December 03, 2019

The Benefits of Gifting Shares

When it comes to efficient and effective giving, all donations are not created equal. At Leith Wheeler, we’ve been helping clients manage their giving campaigns since 1982 and we see several reasons why those contemplating a charitable gift should consider gifting securities instead of cash.

1. Donating securities instead of cash maximizes donations to the charity and the tax deduction to the donor.

By donating securities with embedded capital gains, you can eliminate a layer of tax on donors and maximize the benefit to both sides. Consider two scenarios:

Scenario 1: Selling Securities and Gifting Cash. You sell $50,000 from your investment portfolio to fund a donation to a charity, but the act of selling triggers a tax bill on the capital gains embedded in your portfolio. After paying the government, you now have $42,500 to donate*. The charity gets $42,500 and you get a charitable receipt for $42,500 to write off against your income on this year’s personal tax return.

Scenario 2: Gifting Securities. You transfer $50,000 worth of stock from your investment portfolio as a donation to a charity. As a tax-exempt entity, the charity gets the $50,000 and is able to sell it into cash without tax penalty. You get a charitable receipt for $50,000 to write off against your income on this year’s personal tax return.

The second scenario is clearly better for everyone.

2. You may be able to avoid triggering deferred sales charge (DSC) penalties if you transfer units of a mutual fund to a charity. 

DSCs are charges levied by some mutual fund dealers (Leith Wheeler does not charge them) when you sell units of their funds. When you transfer the units to a charity, however, you can often avoid triggering those charges. For its part, the charity can then manage its own sales of the units over time to minimize or avoid them as well.

3. There are benefits for financial planning.

In addition to being a tax-efficient way to reduce or eliminate positions with significant embedded capital gains, gifting securities can also be a cost-effective way to de-risk and diversify your portfolio, by reducing concentrated positions. This benefit is especially valuable to company founders who would otherwise head into retirement with a large company stake dominating their retirement portfolio. Donating securities with large capital gain positions is also a prudent way to reduce your estate tax bill.

In addition to providing philanthropic opportunities, charitable giving can be a tax planning and risk management strategy. Check with your accountant and the charitable causes you support to see how it might work for you.

*Assumptions: $50,000 sale of securities with $20,000 cost base and $30,000 embedded gain. Half of gain ($15,000) taxed at assumed 50% rate for $7,500 tax bill on $50,000 sale, leaves $42,500 net proceeds.

Michael Schaab

Principal, Portfolio Manager - Private Clients & Foundations