an appealing option for contributions.
It’s a common misconception that charitable gifting happens toward the end of the year. However, Commerce Trust believes charitable giving strategies can be a year-long endeavor based on several factors, including the investor’s situation and the funding needs of the charitable organizations designated to receive a gift.
There are special requirements associated with gifting appreciated shares of stock. The shares of the gifted stock must be held for at least one year prior to the donation. If the stock has appreciated in value since its purchase, directly donating the stock to a charity of choice may be a preferable option. However, if the stock has lost value, it may be more advantageous to sell a portion or the entire position in the stock and donate the proceeds, which would allow the donor to take a tax loss.
Investors considering making a charitable gift of appreciated stock should be aware of what’s happening in the market. In a year of noted market volatility like 2022 – the S&P 500 Index declined 19% for the year* – gifting appreciated stock whose values could be depressed due to market performance may present concerns for some donors.
Although most charitable gifts come from the heart, doing so while also repositioning an investment portfolio for future opportunities and reducing possible tax liability can create a win-win situation for investors.
Here are four strategies investors looking to make charitable gifts may want to consider. To help illustrate possible scenarios behind each strategy, let’s introduce our fictional client, Robert.
Giving appreciated stock and take the basis increase. Let’s say Robert owns stock in a multi-national energy company, which saw strong gains in 2022. He could direct $100,000 worth of those energy stocks to his DAF, shift the 40%+ appreciation he enjoyed in 2022 to charity and take a full market value deduction. Robert still loves the upside opportunity in energy stocks. He could take the $100,000 in cash that was originally earmarked for charity and invest it in his favorite energy company, replacing the shares that he gifted. Robert takes a charitable deduction for the full value, has the same amount invested in energy stocks, but has eliminated his capital gains tax on the $100,000 worth of gifted shares.
Rebalance the portfolio. Growth stocks have dominated their value counterparts for several years, but that could be changing. Value stocks typically outperform growth stocks during periods of high market volatility. Robert could make a gift of $100,000 in growth stocks, and then use his $100,000 in cash to purchase shares of value stock. Not only does Robert re-allocate his portfolio to a value bias, but he also receives a deduction for the full-market amount of the gift. This strategy can work well to reposition one’s portfolio toward future appreciation and/or safety as the market and economic cycles shift, without the concern of triggering a capital gains tax.
Gift concentrated or overweight positions to charity. Some investors may have a concentrated position in company stock. For example, Robert owns several hundred shares of stock from a company where he once was a member of the management team. A portion of those shares could be donated to charity, which would reduce his concentrated position. A new investment of equal value would diversify Robert’s portfolio and possibly offset a large capital gains tax. This strategy also applies to gifting overweight positions.
Eliminate positions no longer wanted. Shareholders choose to sell out of investment positions for a variety of reasons. It could be related to a significant loss of value of a particular high-risk stock. Perhaps the investor no longer feels a company shares the same values. However, liquidating a position could trigger a tax drag if there are imbedded capital gains. Investments where there could be a large capital gains distribution could instead be gifted to remove them from the portfolio. Robert could take a full deduction the donated stock and invest in another security without triggering capital gains.
Gifting appreciated stock can be beneficial to both the donor and the recipient organizations. However, there are multiple complexities to consider. Talking to a Commerce Trust advisor, as well as a tax professional, are the first steps to determine whether charitable giving strategies makes sense for you and your family.
Past performance is no guarantee of future results, and the opinions and other information in the commentary are provided as of January 5, 2023. This summary is intended to provide general information only and may be of value to the reader and audience. Diversification does not guarantee a profit or protect against all risk. This material is not a recommendation of any particular investment or insurance strategy, is not based on any particular financial situation or need and is not intended to replace the advice of a qualified tax advisor or investment professional. While Commerce Trust may provide information or express opinions from time to time, such information or opinions are subject to change, are not offered as professional tax, insurance or legal advice, and may not be relied on as such. Data contained herein from third-party providers is obtained from what are considered reliable sources. However, its accuracy, completeness or reliability cannot be guaranteed.
Securities and Advisory services provided through Commerce Brokerage Services, Inc., member FINRA, SIPC, and a registered investment advisor. Insurance products are offered through Commerce Insurance Services, Inc. Both entities are subsidiaries of Commerce Bank.