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Share Your Financial Abundance Tax-Efficiently

November 1, 2019

With Thanksgiving and the holidays on the horizon, there’s lots of focus this time of year on gratefulness, abundance, and sharing with others. As you donate your wealth, how confident are you that you are giving as tax-efficiently as possible?

There are a variety of ways you can contribute to IRS-qualified charities and benefit from tax deductions:

  • Donating stock that has grown significantly in value from its original purchase price (also known as highly appreciated stock).
  • Contributing a portion of Required Minimum Distributions (RMDs) from an Individual Retirement Account (IRA)
  • Establishing Charitable Trusts
  • Creating Foundations
  • Setting up a Donor Advised Fund

The most appropriate charitable giving strategy for you depends on your specific financial situation. In the spirit of sharing, I offer you the following story of how I recently helped clients change their approach to giving to their favorite charities and optimize their financial and tax plans.

A few months ago, Sam and Judy (names have been changed) decided that they needed something more than just investment management from their financial advisor at a big-name company. As we began working together, I learned that Sam and Judy gave a portion of their income every year to charities. So, we made charitable giving a recurring annual goal in their financial plan.

After understanding Sam and Judy’s other goals as well as their sensitivity to risk, I reviewed their investments. A significant portion of Sam and Judy’s portfolio was held in a single stock. Sam explained that he and Judy inherited the stock from a beloved family member years ago. Having a significant portion of a portfolio in one stock holding is a “concentrated position.” Concentrated positions need to be carefully managed. They may expose their owners to additional risks connected to a business, sector, or industry. Depending on when the owner acquired the concentrated position, the holdings may have grown in value and have significant capital gains. So, tax consequences of changing the position need to be considered.

Sam, Judy, and I talked about how likely they were to achieve their financial goals given their income, savings, spending and current investment allocation. We spent a lot of time discussing changes we would make together over time to improve their likelihood of financial success.

One of the first changes I recommended we initiate was decreasing their concentrated stock position in tax-efficient ways. Using sophisticated financial planning software, I showed Sam and Judy just how negatively and quickly their lives could change if their concentrated stock position dropped in value. They realized that they might not be able to enjoy and share their wealth as they wished. Given their specific situation and charitable giving goal, I suggested they consider setting up a Donor Advised Fund and frontloading several years of future charitable giving now.

I explained a Donor Advised Fund (DAF) is like an investment account that exists only to provide grants to IRS-qualified charities. Sam and Judy could open a DAF and contribute up to 30% of their adjusted gross income in the form of their concentrated stock as an irrevocable gift to the DAF. Then their concentrated stock would be re-invested tax-free into different funds within their DAF. Whenever Sam and Judy wanted to donate money to charities, they simply requested that the DAF issue a grant.

Sam and Judy could benefit in many ways by setting up a DAF:

  • They pre-fund several years of their charitable giving in this tax year
  • They immediately take a tax deduction for the entire value of their stock donation to the DAF
  • They avoid paying capital gains tax on the stock that they contribute to the DAF
  • They reduce their level of concentrated stock risk in their portfolio
  • They no longer rely on their income to fund charitable contributions
  • Investments in their DAF grow tax-free, potentially resulting in more money being available over time to contribute to their preferred charities

Sam and Judy were very appreciative that I heard what was important to them and offered them new financial solutions that met their needs in strategic ways. They volunteered that they felt more comfortable and confident than ever with their financial path forward as a result of working with my team and me. If you would like an independent perspective on your approach to your finances, including tax-efficient giving, or if you would value having the type of relationship with your financial advisor that Sam and Judy enjoy with me, know that I am here.

Caroline Wetzel is one of Natural Nutmeg’s 2019 and 2018 10Best Winners for Business/Life Coach. Caroline is a Certified Financial PlannerTM (CFP®) and Vice President, Private Wealth Advisor with Procyon Private Wealth Partners, LLC. Procyon Private Wealth Partners, LLC and Procyon Institutional Partners, LLC (collectively “Procyon Partners”) are registered investment advisors with the U.S. Securities and Exchange Commission (“SEC”). This article is provided for informational purposes only and for the intended recipient[s] only. This article may also include opinions and forward-looking statements which may not come to pass. Information is at a point in time and subject to change. Procyon Partners does not provide tax or legal advice.

One Comment

  1. Jack

    November 13, 2019 at 1:04 pm

    well done, clear, very interesting

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