Somewhere nestled amid the shuffle of Thanksgiving and New Year’s Eve is a day that reminds us to consider giving back during the holiday season—Giving Tuesday, the Tuesday after Black Friday and Cyber Monday.
So in the spirit of Giving Tuesday and of course my passion for helping others to make smart financial decisions, I’d like to share a recent personal experience that illustrates how you can give smart with your heart.
When giving with your heart, I’m sure the first thought is to give by cash, check, or credit card, but there are potentially smarter ways to have philanthropic impact.
Like many, my family has a few causes that we help support. One weekend I was reviewing the family investment portfolio, and it occurred to me that it was a good time to make a donation. I had the opportunity to donate shares of an equity exchange-traded fund to a local charity I had been planning to give to, rather than to make a cash donation at a different time.
Why did this strike me as a good time to donate? Well, the following 3 benefits immediately came to mind:
- Tax efficiency. Even with this year’s downturn, equity markets over the last 5-plus years had boosted the value of these shares (and equities more broadly) in the form of unrealized capital gains. Donating the shares rather than selling them and donating the cash proceeds will not only allow me to take a tax deduction on the full donation, but also spare me from realizing gains that will cause me to owe capital gains tax.
- Rebalancing. The same run-up by stocks had increased the level of risk in my portfolio because the overall stock weighting had drifted higher than my intended asset allocation. The removal of equity shares from the portfolio will lower the allocation of stocks relative to bonds and at least partially rebalance the portfolio, lowering its risk profile.
- Cost effectiveness. Simply transferring the shares will help me avoid transaction costs that might otherwise be incurred by selling the shares.
Here’s a hypothetical example of these 3 benefits in action. Let’s say you bought $8,000 worth of a stock (or an ETF) over a year ago, and it has increased in value by $2,000 and is now worth $10,000. Gifting the shares means you get the $10,000 deduction while the charity can receive the full $10,000 donation. This happens because the amount isn’t reduced by federal income taxes (a savings of $400 results from the $2,000 capital gain multiplied by the 20% tax rate on long-term capital gains) or transaction costs (any amount over $0 represents savings!). In addition, by reducing the amount invested in stocks, the investor’s portfolio is to some extent rebalanced.
It should be noted that not all charities can accept shares of stock, so keep in mind there are other means of donating to charity in a monetary way and also importantly with our time. I recognize the choice to give is a very personal decision. We all have different causes that are important to us and different capacities to donate time or money. For some, a gifting strategy is part of a broader estate planning process, so it may be wise to consult a financial planner and an attorney.
For this piece, I’ve tried to provide just one mean by which you can not only give with your heart, but also give smart with your heart.
 This blog was inspired by one of my causes, Main Line Animal Rescue, located in Chester County, PA.