Stock ownership is a common way for companies to reward employees. Some companies offer it through a bonus program, while others may provide it through retirement savings funds. Employees who enjoy many successful years with one company may end up with a single stock in their portfolio over time that is quite significant. Significant enough that if the employee decides it’s time to sell the stock, the tax consequences may be quite burdensome.
“When clients approach me about large amounts of stock invested in a single company, we discuss several options,” said Cindy Luckman, private wealth advisor with U.S. Bank Private Wealth Management. “We look at how the stock fits into their entire financial picture, from current financial needs to their estate plan. Often, we recommend looking at philanthropy as a way to mitigate overall costs.”
If you have a large amount of company stock and are concerned about capital gains taxes upon sale, there are several philanthropic avenues you can consider. These include:
1. Giving the stocks directly to a charity. When stock is given to a charity, the donor can deduct the gift at full market value. The charity can sell the stock without any tax penalty.
2. Set up a charitable remainder trust. A charitable remainder trust allows a donor to turn an appreciated asset, such as stock, into income that will continue to pay out to the donor for the rest of the donor’s life. This strategy also helps to mitigate income taxes on the sale of the stock while removing the asset from the estate. When a donor transfers appreciated stock into a charitable remainder trust, the donor also receives an immediate charitable income tax deduction. Once the stocks are in the irrevocable trust, the trustee can sell the stocks at full market value (and avoid any capital gains taxes), and reinvest the income in a balanced portfolio. For the rest of the donor’s life, the trust will make a payment to the donor based on a percentage of the corpus of the trust. When the donor dies, the trust corpus goes to the charity (remainder beneficiary) set by the donor.
3. Donor advised funds (DAFs). Like a direct gift to a specific charity, assets are placed into DAFs to remove them from the estate and gain an immediate tax deduction. Certain restricted, controlled or lock-up stocks can be donated to the fund. Once in the fund, the stocks can be sold and reinvested without capital gains tax. The donor can then recommend which charities they would like to receive the donations. Donor advised funds are great for families who want to start a philanthropic legacy. DAF’s allow a family to take advantage of the tax break but also take the time then to research the organizations they like and make a determination on how they can best provide support.
Before making a donation, it’s important to have a discussion with the charity first.
“If a person has a charity they’re passionate about, it is very important to reach out to the charity to build a relationship and learn what type of gift works best for the organization and for the donor,” said Mike Penfield, national director for Charitable Services with U.S. Bank. “For example, some donors would like to place restrictions on the gift while the needs of the organization may best be served by an unrestricted gift.”
A financial advisor, along with an attorney and tax advisor, can review with a donor his or her overall financial plan, the interests he or she may have in philanthropy and also the options to reduce taxes when it comes to working with transitioning investment assets.
Cindy Luckman, Private Wealth Advisor with U.S. Bank Private Wealth Management
Mike Penfield, National Director for Charitable Services with U.S. Bank Wealth Management