Gifting Appreciated Assets

Giving gifts of cash by writing a check to the ministry of your choosing is very common. However this approach may not result in the maximum benefit to the donor or the designated ministry. Donors who own assets such as stocks, mutual funds, or real estate which have appreciated in value will likely have a significant opportunity to pay less tax and give more. Let’s take a look at one possible scenario.

Mr. and Mrs. Generous Giver are considering selling 100 shares of XYZ stock, currently valued at $10,000 and giving the cash received from the sale to their local church to be used for a recently initiated building program. The shares of the XYZ stock was given to them by Mrs. Givers mother who paid $2000 for the stock 10 years ago. Mr. Giver has further researched the stock and feels it is likely to appreciate further over the next couple of years and does not want to miss that opportunity. Mrs. Giver has suggested that it might then be better to give a $10,000 cash gift rather than the stock.

After meeting with their financial adviser Mr. and Mrs. Giver learn they will owe $1600 in tax if they sell the stock because they received the stock as a gift rather than inheriting it. Their adviser tells them the IRS considers their cost for the stock to be $2000 (What Mrs. Givers Mother Paid for the Stock). Thus if they sell the stock they will owe tax on the $8000 gain, which could be taxed by as much as 20% (15% Federal and 5% State). Given the tax implications of selling the stock resulting in a smaller gift to the ministry and the potential loss of future appreciation in the stock, Mr. and Mrs. Are convinced it would be best to give a $10,000 cash gift.

Their adviser suggests Mr. and Mrs. Giver gift the 100 shares of stock to the ministry rather than selling the stock and giving the ministry $8400 ($10,000 less $1600 in taxes to be paid). He tells them the ministry can then sell the stock for its fair market value ($10,000) if they choose. He further explains Mr. and Mrs. Giver will be able to take a current tax deduction for the fair market value of the stock on the date of the gift. Further if the stock continues to appreciate as Mr. Giver believes will happen, the ministry could hold the stock to be sold in the future resulting in a more significant gift.

Finally their adviser suggests they deposit the $10,000 cash they were going to give in lieu of the stock, in their investment account and purchase 100 shares of the XYZ stock. Their adviser explains that by following this strategy they avoid paying tax on the highly appreciated shares of stock, maximize their gift to the ministry, receive a current tax deduction and purchase shares with a higher cost basis, resulting in potentially lower tax consequences in the future as well as providing Mr. and Mrs. Giver the opportunity to participate in the anticipated growth in the stock.
Funding a donor advised fund with highly appreciated assets as described above can accomplish the same objective but allow the donor current tax benefits while making the grant of the gift at some day in the future.