If you have worked at the same company for a long time, or received a large inheritance, it's likely that a significant portion of your wealth is tied up in a concentrated stock position. While this can certainly have monetary benefits when the company stock is rising, it also comes with a certain level of risk. A concentrated position means that you are reliant on the success of a single company—while the market as a whole might bounce back from a decline, an individual stock might not. Additionally, selling the entire stock position may result in a large capital gains tax bill.
There are several options for mitigating this risk. If you are charitably inclined, a donor-advised fund may be an attractive solution, because of its ease, convenience, and overall benefits.
What is a donor-advised fund?
A donor-advised fund, or DAF, is an account held through a sponsoring public charity for accepting charitable gifts. One a gift has been made, the donor becomes a grant advisor to the DAF. As a grant advisor, he or she can make non-binding recommendations that the sponsoring charity direct grants from the DAF to other public charities.
Gifts to a DAF may qualify for a charitable income tax deduction that equals the fair market value of the gifted cash or property in the year in which the gifts are made. The total deductibility of gifts in any given year is subject to the same limitations as gifts made outright to a public charity—currently, 60% of the donor's adjusted gross income (AGI) for cash gifts, and 30% of AGI for long-term capital gain property. If the full deduction cannot be taken in the year of the gift because of AGI limitations, the donor may carry forward the unused deduction for five years.
What are the benefits of funding a DAF with concentrated stock?
Funding a DAF with appreciated concentrated stock can provide the following benefits:
- On the date of contribution, the donor receives an income tax deduction equal to the shares' fair market value.
- Once contributed, the shares can be sold without incurring capital gains tax.
- The donor has a pool of charitable funds that can be directed to support various charitable organizations.
- DAFs are typically easier and less expensive to establish and maintain than other concentrated stock strategies.
- The donor may have the funds professionally managed by his or her financial advisor.
- The donor can designate successor grant advisors who can continue recommending grants to the DAF after his or her passing.
For example, let's say Mr. Smith owns a large, highly appreciated position in ABC Corp. He typically makes annual gifts to various charities, and would like to create a DAF funded with $100,000 of ABC stock that has a cost basis of $20,000.
Upon funding the DAF, Mr. Smith can receive a $100,000 charitable income tax deduction. The shares will then be sold—without incurring capital gains tax—and allocated into a diverse portfolio by Mr. Smith's financial advisor. Rather than write personal checks to the various charities that he typically supports, Mr. Smith can now make grant recommendations to the DAF in support of the same charities*.
For owners of concentrated positions who have a charitable intent, a DAF can be an excellent way to sell appreciated shares and help fund a charitable legacy in a more tax efficient manner. As a guest blogger, I'm unable to respond directly to comments posted below, but if you have any questions about donor-advised funds, or managing your concentrated stock position, please don't hesitate to contact me directly. I'm happy to help!
* This is a hypothetical example and is for illustrative purposes only. No specific investments were used in this example. Actual results will vary. There can be no assurance of positive performance from the portfolio.
Kristen Zavaski is a guest blogger, representing Axial Financial Group in Burlington, MA. She offers securities as a Registered Representative of Commonwealth Financial Network, Member FINRA/SIPC. CRR, LLP (also represented as CRR, CRR CPA), Axial Financial Group, and Commonwealth Financial Network are separate and unrelated entities. Kristen can be reached at 781-273-1400 or firstname.lastname@example.org. This material has been provided for general informational purposes only and does not constitute either tax or legal advice. Although we go to great lengths to make sure our information is accurate and useful, we recommend that you consult a tax preparer, professional tax advisor, or lawyer.