As an executive, you put in long hours. Your days are packed with meetings and deadlines. When you hit your targets, the bar is raised even higher for next year. Executives’ compensation packages are increasingly complex. Most execs don’t have the time or expertise to manage their finances as well as they manage their careers, and in many cases they don’t know what they don’t know.
The focus of this blog is just one of the many details that is often overlooked within your compensation package – should you be making your charitable gift via cash/payroll deduct or would it make more sense to gift shares of stock?
Let’s get right into it with an example: You would like to make a gift of $5,000 to your favorite charity. Let’s say you own $5,000 of stock for which you paid $2,500. So the position is $2,500 of cost basis and $2,500 of gains. Allow me to break down the mechanics of gifting $5,000 of stock.
From your perspective, you are entitled to the same $5,000 deduction regardless of whether you gift shares or cash. The added bonus for you is that you are gifting away your gains. If you hold the shares and eventually sell them instead, the transaction will trigger capital gains taxes. If you are paying 20% taxes for long-term capital gains, in this example you would save 20% x $2,500 = $500.
Another benefit of gifting shares is that you may WANT to sell the stock, but are avoiding doing so in order to defer the taxes. Gifting is a tax-friendly method of exiting the position. If you like the idea of gifting away your gains but you don’t want to bail on the stock, there is a solution for that too. Gift the shares, then use that $5,000 of cash you had earmarked for the gift to buy $5,000 of stock at the current market price, effectively stepping up your basis.
From the charity’s perspective, when they receive shares of securities, they typically sell them immediately. Registered 501(c)(3) charities are tax-exempt – so no one pays the taxes on those gains. The charity is indifferent about whether you gift cash or shares. For those who are even more charitably-inclined, they may feel compelled to gift even more to the charity, sharing the tax benefit.
The disadvantage is the administration of executing the transaction. That is where we come in, of course, not only handling the logistics but also making recommendations of which securities make the most sense to gift. Even if you are pledging to gift stock as your annual United Way pledge through your company, that does not necessarily mean you have to gift company stock. If you are an ETF investor, you should be sitting on long-term unrealized gains, which would be perfect for your charitable gifting.
By the way, the benefits of gifting highly-appreciated securities are not limited to charities. Stock gifting can be woven into your estate planning and college funding strategy as well. These techniques pair extremely well with stock option strategies such as exercise-to-hold and swaps. As our corporate executive clients have come to understand, there is a tremendous difference between planning and planning done right, including coordinated efforts from your financial planner and CPA. Over time, consistently capitalizing on benefits such as these could make a big difference to your big picture.
If you aren’t sure if you are getting the most of your total rewards, reach out to us today to schedule a time to sit down. You deserve every penny of that compensation package. It is our job to make sure you are getting the most out of it.
Lincoln Financial Advisors Corp. and its representatives do not provide legal or tax advice. This information should not be construed as legal or tax advice. You may want to consult a legal or tax advisor regarding any legal or tax information as it relates to your personal circumstances.
Adam Weingartner is a registered representative of Lincoln Financial Advisors. Securities and advisory services offered though Lincoln Financial Advisors Corp., a broker/dealer (Member SIPC) and registered investment advisor. Insurance offered though Lincoln affiliates and other fine companies. Bluestone Wealth Partners is not an affiliate of Lincoln Financial Advisors. CRN-3443755-020821