Financial Advisors may discuss charitable giving with clients for the same reason that most people choose to give in the first place: It's the right thing to do. But you can use that discussion to clean up your client's portfolio and simplify your own job too.
I'm referring to the donation of appreciated stock, and specifically the “odd-lot” positions that clog up many a portfolio. Here's how you and your benevolent clients can save time, money, and headaches by giving away those pieces of financial flotsam.
Whether caused by reverse splits or long-forgotten spin-offs, many veteran investors have at least a few odd-lot positions lying dormant in brokerage accounts or safety deposit boxes.
There's nothing wrong with owning less than a hundred shares of a particular company. But as custodial, accounting and mailing costs head skyward, many corporations are begging odd-lot shareholders to round up to at least an even hundred shares, or cash out of the position.
Usually, you and the client can agree that it's a waste of time to continually monitor and analyze a three- or four-figure component of a much-larger portfolio, and the client is happy to cash out.
But doing so may involve a minimum-commission charge that could eat up a good chunk of the sales proceeds. Worse, your client (or you or your assistant) is then responsible for tracking down the cost-basis of the stocks, so that any capital gains taxes can be calculated correctly. (Note that the operative phrase is “tracking down,” and not “making up.”)
Giving Instead Of Selling
Whether the shares in question are odd-lots or not, donating them to a qualified non-profit may actually be easier than liquidating the position, and then hunting for the original purchase price and date. Especially if the client has already planned to just write a check to the charity.
First, once the shares are held by the charitable organization, selling them (and paying the commission to do so) is the responsibility of the charity — not you or your client.
And qualified non-profits pay no taxes on capital gains, so the charity will keep the entire proceeds of the sale, net of fees or commissions. Since your client didn't sell the shares, he or she is off the hook for both paying the capital gains taxes, and figuring out the cost basis and date of purchase.
Oh Yeah — The Tax Deduction
Be thankful that your client's CPA is responsible for calculating the exact tax savings of donating shares to a charity. But it's still helpful for you to have some idea of how the final figure is reached.
Your client must itemize to take advantage of the charitable deduction. Also, the shares in question must have been owned for at least a year — otherwise the deduction is limited to the amount of the cost basis.
For gifts like appreciated securities, the amount deducted by your client cannot exceed 30 percent of his adjusted gross income during the year of the donation. But any unused deductions can be carried forward for up to five years.
How To Do It
Once sufficiently motivated, your client can donate a particular group of shares through a couple of ways, depending on how the shares are held.
Shares held in certificate form should be sent unendorsed to the charity. An envelope sent separately from the shares should include completed stock-power forms for each holding, and a dated letter from the client indicating his wishes.
If the client's shares are held in the name of your broker/dealer, they can be transferred to the charity's brokerage account electronically through the Depository Trust Company (DTC), and then sold by the person the charity has authorized to run the account.
A Mutually Beneficial Opportunity
Of course, the charity should be notified in advance that the client is making a donation. In the process of alerting the organization to their windfall, you have a chance to simultaneously serve the greater good and your professional interests.
You can suggest to the charity that in the anticipation of future donations of appreciated securities, they may want to establish an account with you at your firm.
Not only will your benevolent clients be afforded an easier transfer of shares between accounts held at your firm, but the charity may direct other like-minded individuals in your direction in the future.
Only 31 More Days To Donate
The window of time to clean up your generous clients' odd-lot positions is rapidly closing. To get the donation into this year's tax return, shares held in certificate form need to be mailed to the charity before the end of December. And those being transferred via DTC should be sent on their way by the middle of December.
If the donation can't be completed by the end of this year, the charity will be delayed from putting the funds to good use, your client may pay more income taxes next April 15, and you'll be sentenced to at least one more year of supervising a superfluous stock position.
Kevin McKinley, CFP(R) is a Vice President-Private Wealth Management at Robert W. Baird & Co., and the author of the book Make Your Kid a Millionaire (Simon & Schuster). You can reach him at [email protected]
HOW SELLING SAVES
Say a client has five odd-lot stock positions held for at least a year. Each position has a cost basis of $500, and a current value of $2,000. Assume he itemizes, would pay a combined 20-percent state and federal tax on any gains, and is in the 35-percent combined income-tax bracket. Here are the advantages to donating the $10,000 worth of stocks to a qualified charity, instead of selling them and donating the proceeds:
|Donate sales proceeds||Donate stock|
|Capital gains tax||1,500||0|
| Commission to sell |
($60 per trade)
|Income tax saved by client||2,870||3,500|
The client comes out $630 ahead by donating the shares. The charity gets an extra $1,800 before cost to sell the shares. And perhaps, most importantly, no one is forced to find decades-old confirms to establish the original cost basis and purchase price.