I spoke with a client over the weekend about a not-so-unusual charitable gift he wanted to make—that of a gift of shares of stock. In this client’s case, the client inherited about $50,000 worth of shares in a mutual fund several years ago. The client has held these shares for several years and has experienced a significant appreciation in the shares over time. However, in the most recent years, the fund’s performance has been mediocre, and the client is interested in reallocating his investments.
The client’s primary concern with owning the shares in the fund is the fund’s annual generation of capital gains taxes, which the client must pay for despite not receiving cash distributions from the fund to pay these taxes. The client is also concerned about triggering a large, personal capital gain event if he sells the shares outright. The client would prefer to generate a tax deduction or credit to offset other gains he experienced this year. In short, the investment is costly from a cash flow perspective, and selling it does not create an optimal tax scenario for the client.
The client and I discussed a unique solution to his specific investment—that of contributing the shares to a charity of his choice. This solution offloads the non-performing shares from the client’s balance sheet, while also preventing the client from realizing a large capital gain event. The charitable contribution also provides the client with a meaningful deduction to reduce his tax liability elsewhere.
It is important to note that several factors need to be considered when making a contribution of appreciated property to a charity. First, how long you’ve held the property determines whether it will be treated as long-term or short-term capital gain property. Second, which type of organization receives the gift could affect the amount of your deduction. Third, you need to consider whether to elect to reduce the deductible amount of long-term capital gain property in order to increase the total amount of your tax deduction. Fourth, you need to consider how to substantiate the value of your contributed property.
My client was able to turn a financial liability into a tax asset by thinking creatively about his overall tax and financial picture. He regularly makes charitable donations, but this is his first time considering a gift of property other than cash. You too might want to consider whether giving an underperforming investment to charity might be a financial benefit to you. It is important to speak with your tax and financial advisors prior to making such a decision. We here at the Shmuel Law Group are on call ready to assist you in making these and similar decisions.