As I write this, the S&P 500 is up more than 20 percent in the last 12 months and 74 percent over the last five years. If your clients have a goal of building or preserving their personal wealth and are heavily invested in stocks, this has probably been a good time for them.
At the same time, portfolio rebalancing—the periodic purchase or sale of assets in a portfolio to maintain an original desired level of asset allocation—is a key ingredient in a well-constructed financial plan. For some of your clients, now may be a good time to consider offloading some stocks to rebalance their portfolios.
Rebalancing usually results in the realization of long-term capital gains, which typically means a heftier tax bill. But for clients who are charitably minded, it also presents a golden opportunity to support the causes they care about while mitigating their tax liability. If you have clients who need to rebalance, and who you know will be making charitable contributions anyway, ask yourself: Instead of selling their stocks and donating the after-tax cash, would it make more sense for them to make a gift of appreciated stock to a Donor Advised Fund?
Donating appreciated stocks yields two possible tax benefits. The first is the elimination of capital gains tax on the stock contributed. Normally, when you sell an appreciated stock, you pay capital gains tax on the increase in its value. For example, if you bought stock for a total of $100,000 and sold it years later for $500,000, your capital gains tax would be calculated on the $400,000 gained from the sale. But by donating some, or all, of their appreciated securities, your clients can avoid capital gains tax on some, or all, of the gain. The Donor Advised Fund receiving the donation is free from capital gains tax on the contribution as well.
Clients who itemize deductions can reap a second tax benefit by taking a charitable income tax deduction for their gift of appreciated stock. In doing so, they can list a larger amount, since the donation will be the entire value of the asset, not the value minus taxes. In other words, your clients can take a charitable deduction on money that hasn’t been taxed.
There are limits to these deductions, but regardless, charitable clients can save big in taxes and thus provide more money for the issues and organizations they care about most. Bottom line: Next time your charitable clients are preparing to sell appreciated stocks, ask them if they have considered donating some of the stock to a Donor Advised Fund!