Companies love to reward their employees with stock ownership. Ownership may come in the form of a bonus or through retirement savings funds. As time passes and companies grow, the value of this stock ownership can become significant. And, when the recipient of the company stock makes the decision to transition it, the tax consequences can be quite burdensome.
“When clients approach me about large amounts of stock invested in a single company, we discuss numerous directions in which they could go,” said Cindy Luckman, private wealth adviser 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 a person receives a large amount of company stock and is interested in selling it, but is concerned about capital gains taxes, there are several philanthropic avenues he or she could choose to use. These include:
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. If, instead, the donor were to sell the stocks, he or she would be taxed on the increase value of the stock from its original cost.
Set up a charitable remainder trust. A charitable remainder trust allows a donor to turn an appreciated asset such as stocks into income that will continue to pay out 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 would also receive an immediate charitable income tax deduction. Once the stocks are in the irrevocable trust, the trustee would sell the stocks at full market value (and not have to pay any capital gains taxes) and reinvest the income in a balanced portfolio. For the rest of the donor’s life, the trust would make a payment to the donor based on a percentage of the corpus of the trust. When the donor passes away, the trust corpus goes to the charity (remainder beneficiary) set by the donor.
Donor advised funds. Like a direct gift to a specific charity, assets are placed into donor advised funds 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 donations.
Donor advised funds are great for families who want to start a philanthropic legacy. They 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.
It’s important to approach a gift by having 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 adviser 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 is senior vice president for Private Wealth Management of U.S. Bank in Vancouver. Follow her on LinkedIn at https://www.linkedin.com/in/cindyluckman.
Mike Penfield is the national director of the U.S. Bank Charitable Services Group, which manages the needs of private foundations, endowments and institutional planned giving clients. Follow him on LinkedIn at https://www.linkedin.com/in/mike-penfield-1a8962/.
U.S. Bank and its representatives do not provide tax or legal advice. Your tax and financial situation is unique. You should consult your tax and/or legal adviser for advice and information concerning your particular situation.