Mailbag: How Can I Get Started Gifting Appreciated Investments?

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How can I get started gifting appreciated investments?

I heard you speak earlier this year and I’m working to put our finances in order. Remembering your talk and reading Seven Financial Resolutions for the New Year – 2011. You talk about giving appreciated assets rather than cash. I was wondering how you would go about transitioning from giving cash to giving assets?

– Charitably Inclined

First a refresher for those unfamiliar with the idea: If you earn $50,000 a year and your charitable giving is normally $5,000 a year, you can boost your charitable giving and save taxes by giving appreciated stock. If you have an investment that you purchased for $3,000 and now it is worth $5,000 you can give that asset to the charity.

You still receive a $5,000 tax deduction, but you avoid paying tax on the $2,000 capital gains. When the charity sells the stock they are exempt from paying the capital gains tax. With capital gains taxes currently at 15% you save $300. Next year the top capital gains tax rises to 20% and you will save $400.

Now a reminder: This year is the last year to realize capital gains in the lowest two tax brackets for 0% capital gains.  If you are in these two tax brackets do no miss this tax planning opportunity!

Now for the question: How can I get started gifting appreciated investments?

Once you have been gifting appreciated assets for many years, you gift $5,000 of appreciated stock. Then with the money you would have given to the charity you buy additional assets. The assets you are buying are like planting seeds that later will grow into appreciated assets. It is like you are planting the investments you will be giving ten years from now.

The question is: How can I get started? Do I start planting investments and then refrain from giving for ten years?

No, we encourage you to remain charitably inclined. And that is why in the Seven Financial Resolutions, gifting appreciated investments was 5th. If you remember, that list was:

Seven Financial Resolutions

  1. Be and stay debt free.
  2. Automate your 401(k) match.
  3. Fully fund your $5,000 Roth IRA.
  4. Invest 5% in a taxable account.
  5. Gift 10% in appreciated investments.
  6. Save 10% for unknown unknowns.
  7. Push saving and investing to 50%.

If you have been doing the first four resolutions, that means you have been investing 5% of your salary in a taxable account. Adding resolution number five  means now you should be investing 15% of your salary in a taxable account each year and gifting 10% of your salary. If your salary is $5,000 then you put $7,500 into the account and gift $5,000. The account will gradually grow in size for giving in future years. Also, if you put $7,500 into investments and it appreciates 10%, next year when you gift $5,000 you will still have $3,250 remaining in the account. Gradually this account will grow in size and appreciated amount.

When you reach resolution number six we recommend you put the additional 10% for unknown unknowns into your taxable investments as well. This money will also appreciate and provide additional candidates for gifting before it needs to be used as an emergency fund.

Flowing everything through your taxable investment account has great advantages for financial planning.

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President, CFP®, AIF®, AAMS®

David John Marotta is the Founder and President of Marotta Wealth Management. He played for the State Department chess team at age 11, graduated from Stanford, taught Computer and Information Science, and still loves math and strategy games. In addition to his financial writing, David is a co-author of The Haunting of Bob Cratchit.