May 23, 2022
Gifts of stock are 100X the size of cash gifts. Is your nonprofit ready to accept them?
The Opportunity
In the United States, more than $1 billion dollars is donated per day.
While Americans donate just 2% of their income to nonprofits, the average cash gift is approximately $1,000. Donations of appreciated assets, such as stocks raise the average gift to $5,230. According to the U.S. Census, 97-99% of all wealth is held in non-cash assets.
Donors that are giving gifts of cash are looking at the available dollars in their checking or savings accounts. Unless they make a gift (or gifts) that exceed the itemization threshold, their gifts do not provide a unique tax benefit. In 2022, the itemization threshold is $12,950 for individuals and $25,900 for a married couple. Gifts of stock, however, can be used to reach or exceed the itemization threshold but also avoid capital gains tax.
By 2050, an estimated $68 trillion will be passed from the Baby Boomer generation to the Millennial generation. As many have indicated, this will be the largest wealth transfer in human history and an unprecedented opportunity for philanthropy.
In addition to the fact that Millennials account for more than a fifth of all stock trades in recent years, inherited stock receives a new basis based on the day the inheritance occurs (typically the death of the original owner). This creates an opportunity for a millennial donor to receive an immediate tax advantage and avoid capital gains tax by gifting appreciated stock to your nonprofit.
The Problem
Nonprofits face two significant problems when it comes to accepting stock gifts. The first issue is procedural. In order to accept a gift of stock, a broker or advisor needs to be involved. The donor must notify their broker that they wish to gift X number of Y stocks on Z date to a specified nonprofit organization. The donor’s broker needs to transfer the asset (not sell it) to a broker acting on behalf of the nonprofit. When the shares are transferred to the nonprofit, the organization can choose whether to sell the stock or keep it as an investment. The first problem arises because the donor already has a broker but the nonprofit doesn’t. There are a few challenges that nonprofits may need to overcome:
• Some brokers may charge a fee to open or keep open an account
• Many brokers will charge a commission for the sale of the stock
• Other brokers may require a minimum investment amount to open or maintain a brokerage account
Once the nonprofit has a brokerage account in place, the next problem is letting donors know about making a gift of stock to the organization. While most households have some exposure to the stock market, it can seem like yet another thing to market without knowing who will engage (or take advantage of the opportunity). While there are some sophisticated tools that we provide to our clients to segment likely stock donors to an organization, we recommend that every organization place their stock transfer form on their website and regularly let all donors know of the opportunity and advantages of making gifts of stock. There are a few other ways to identify stock donors:
• Do they work for a company that advertises a stock benefit to employees? Many companies offer this benefit and for long time employees, this is a key indicator of low-basis stock.
• Conduct a survey of your donors to see who has already given a gift of stock.
• Ask donors in face-to-face conversations if they have considered a gift of stock.
We also recommend that nonprofits share stories of donors who have given through this mechanism (even if not to your organization) to help donors visualize the pathway for themselves.
The Solution(s)
Tapping into the billions of dollars in stock available for donation to your organization could not be simpler or easier. Unfortunately, some companies try to over-complicate the problem to justify charging your nonprofit fees for doing things that are actually quite easy and free.
Open a Brokerage Account
This is basically like any other account your nonprofit might have like a checking account or savings account except that it’s designed for stocks. Endowment Partners will open a brokerage account for your nonprofit for free with no fees so that you can accept gifts of stock. You won’t be charged any commissions on sales or have any minimums. We do charge a fee for any assets you invest with us but not for stocks that are sold and converted to cash.
Nonprofits should be wary of any service that takes a percentage of a donation to facilitate this process. Every donor must alert their broker directly so no time or effort can be eliminated by a third party. This is a highly regulated field so there are very few shortcuts.
Likewise, the sale of a stock should not result in a commission. It’s quite literally clicking a button but we have seen clients get fleeced by retail brokers who will charge 1-2% in a commission. In one actual example, a $50,000 stock gift was made to a nonprofit but the organization only received $48,000. The broker got $2,000 for 30 seconds of work.
Determine who will be in charge of keeping track of stock donations, recording them, and acknowledging them.
Most nonprofits appoint someone from their accounting or finance departments to complete the gift transfer from the brokerage. That person will usually tell someone in development to record the gift, and the donor may be thanked. Since nonprofits vary in size, it will depend on what makes the most sense for your organization and who has the time and resources to steward and follow up with donors. It is important that the recording of the stock gift follows the IRS guidelines so that the donor is provided with the most accurate information. It is important to note that the donor’s tax deductibility is different from what price the nonprofit sells the stock. For example, if I contribute 10 shares of XYZ stock to my local food bank on Tuesday, my tax deduction is the average of the high and the low price on Tuesday. If the high was $11 and the low was $9, my tax-deductible value is $100 regardless of whether the nonprofit sold it at $9 or $11 for $90 or $110. Also, if the stock receives a dividend on Wednesday of $1 per share and is sold at $12 on Thursday, the nonprofit will receive a total of $130 but my tax deduction is still $100. A good investment adviser will notify you of specific opportunities with donated stock transfers to ensure that you receive the appropriate documentation to give to the donor on valuation but also if an asset should be kept to take advantage of a dividend or earnings call.
Make a page on your website dedicated to stock donations.
Many nonprofits include information about stock transfers on their donation pages in a section that we recommend called ‘Smarter Ways to Give,” which includes gifts that pay you and your family money, gifts that help you avoid taxes, and gifts in wills.
If you are working with a big firm and don’t know your adviser personally, you should obtain your donor’s contact information and any information about the donation. This is because a big-box firm won’t necessarily contact you and tell you that you’ve received a donation from Dolly the Donor or what the stock was etc. The broker probably also doesn’t understand that good fundraising would benefit from you, as the nonprofit reaching out quickly to thank the donor and acknowledge the gift.
Some organizations will use a form on the website to collect the donor information. Then, your donor can be directed to another page on your site or sent an automatic email with your brokerage account information once they've completed the form. You don't want to postpone your response time in this case because it could lead to a reduced number of completed donations.
If you have an adviser that you know and specializes in nonprofits, they’ll reach out to you as soon as the gift occurs with information about thanking your donor as well as how to record it and recommendations on what to do with the asset.
Note that transferring shares in a private company can take longer than moving stock in a publicly-traded corporation. It could potentially cause problems with valuation. If your donor is transferring private stock in November or December, make sure they understand that it may take longer and may not be finished in time to be deducted from their taxes for that year.
Also, cryptocurrency is not treated the same as a standard stock or bond asset. It requires an appraisal to be donated and a few additional steps to qualify for a tax deduction.
Send a tax receipt and thank your donation.
The IRS requires receipts for any donation of $250 or more. Send the donor a tax receipt that includes the date of transfer, the value of the offering, the number of shares, and the stock's ticker name once the stock donation is received. Typically, stock gifts are more than $250 but you should thank any donor regardless of the amount. If your database allows for grouping, tagging, or other segmentation, you should mark donors as stock donors so you can continue to follow up with them.
For significant donors to our clients, we’ll set up price alerts that will let a nonprofit know that the price of a specific stock has hit a 52-week high. It’s a good reason to reach out to a donor to let them know that they can off-load a low basis stock. We also arm our clients with an illustration of what’s called the charitable swap where a donor contributes that low basis stock and uses their cash to buy the same stock at the new higher basis. The donor gets the double tax benefit and still has the same exposure to the stock but now decreases a future tax burden.
If you are curious about the charitable swap, smarter ways to give, marketing stock gifts, or getting your own free brokerage account, please reach out to us!