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Can a Robo Advisor Select the Most Advantageous Stocks for You to Donate to Charities?

Which Stocks are the Best to Donate?

By Andrew Rombach, a Content Associate for Lendedu – a website that helps investors, consumers, small business owners, and more with their finances

When most people think of making charitable contributions, activities like volunteering, donating gently-used household or clothing items, or writing a check at a fundraiser come to mind. However, donating stock to charity is another way to make an impact. The process of giving stock to a non-profit organization is similar to that of any other contribution of stock investments, but this type of donation may provide tax benefits to you as the donor.

While the benefits of charitable stock donations may be enticing, keep in mind that you can only make a donation if you own stocks in the first place. You need to select and invest in a stock before you can even consider any benefit from a donation; it can be difficult to make the right buy, especially if you’re new to investing.

Luckily, beginner and experienced investors have two main options for investment advice. Alongside traditional human advice, robo-advisors are a growing resource for portfolio management thanks to advances in technology. This begs the question: which advisor should you rely on? How do up-and-coming robo-advisors stack up compared to traditional advisors?

What Are the Advantages of Using a Robo-Advisor?

Robo-advisors are a relatively new addition to the investing marketplace. Through technology-driven platforms, robo-advisors help individuals invest their money in a variety of investment vehicles, often automatically. Investment options currently include mutual funds, exchange-traded funds, and individual stocks. Through a mobile app or an online website, robo-investors can add money periodically or systematically to an account, and the funds are immediately invested.

One of the most significant benefits of using a robo-advisor is the lower barrier to entry. Robo-advisors are designed to help novice investors get started with building a portfolio. They often only require small contributions to start, reducing the upfront commitment. This provides access to stocks in smaller increments, with lower dollar amounts necessary, giving investors the ability to build up a stock portfolio over time that can ultimately be donated to charity.

Robo-advisors may be less expensive than traditional brokerage accounts or investment advisors. There are minimal fees when using a robo-advisor, which can be beneficial when trying to invest for a future donation. Lower fees may benefit an investor by reducing the overall cost of investing and increasing the final profit margin.

Aside from reduced cost, robo-advisors offer live data and instant updates on stock performance, allowing an investor to keep tabs on their money. This could help an investor make faster decisions and react more quickly to the market if needed. Furthermore, robo-advisors will offer suggestions based on your individual risk tolerance and preferences which could be instrumental for a new investor still learning the ropes.

Are They Trustworthy Compared to Traditional Advisors?

Although robo-advisors can be less expensive and easier to work with on the surface, investors have another option for building up a stock portfolio with the help of a traditional financial advisor. Human advisors are the preferred choice for some millennial investors according to a recent study, given the higher level of engagement, knowledge, and experience they bring to the table.

To start, traditional investment advice is typically more expensive compared to a robo-advisor. Selling points for robo-advisors are the low account minimums and fees. Contrarily, some traditional advisors may charge higher fees and only work with clients who are investing larger sums.

Although fees and account minimums are higher, human advisors bring a wealth of experience to the table as well as the human touch. They can see possibilities and developments that a robot may not always catch. Some would argue that human advisors can extract a greater return from your investments, whereas a robo-advisor may offer more limited investment options.

However, others still argue that robo-advisors are able to generate the same or better investment performance as fee-heavy financing advisors over the long run, but this may not be completely accurate yet. The current short track record of robo-advisors may not be comparable to financial advisors.

Additionally, human advisors can add much more in terms of forward-thinking and strategic planning. Financial advisors can tailor a portfolio for the purpose of donating stocks in the future, while robo-advisors may not be able to factor in this intention.

The Bottom Line

Donating appreciated stock can be a smart move from a tax perspective – not to mention an incredibly valuable contribution to a charitable organization. Donating investors pay a greatly reduced capital gains tax on the transaction while the charity reaps the benefits of an asset it can use later on.

Robo-advisors offer the ability to invest without high or unrealistic account minimums, like some financial advisors require. They can also offer stock investing on the cheap, compared to the fees charged by human advisors. However, these benefits do come with trade-offs as mentioned. On the other hand, traditional advisors offer strategic advantages, but at a cost. An investor needs to weigh those costs and advantages with the expected growth of their investments.

With that in mind, beginner investors may want to start with robo-advisors to build up a portfolio, then transition  to a human advisor for the long term before donating to charity.

How to fundraise by accepting stock donations.

Average increase in funds by accepting stock donations:
55
Dramatically increase your contributions before the end of the calendar year...
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If you learn to ask for gifts from appreciated assets you’ll repeatedly GET more generous DONATIONS.

Dr. Russell James J.D., Ph.D., CFP®, professor in the Department of Personal Financial Planning at Texas Tech University completed a study reporting on data from 1 million NPO tax returns from 2010 – 2017.

 

This included IRS-released data from e-filed returns of more than 200,000 nonprofit organizations.

The following are the conclusions from his study:

  1. Non Profits that received only cash gifts  had only 11% growth. 
  2. Non Profits that constantly received non-cash gift had closer to 50% growth. 
  3. Non Profits that received stocks and securities had closer to 66% growth.

A 55% difference in growth between accepting just cash and accepting securities.

Per the research:

  • People are more likely to spend irregular, unearned gains (e.g., capital gains on appreciated assets) on luxury goods (O’Curry 1999) and philanthropy in particular (Reinstein & Reiner, 2012; Konow, 2010) than they are regular, earned income.
  • Framing a donation as an exceptional event removes it from comparison with regular disposable income budget items and increases giving (Sussman, Sharma & Alter, 2015).
Open an account today. /open-new-account

Tax Shelters Closed, but Stock Donator Still Alive

Below is an article that lists a tax shelter that Mitt Romney benefited from, but later was closed.  Stock Donator still allows similar tax shelters and is available for all types of donors.

________________________

reprinted from Bloomberg:

http://mobile.bloomberg.com/news/2012-10-29/romney-avoids-taxes-via-loophole-cutting-mormon-donations.html

 

In 1997, Congress cracked down on a popular tax shelter that allowed rich people to take advantage of the exempt status of charities without actually giving away much money.

Individuals who had already set up these vehicles were allowed to keep them. That included Mitt Romney, then the chief executive officer of Bain Capital, who had just established such an arrangement in June 1996.

The charitable remainder unitrust, as it is known, is one of several strategies Romney has adopted over his career to reduce his tax bill. While Romney’s tax avoidance is legal and common among high-net-worth individuals, it has become an issue in the campaign. PresidentBarack Obama attacked him in their second debate for paying “lower tax rates than somebody who makes a lot less.”

In this instance, Romney used the tax-exempt status of a charity — the Mormon Church, according to a 2007 filing — to defer taxes for more than 15 years. At the same time he is benefitting, the trust will probably leave the church with less than what current law requires, according to tax returns obtained by Bloomberg this month through a Freedom of Information Act request.

In general, charities don’t owe capital gains taxes when they sell assets for a profit. Trusts like Romney’s permit funders to benefit from that tax-free treatment, said Jonathan Blattmachr, a trusts and estates lawyer who set up hundreds of such vehicles in the 1990s.

“The main benefit from a charitable remainder trust is the renting from your favorite charity of its exemption from taxation,” Blattmachr said. Despite the name, giving a gift or getting a charitable deduction “is just a throwaway,” he said. “I used to structure them so the value dedicated to charity was as close to zero as possible without being zero.”

When individuals fund a charitable remainder unitrust, or “CRUT,” they defer capital gains taxes on any profit from the sale of the assets, and receive a small upfront charitable deduction and a stream of yearly cash payments. Like an individual retirement account, the trust allows money to grow tax deferred, while like an annuity it also pays Romney a steady income. After the funder’s death, the trust’s remaining assets go to a designated charity.

Romney’s CRUT, which is only a small part of the $250 million that Romney’s campaign cites as his net worth, has been paying him 8 percent of its assets each year. As the Romneys have received these payments, the money that will potentially be left for charity has declined from at least $750,000 in 2001 to $421,203 at the end of 2011.

The Romney campaign declined to answer written questions about the trust.

“The trust has operated in accordance with the law,” Michele Davis, a campaign spokeswoman, said in an e-mail.

Paul Comstock, a financial adviser to LDS Philanthropies, an arm of the Mormon Church, said that while he wasn’t familiar with the trust, Romney and his trustee might arrange to compensate the church for the dwindling amount with other gifts.

“It may be that they’ve made provisions for the charity someplace else that will make up for what this isn’t going to give them,” Comstock said.

Bloomberg News obtained the trust’s tax returns from 2007 to 2011 from the Internal Revenue Service. Romney hasn’t disclosed the trust’s tax returns and is under no legal obligation to do so. He did make some disclosures about the trust’s investments in Massachusetts filings from 2002 to 2007 and as a presidential candidate in the current campaign.

Funds held by Romney’s trust are scheduled to be distributed after the death of Romney and his wife to “a charitable organization to be designated by Romney,” according to the 2007 filing, disclosing assets he held while governor of Massachusetts. “In the absence of such a designation the funds will go to the Church of Jesus Christ of Latter-Day Saints.”

Davis declined to comment on whether Romney has designated another charity since then.

Romney has been an active member of the church, which expects members to donate 10 percent of their income. Over the years, he has donated millions of dollars of stock in Bain-owned companies to the church, securities filings show.

The church recommends such trusts on its website as one of many options for donors.

“Probably one of the advantages of a charitable remainder trust is that it helps with capital gains tax,” said Carl McLelland, an attorney in the planned giving office for LDS Philanthropies.

CRUTs were more common in the 1990s when capital gains rates were higher. In 1996, when Romney set up his trust in Massachusetts, the federal rate was 28 percent, compared with 15 percent today. At the time, a Massachusetts state resident who sold shares for a gain of $1 million could have faced a combined state and federal capital gains tax of as much as 40 percent, reducing his take to $600,000.

By contrast, if he contributed the stock to a CRUT, and it sold the shares, it typically wouldn’t owe any tax since it is a charitable trust. The CRUT could reinvest the $1 million and earn a return on the full amount.

“The power of this is the tax deferral,” said Jay A. Friedman, a partner at accounting firm Perelson Weiner LLP in New York. “The money is all growing tax free and he only pays tax on what is distributed to him.”

Concerned that CRUTS weren’t sufficiently philanthropic, Congress mandated in July 1997 that the present value of what was projected to be left for charity must equal at least 10 percent of the initial contribution. Existing CRUTS weren’t affected by the new law.

Romney’s trust was projected to leave to charity an amount with a present value of a little less than 8 percent of the initial contribution, according to an analysis by Friedman. Thus, the specifics of Romney’s trust wouldn’t have passed legal muster if it had been set up 13 months later, he said.

Because the trust’s investments have been earning a return far below its annual payouts to the Romneys, its principal has dwindled rapidly.

In 2001, five years after it was established, the trust had a value of between $750,000 and $1.25 million. Since then, it has pursued a conservative investment strategy — regardless of the ups and downs of the stock market — buying a mix of money- market funds, federally-backed bonds and federal bond funds. Since 2007, it has moved its assets entirely into cash. By 2011, its investments earned a return of $48, down from between $60,001 and $100,000 in 2001. It paid $36,696 to the Romneys in 2011.

The current investing strategy favors the Romneys over the charity because they get a guaranteed payout, said Michael Arlein, a trusts and estates lawyer at Patterson Belknap Webb & Tyler LLP.

“The Romneys get theirs off the top and the charity gets what’s left,” he said. “So by definition, if it’s not performing as well, the charity gets harmed more.”

The trustee for Romney’s CRUT is R. Bradford Malt, chairman of the law firm Ropes & Gray LLP, and manager for Romney’s various family trusts as well as his personal attorney. Ropes & Gray has also been for years the main outside counsel for Bain Capital.

If the CRUT maintains the same investing strategy, assets will continue to shrink, said Jerome M. Hesch, a tax and estate planning attorney at the law firm Carlton Fields. The trustee acted prudently in protecting against losses during a stock market decline, he said.

Nevertheless, “what’s going to go to charity is probably close to nothing,” Hesch said.

IRS publication 561

Questions and answers regarding IRS Publication 561 for Stock Donations to 501c3s and other charities.

What Is Fair Market Value (FMV)?

To figure how much you may deduct for property that you contribute, you must first determine its fair market value on the date of the contribution.

Fair market value.

Fair market value (FMV) is the price that property would sell for on the open market. It is the price that would be agreed on between a willing buyer and a willing seller, with neither being required to act, and both having reasonable knowledge of the relevant facts. If you put a restriction on the use of property you donate, the FMV must reflect that restriction.

Example 1.

If you give used clothing to the Salvation Army, the FMV would be the price that typical buyers actually pay for clothing of this age, condition, style, and use. Usually, such items are worth far less than what you paid for them.

Example 2.

If you donate land and restrict its use to agricultural purposes, you must value the land at its value for agricultural purposes, even though it would have a higher FMV if it were not restricted.

Factors.

In making and supporting the valuation of property, all factors affecting value are relevant and must be considered. These include:

  • The cost or selling price of the item,
  • Sales of comparable properties,
  • Replacement cost, and
  • Opinions of experts.

These factors are discussed later. Also, see Table 1 for a summary of questions to ask as you consider each factor.

Date of contribution.

Ordinarily, the date of a contribution is the date that the transfer of the property takes place.

Stock.

If you deliver, without any conditions, a properly endorsed stock certificate to a qualified organization or to an agent of the organization, the date of the contribution is the date of delivery. If the certificate is mailed and received through the regular mail, it is the date of mailing. If you deliver the certificate to a bank or broker acting as your agent or to the issuing corporation or its agent, for transfer into the name of the organization, the date of the contribution is the date the stock is transferred on the books of the corporation.

Stocks and Bonds

The value of stocks and bonds is the FMV of a share or bond on the valuation date. See Date of contribution, earlier, under What Is Fair Market Value (FMV).

Selling prices on valuation date.

If there is an active market for the contributed stocks or bonds on a stock exchange, in an over-the-counter market, or elsewhere, the FMV of each share or bond is the average price between the highest and lowest quoted selling prices on the valuation date. For example, if the highest selling price for a share was $11, and the lowest $9, the average price is $10. You get the average price by adding $11 and $9 and dividing the sum by 2.

 

No sales on valuation date.

If there were no sales on the valuation date, but there were sales within a reasonable period before and after the valuation date, you determine FMV by taking the average price between the highest and lowest sales prices on the nearest date before and on the nearest date after the valuation date. Then you weight these averages in inverse order by the respective number of trading days between the selling dates and the valuation date.

Example.

On the day you gave stock to a qualified organization, there were no sales of the stock. Sales of the stock nearest the valuation date took place two trading days before the valuation date at an average selling price of $10 and three trading days after the valuation date at an average selling price of $15. The FMV on the valuation date was $12, figured as follows:
[(3 x $10) + (2 x $15)] ÷ 5 = $12

Listings on more than one stock exchange.

Stocks or bonds listed on more than one stock exchange are valued based on the prices of the exchange on which they are principally dealt. This applies if these prices are published in a generally available listing or publication of general circulation. If this is not applicable, and the stocks or bonds are reported on a composite listing of combined exchanges in a publication of general circulation, use the composite list. See also Unavailable prices or closely held corporation, later.

Bid and asked prices on valuation date.

If there were no sales within a reasonable period before and after the valuation date, the FMV is the average price between the bona fide bid and asked prices on the valuation date.

Example.

Although there were no sales of Blue Corporation stock on the valuation date, bona fide bid and asked prices were available on that date of $14 and $16, respectively. The FMV is $15, the average price between the bid and asked prices.

No prices on valuation date.

If there were no prices available on the valuation date, you determine FMV by taking the average prices between the bona fide bid and asked prices on the closest trading date before and after the valuation date. Both dates must be within a reasonable period. Then you weight these averages in inverse order by the respective number of trading days between the bid and asked dates and the valuation date.

Example.

On the day you gave stock to a qualified organization, no prices were available. Bona fide bid and asked prices 3 days before the valuation date were $10 and 2 days after the valuation date were $15. The FMV on the valuation date is $13, figured as follows:
[(2 x $10) + (3 x $15)] ÷ 5 = $13

Prices only before or after valuation date, but not both.

If no selling prices or bona fide bid and asked prices are available on a date within a reasonable period before the valuation date, but are available on a date within a reasonable period after the valuation date, or vice versa, then the average price between the highest and lowest of such available prices may be treated as the value.

Large blocks of stock.

When a large block of stock is put on the market, it may lower the selling price of the stock if the supply is greater than the demand. On the other hand, market forces may exist that will afford higher prices for large blocks of stock. Because of the many factors to be considered, determining the value of large blocks of stock usually requires the help of experts specializing in underwriting large quantities of securities, or in trading in the securities of the industry of which the particular company is a part.

Unavailable prices or closely held corporation.

If selling prices or bid and asked prices are not available, or if securities of a closely held corporation are involved, determine the FMV by considering the following factors.

  • For bonds, the soundness of the security, the interest yield, the date of maturity, and other relevant factors.
  • For shares of stock, the company’s net worth, prospective earning power and dividend-paying capacity, and other relevant factors.

Other factors.

Other relevant factors include:

  • The nature and history of the business, especially its recent history,
  • The goodwill of the business,
  • The economic outlook in the particular industry,
  • The company’s position in the industry, its competitors, and its management, and
  • The value of securities of corporations engaged in the same or similar business.

For preferred stock, the most important factors are its yield, dividend coverage, and protection of its liquidation preference.

You should keep complete financial and other information on which the valuation is based. This includes copies of reports of examinations of the company made by accountants, engineers, or any technical experts on or close to the valuation date.

Restricted securities.

Some classes of stock cannot be traded publicly because of restrictions imposed by the Securities and Exchange Commission, or by the corporate charter or a trust agreement. These restricted securities usually trade at a discount in relation to freely traded securities.

To arrive at the FMV of restricted securities, factors that you must consider include the resale provisions found in the restriction agreements, the relative negotiating strengths of the buyer and seller, and the market experience of freely traded securities of the same class as the restricted securities.

Publicly traded securities

Publicly traded securities.

Even if your claimed deduction is more than $5,000, neither a qualified appraisal nor Section B of Form 8283 is required for publicly traded securities that are:

  • Listed on a stock exchange in which quotations are published on a daily basis,
  • Regularly traded in a national or regional over-the-counter market for which published quotations are available, or
  • Shares of an open-end investment company (mutual fund) for which quotations are published on a daily basis in a newspaper of general circulation throughout the United States.

Publicly traded securities that meet these requirements must be reported on Form 8283, Section A.

A qualified appraisal is not required, but Form 8283, Section B, Parts I and IV, must be completed, for an issue of a security that does not meet the requirements just listed but does meet these requirements:

  1. The issue is regularly traded during the computation period (defined later) in a market for which there is an “interdealer quotation system” (defined later),
  2. The issuer or agent computes the “average trading price” (defined later) for the same issue for the computation period,
  3. The average trading price and total volume of the issue during the computation period are published in a newspaper of general circulation throughout the United States, not later than the last day of the month following the end of the calendar quarter in which the computation period ends,
  4. The issuer or agent keeps books and records that list for each transaction during the computation period the date of settlement of the transaction, the name and address of the broker or dealer making the market in which the transaction occurred, and the trading price and volume, and
  5. The issuer or agent permits the Internal Revenue Service to review the books and records described in item (4) with respect to transactions during the computation period upon receiving reasonable notice.

An interdealer quotation system is any system of general circulation to brokers and dealers that regularly disseminates quotations of obligations by two or more identified brokers or dealers who are not related to either the issuer or agent who computes the average trading price of the security. A quotation sheet prepared and distributed by a broker or dealer in the regular course of business and containing only quotations of that broker or dealer is not an interdealer quotation system.

The average trading price is the average price of all transactions (weighted by volume), other than original issue or redemption transactions, conducted through a United States office of a broker or dealer who maintains a market in the issue of the security during the computation period. Bid and asked quotations are not taken into account.

The computation period is weekly during October through December and monthly during January through September. The weekly computation periods during October through December begin with the first Monday in October and end with the first Sunday following the last Monday in December.

 

Table 1. Factors That Affect FMV.

IF the factor you are considering is… THEN you should ask these questions…
cost or selling price Was the purchase or sale of the property reasonably close to the date of contribution?
Was any increase or decrease in value, as compared to your cost, at a reasonable rate?
Do the terms of purchase or sale limit what can be done with the property?
Was there an arm’s-length offer to buy the property close to the valuation date?
sales of comparable properties How similar is the property sold to the property donated?
How close is the date of sale to the valuation date?
Was the sale at arm’s-length?
What was the condition of the market at the time of sale?
replacement cost What would it cost to replace the donated property?
Is there a reasonable relationship between replacement cost and FMV?
Is the supply of the donated property more or less than the demand for it?
opinions of experts Is the expert knowledgeable and competent?
Is the opinion thorough and supported by facts and experience?

SOURCE – IRS WEBSITE

Article on Motley Fool Describes Benefits of Stock Donations

There is a great article on the Motley Fool by Roy Lewis which explains in detail the benefits of stock donations.  That article can be found hereA http://www.fool.com/FoolCharityFund/Donating_Stock.htm

Among other things it gives illustrative examples of how much a donor could save if they donate stock rather than cash.

Stock Donator prides itself on being the easiest way to give stock to organizations. Sign up for a free account today.

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