The old year came to a close amid an ongoing five-year bull run in equities, which pulled prices from the depths of the economic crisis in 2008 and 2009 to the all-time highs where they ended 2014. To give some perspective, the shareholder of an ETF or mutual fund tracking the S&P 500 would have enjoyed a cumulative return of well over 200% from the lowest point on March 9, 2009, through December 31, 2014.
In addition to potentially allowing client portfolios to more than make up for lost ground, this favorable market environment may yield charitable planning opportunities for your clients.
The Building Blocks of a Charitable Strategy
Clients who had the wherewithal to remain invested in equities during the crisis and recovery likely now own nonqualified positions with low cost basis relative to their current fair market value. For the philanthropic client, these positions can be the building blocks of a successful, tax-efficient charitable strategy that also serves to complement the client’s overall financial plan.
First, let’s consider the client who writes a $500 check to her favorite charity. She may be able to deduct the full amount of the donation from her income, thus reducing the total amount of income on which she will be taxed by the IRS. The tax benefit that accompanies a charitable donation is the federal government’s way of incenting taxpayers to support the various charitable organizations that exist today.
But suppose there’s an even more tax-advantaged way for this taxpayer to fulfill her charitable goals. If she happens to own equity positions in her nonqualified account, there just may be. Let’s assume that this client owns a position in ABC with a fair market value of $500, where that value represents a long-term capital gain of $250 and an income tax basis of $250. Instead of writing a check for $500 to her favorite charity, she could donate her ABC shares directly.
Not only would she receive an income tax deduction equal to the fair market value of the shares, but she would also avoid paying taxes on the long-term capital gain, which she would otherwise have to pay if she sold the shares herself. She also wouldn’t have to worry about the charity footing the bill for the capital gain, since the charity is tax exempt. It’s certainly a win-win from both an income tax and a philanthropic standpoint.
Preserving the Overall Asset Allocation