Gifting closely held stock to charity

Another attractive feature of gifting closely held stock is the ability to bypass capital gains tax. If you were to sell the stock directly, you would be subject to capital gains tax on the appreciation. However, by donating the stock instead, you not only avoid this tax but also enable the charity to receive the full value of the stock upon sale without any tax implications due to the charity’s tax-exempt status.

Ownership is a key concern for both the business and charitable donee. The business often does not want an outsider, such as a charity, as an owner of its closely held stock, and the charitable donee usually has no interest in owning an illiquid asset, especially if it represents an interest in an operating business. In addition, if the charitable donee is a DAF, it must ensure that its receipt of the donation does not implicate the “excess business holdings” rules (triggered when a DAF owns more than 2% of a business).

When a charitable gift is made, it’s often in the interests of all parties for the stock to be redeemed as quickly as possible. A charitable donation can also be made in anticipation of a liquidation event, so long as the donation is made before any formal decision to liquidate the business.

In order to preserve the income tax advantages to the donor associated with the donation, there cannot be any prearranged agreement between the donor and the charity. There cannot be any pre-existing obligation on the part of the charity that it will sell the gifted stock back to the business or a third party.

Under the “assignment of income” doctrine, if such a prearrangement or obligation is found by the Internal Revenue Service (IRS) to exist, the charitable contribution made by the donor is reclassified as follows:

1. It is deemed a sale of the closely held stock by you (the donor).
2. Any gain on the sale must be recognized by you.
3. You are then deemed to have made a gift to the charitable donee of the proceeds from the sale.

A deemed sale means that you must recognize the gain in the asset and will be taxed accordingly, defeating the goal of making a charitable gift that also minimizes your capital gains tax and maximizes your charitable deduction.

By donating closely held stock, you have the opportunity to make a more substantial impact on the charitable organization you support. Nonprofits can use the donated stock for their operations or sell it to fund their programs. This allows them to leverage the value of the stock to further their mission and make a tangible difference in the lives of those they serve.

Begin by researching and selecting a qualified charitable organization that aligns with your values and the causes you’re passionate about. Ensure that the charity accepts closely held stock donations.

Due to the complexity involved in gifting closely held stock, it’s crucial to consult with professionals such as tax advisors, attorneys, and financial planners. They can guide you through the process and help you maximize the benefits.

Obtain an independent appraisal of the closely held stock to determine its fair market value. This appraisal is essential for calculating your tax deduction accurately.

Work with your financial institution or broker to transfer the stock to the charity’s account. Be sure to follow the specific instructions provided by the charity to ensure a smooth transfer.

Request a written acknowledgment from the charity confirming the donation. This acknowledgment is necessary for tax purposes and substantiating your deduction.

A business owner wishes to make a generous donation to a qualifying charity. Below, we’ll look at the difference between gifting cash outright vs. gifting privately held stock, and the positive impact directly gifting closely held stock to charity may have to the charity of choice.

• Fair market value of the stock as determined by a qualified appraisal, held for more than one year.
• Assumes all realized gains are subject to the maximum federal long-term capital gains tax rate of 20% and the Medicare surtax of 3.8%, and that the donor originally planned to sell the stock and contribute the net proceeds (less the capital gains tax and Medicare surtax) to charity.
• This does not take into account state or local taxes, if any.
• The effective unrelated business income tax (UBIT) rate in this instance is 10%.
• The discount rate is an estimate reflective of applied discount rates generally seen in the valuations of privately held companies. This assumes a rough range of 5%-10% discount for a minority interest and lack of control. The applied discounts could be higher or lower depending on the nature of the interest and the company itself.
• The amount of charitable deductions available based on the 8% valuation discount.
• Assumes a stock sale with no ordinary income attributed to the sale with a zero-cost basis. The amount available for granting purposes is after payment of unrelated business income tax.

Gifting closely held stock to charity offers a unique opportunity to combine philanthropy with financial strategy. By donating appreciated stock, you can unlock substantial tax benefits, bypass capital gains tax, and make a greater impact on the causes you care about. Remember to consult with professionals and carefully follow the donation process to ensure a successful and rewarding experience. Start exploring this philanthropic approach today and make your investments count in a meaningful way.