Gifts of Securities

Description

Securities or stocks can be separated into three categories: Closely Held Stock, S Corporation Stock, and Qualified Appreciated Stock.

Closely Held Stock - The FMV of closely held stock can be difficult to determine. Therefore, if the deduction exceeds $10,000, the donor must obtain a qualified appraisal. Even if the donation is less than $10,000, an independent appraisal may be helpful to help support the claimed value. If the recipient cannot sell the stock, the gift may have limited value. Also, the donor may not be able to give much stock without giving the recipient control or influence over voting matters.

S Corporation Stock – S Corporation Stock is not publicly traded, so a qualified appraisal is required for donations over $10,000. And just like closely held stock, it may have limited value because of inability to sell the shares, and the recipient may have control or influence over voting matters. In addition, the pass-through income from ownership in S Corporation stock is treated as unrelated business income tax (UBIT) to the Foundation. Therefore, the donation may be unattractive to the Foundation because the income can trigger income tax.

Qualified Appreciated Stock – Normally, the charitable deduction for appreciated stock donations is the full fair market value of the stock. Qualified appreciated stock is stock for which market quotations are readily available on an established securities market and which would generate long-term capital gain if sold. Mutual fund shares that are not subject to any resale restrictions are considered qualified appreciated stock.

Benefits

Donations of stock can offer tax benefits to donors, depending on the time frame in which the stocks were held and their individual tax situation.

Short-Term Capital Assets (Assets held less than 12 months) - Donations of Short-Term Capital Assets do not offer tax benefits to the donor but can satisfy a donor's desire to contribute. If the stock has appreciated, meaning the purchase price (Basis) is less than the current fair market value (FMV), the donor deducts the basis as a charitable contribution. If the stock has depreciated, meaning the Basis is greater than the current FMV, the donor deducts the FMV as a charitable contribution. Basically, with short-term capital assets, the donor deducts the lessor of Basis or FMV. In addition to the charitable deduction, the donor does not have to recognize any gains (triggering a taxable event) on the transfer of the stock.

For example, John bought 100 shares of XYZ Corporation in March for $1,000.00 ($10 per share). Three months later, John donated the shares to the UVU Foundation. At the time of the donation, the shares were worth $9 per share. UVU Foundation receives a benefit of $900, but John only can claim a charitable donation of $900. If the shares increased in price to $11 per share, UVU Foundation would receive a benefit of $1,100, but John can only claim a charitable donation of $1,000. If John had sold the stock and donated the cash, he would need to recognize the $100 loss or gain and report it on his tax return.

Long-Term Capital Assets (assets held more than 12 months) - If the stock has appreciated, meaning the Basis is less than the current FMV, the donor deducts the FMV as a charitable contribution. If the stock has depreciated, meaning the Basis is greater than the current FMV, the donor deducts the FMV as a charitable contribution. Basically, with long-term capital assets, the donor gets to deduct the FMV of the stock. In addition to the charitable deduction, the donor does not have to recognize any gains (triggering a taxable event) on the transfer of the stock.

For example, John bought 100 shares of XYZ Corporation in March for $1,000.00 ($10 per share). Three years later, John donated the shares to the UVU Foundation. At the time of the donation, the shares were worth $9 per share. UVU Foundation receives a benefit of $900, but John only can claim a charitable donation of $900. If the shares increased in price to $11 per share, UVU Foundation would receive a benefit of $1,100, and John can claim a charitable donation of $1,100. If John had sold the stock and donated the cash, he would need to recognize the $100 loss or gain and report it on his tax return.

Only the donations of Long-Term Appreciated Stock offer a donor a significant tax benefit. The other offers some tax benefit as well, but not as great. In addition to the charitable deduction, donors avoid the potential of a taxable event if the sale of the stock is followed by the donation of cash.