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Charitable gifts of appreciated stocks, bonds, mutual funds and other securities

July 03, 2019 | by Phillip Buchanan


Charitable gifts of appreciated stocks, bonds, mutual funds and other securities

Charitable gifts of appreciated stocks, bonds, mutual funds and other securities can give you an extra bonus in terms of tax savings (as compared to a donation of cash). If you have owned publicly traded securities more than one year—which makes it a “long term capital gain” asset—you can claim a tax deduction for the full fair market value of the securities and never have to pay capital gains taxes on the appreciation.

In other words, you can donate the same gift value (or larger) at a lower “out of pocket” cost. If you really like a particular stock, you can donate the stock and then use the cash you would have otherwise used to make a charitable gift to buy more of the same stock. This gives you a higher cost basis in the stock, which saves you tax if you eventually sell the stock.

HOW TO DETERMINE THE CHARITABLE DEDUCTION

For gifts of publicly traded securities held for more than one year, the deduction is determined by taking the average of the high and low selling prices of the security on the date of the gift (or the nearest trading date(s) if there are no trades that day). These are listed on a public exchange such as the NYSE or NASDAQ. Securities held for less than one year may also be donated, but the deduction is limited to the lesser of cost basis or fair market value. For inquiring minds, I.R.S. Publication 561, and Treasury Regulations sections 20.2031-2 and 25.2512-2, provide more specific information about deductions for charitable gifts of securities.

Charitable gifts of appreciated assets may be deducted up to 30 percent of your adjusted gross income (AGI) each year. You can carry over any excess deduction for up to five additional years, but you must take the maximum deduction each year. Ergo, if you think a stock price has peaked or has run up in value due to a takeover bid or tender offer, you may want to make a larger charitable gift and know you have time to use up your deduction. You can prepay a multi-year charitable pledge to Duke or contribute to a donor advised fund and then dole out charitable gifts over several years.

Remember that you should not donate securities in which you have an investment loss. If you want to use a capital loss asset to make a charitable gift, you should:

  1. Sell the asset,

  2. Document your tax-deductible capital loss, and

  3. Use the net sale proceeds to make a cash gift to Duke.

You may be able to use a capital loss to offset capital gains and some ordinary income, but a tax exempt charity (like Duke) cannot write off your investment loss. 

HOW TO MAKE AN OUTRIGHT GIFT OF STOCKS, BONDS, MUTUAL FUNDS OR OTHER SECURITIES TO DUKE UNIVERSITY

When transferring publicly traded securities to make an outright gift to Duke, you or your broker should notify Duke University’s Office of Alumni and Development Records by calling (919) 684-2338 or emailing stockgifts@duke.edu. You may also complete a stock gift notification form at giving.duke.edu/stock.

Remember that it may take a few days for stock to be transferred from your brokerage to Duke, and mutual funds may take several weeks. Please work with our office, or a Duke Development Officer, to create written instructions for how you want your gift to be used at Duke University. Undesignated gifts will be used wherever Duke needs them the most at the time of receipt.

HOW TO MAKE A GIFT OF STOCKS, BONDS, MUTUAL FUNDS OR OTHER SECURITIES TO FUND A LIFE INCOME GIFT

Life income gifts—such as charitable gift annuities and charitable remainder trusts—typically provide income to a donor and/or spouse but can also be established to provide income for a loved one (e.g. sibling, child or friend). These produce a charitable tax deduction and can provide capital gains tax relief if funded with appreciated assets. The securities should be transferred to the trustee of the trust or to the charity issuing the gift annuity prior to sale of the securities. 

If you have an interest in learning more about life income gifts, Duke’s Office of Gift Planning can provide overviews, specific illustrations and example documents for review and approval by you and your advisors. Our Trusts and Estates team members can help arrange the transfer of securities to fund a charitable trust or annuity with Duke. We can work with you to create written instructions for how you want the remainder of the life income gift to be used at Duke University.

Please contact Jane Heuser (919) 681-6776 or Karen Smedley (919) 684-0367 in the Office of Gift Planning for more details.

LESS COMMON TYPES OF CHARITABLE GIFTS OF SECURITIES

Any proposed charitable gift of closely or privately held securities, restricted stock, Section 144 stock, S corporation stock, limited liability company interests or partnership interests should be reviewed with Duke University and your advisors prior to the gift. Gifts of these types of securities will usually require a “qualified appraisal” if the donor wants to claim a tax deduction. Our FAQ: Gifts of privately held securities blog article contains more information about this type of gift to Duke.

GIFTS OF QUALIFIED EMPLOYER STOCK

Some employees own a significant amount of their employer’s stock in a qualified company retirement fund—like an ESOP, profit sharing plan or 401(k). With proper planning upon retirement or departure from the company, the employee can take a distribution of the company stock out of the retirement fund and will only have to pay tax on the cost basis—in this case, the amount the company paid for the stock when it was put into the plan. If the company stock was put into the retirement fund many years ago, or before a company went public, the stock’s cost basis may be minimal as compared to its current value. This qualified employer stock may then be donated to Duke or other charity, and the owner will never have to pay tax on the gain, which is referred to as “net unrealized appreciation” under I.R.C. §402(e)(4).

Note—it may be wise to use qualified employer stock for outright or life income gifts because, unlike capital gain assets, this stock does not get a stepped-up cost basis at death.

GIFTS OF APPRECIATED STOCK ACQUIRED THROUGH AN OPTION

Stock acquired by statutory/qualified option—such as incentive stock options or employee stock purchase plans—is treated as a gift of a long-term capital gain asset if the appreciated stock

  1. Has been held for at least two years from the grant of the option, and

  2. Has been held over one year after exercise of the option through which it was purchased.

Gifts of non-qualified options are rare due to several hurdles—including the need for the recipient (e.g. employee, board member, contractor) to make an I.R.C. section 83(b) election to secure a cost basis and the difficulty of establishing market value in most cases.

In August, we'll dive deeper into charitable gifts of stock options. Stay tuned!


If you have questions about these or other tax-wise ways to support any part of Duke University, please contact Duke’s Office of Gift Planning at (919) 681-0464 or giftplanning@duke.edu.

About the author

phil-buchanan-headshot

Phillip Buchanan Senior Philanthropic Counsel for Duke University

Phil is a veteran of development and gift planning who considers it a privilege to help good people celebrate the joy of giving. He serves as Duke’s senior philanthropic counsel and helps donors, professional advisors and Duke Development officers evaluate the best options for making a charitable gift to Duke. He has been featured in publications such as BusinessWeek and Kiplinger’s. When he’s not at work, Phil attempts to solve the mysteries of the universe for his three inquisitive young sons.

Phillip Buchanan can be contacted via email or by phone at (919) 681-0467.

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