In the decade since the Great Recession, the S&P 500 rose from a bear market low of 676 in March 2009 to over 3,000 in November 2019—an upswing of more than 400% in the longest bull market in U.S. history. Simultaneously, companies have been relying more heavily on equity compensation, both publicly traded and restricted, to retain valued employees. Combined, new compensation models and the market’s steady climb have left many clients with portfolios of highly appreciated assets—but with significant gains come significant tax burdens.
What if these highly appreciated assets—like publicly traded stock, private equity interests, equity compensation or restricted stock—could transform from a hefty tax burden to a treasure trove for clients’ charitable giving? Donating appreciated assets held for more than a year directly to charity does just that: generally, capital gains tax on the sale of the securities is eliminated, and the donor can claim a fair market value deduction. In my mind, this makes it one of the best ways for advisors to help charitably inclined clients maximize their tax savings and their philanthropic impact, making more of the asset value available to support their favorite charities.
Overlooked Opportunity
Despite this option for strategic, tax-efficient charitable giving, many overlook this opportunity. When donors want to support their favorite causes, they habitually reach for their checkbooks or cash—even if that cash comes from liquidating securities. According to a study we conducted at Fidelity Charitable, 80% of donors own publicly traded appreciated securities, but only 19% have contributed these types of assets to charity.
Why this persistent gap? Some clients may be skeptical of making noncash donations because they think it will require complicated paperwork and phone calls, and often, their chosen charity can’t easily accept these contributions. Others may not be aware that they can still experience a tax benefit for charitable giving even if they are no longer itemizing income tax deductions following the Tax Cuts and Jobs Act of 2017.
Others simply may never have had anyone walk them through the math or options like donor-advised funds (DAFs). We typically see more than 60% of incoming contributions to our DAF program at Fidelity Charitable as noncash assets because the process of noncash donations becomes much simpler.
Tax Deduction
When these assets are donated to a public charity with a DAF, your clients are eligible for a tax deduction in the current year. They can then support charities by recommending grants on the timetable that makes sense, rather than in a year-end frenzy. In the meantime, their contributions can be invested for tax-free growth, multiplying the impact to the charities they care about even further.
This simple but savvy strategy presents the opportunity to help your clients do more of two things: give to the causes they care about and save on taxes. While no one knows how much longer the bull market will last, we do know that many clients are both sitting on sizable gains and already planning to give—meaning that there’s never been a better time to help them make this tax-savvy move.