Authored by: Nicholas M. Brown, CFA, CFP

As 2024 draws to a close, many investors find themselves in a fortunate position. The markets have delivered a year of solid growth, and many portfolios could be brimming with appreciated securities. While this success is worth celebrating, it also creates an opportunity to reassess philanthropic strategies. One powerful option is donating highly appreciated securities to charity—a move that can benefit both your favorite causes and your overall financial plan. However, it’s essential to understand the pros, cons, and tax implications to make the most of this strategy.

Why Donate Appreciated Securities?

When you donate appreciated securities, such as stocks, mutual funds, or other investable securities, that you’ve held for over one year, you can unlock several advantages:

• Avoid Capital Gains Taxes: By transferring the securities directly to a qualified charity, you bypass the need to sell the asset and pay capital gains taxes, which can range from 15% to 23.8% federally, plus state taxes.
• Claim a Full Market Value Deduction: For securities held longer than one year, you can deduct the full fair market value (FMV) of the donation, subject to IRS limits (generally up to 30% of your adjusted gross income for donations of securities).
• Simplify Cash Flow: Donating securities rather than cash allows you to support charitable causes without reducing your available cash reserves.

These benefits make appreciated securities an efficient way to give, particularly in a year when portfolios are flush with gains.

The Role of the Holding Period

The tax benefits of donating appreciated securities hinge on the holding period of the asset:

• Held Longer Than One Year: Securities held for more than one year qualify for a deduction equal to their Fair Market Value (FMV) at the time they are donated. This is the most tax efficient option, as you avoid capital gains taxes entirely.
• Held for One Year or Less: For securities held less than a year, the deduction is limited to the lower of the FMV or the cost basis (what you paid for the security). This restriction significantly reduces the tax benefit of the donation and should typically be avoided.

For investors considering year end charitable giving, prioritizing long term holdings helps maximize both the philanthropic and financial benefits of the gift.

Comparing Securities to Other Types of Assets

While appreciated securities offer compelling advantages, they aren’t the only option for charitable giving. Here’s how they compare to other assets:

Cash Donations

• Pros: Cash is straightforward, and the deduction limit is higher (up to 60% of adjusted gross income).
• Cons: No additional tax benefits; you can’t avoid capital gains taxes as you can with securities.

Real Estate or Other Appreciated Assets

• Pros: Like securities, donating real estate or other appreciated assets can avoid capital gains taxes and offer FMV deductions.
• Cons: Transactions can be more complex, and not all charities or Donor Advised Funds are equipped to handle non liquid assets.

Qualified Charitable Distributions (QCDs)

• Pros: If you are over age 70½, QCDs allow you to donate directly from an IRA, satisfying required minimum distributions (RMDs) without increasing taxable income.
• Cons: QCDs are limited to $100,000 per year (indexed for inflation starting in 2024), and they don’t offer a deduction in addition to the exclusion from taxable income.

Considerations and Next Steps

Before donating appreciated securities, it’s crucial to consider a few additional factors:

1. Choose a Qualified Charity: Ensure the organization is a registered 501(c)(3) to receive tax benefits.
2. Confirm the Charity’s Capability: Not all charities are equipped to accept securities, so confirm this with your intended recipient in advance.
3. Consult Your Financial Advisor: Many investors donating highly appreciated securities will utilize a Donor Advised Fund. This strategy can amplify the impact of your donation by allowing you to manage the timing of contributions and grants, especially if you are unsure of which charity you would like to support, or they cannot accept appreciated securities. Read more about donor advised funds here.

A Win-Win Strategy

The combination of a strong market year and appreciated securities presents a unique opportunity for philanthropic investors in 2024. Donating these assets not only supports causes you care about but also maximizes tax efficiency, leaving more of your wealth available to grow and sustain future giving. By working with a trusted financial advisor, you can ensure your charitable contributions align with both your financial goals and personal values.

Granite Harbor Advisors is here to guide you through the complexities of charitable giving and help you make the most of your philanthropic efforts. Contact us to create a strategy that supports your legacy and benefits the causes closest to your heart.