Using Appreciated Assets to Achieve Charitable Goals While Rebalancing Your Portfolio

Many individuals own stock with an extremely low basis, the sale of which would result in significant capital gains.  This is often the case for individuals who spend a significant portion of their career with one company and acquired stock during their employment or who inherit a portfolio that is not actively managed and accrues significant growth.  Because of the potentially high capital gains, individuals frequently are reluctant to sell some or all of these assets.  Of course, the fact that assets have appreciated indicates the investment has been successful, but there is a point at which the unwillingness to sell assets (because of capital gains taxes) can have a negative effect.  For instance, investments may be at a higher risk because they are not diversified or the stock in question does not provide suitable income.

If you are charitably inclined, creating a charitable trust may be an option to reduce the low basis stock in your portfolio.  The highly appreciated asset is transferred to a trust in which you give yourself an income stream of either a fixed dollar amount per year or fixed percentage based on the value of the assets transferred to the trust.  The trust defines whether you will receive the payments for a fixed number of years or for the rest of your life.  You also will have the ability to add an additional beneficiary, such as a spouse, to continue to receive the income after your death.  At the conclusion of the established term, the assets that remain in the trust will be paid to the charity or charities you have selected.

When the assets are transferred to the trust, the trustee, who you have selected but must be independent, will sell the assets and then invest the funds in a more diversified portfolio.  These decisions will take into account the assets transferred, the rate of payment you select, the number of years income payments are to be made, and the number of beneficiaries.  In the year you create the trust and the assets are transferred to it, you will receive a charitable deduction on your income tax return based on the value of the transfer, the number of years of the trust, the payout rate and the number of beneficiaries. Your accountant and attorney will work together to maximize the amount of charitable deduction you will be able to take on your income tax return.  By making this transfer, you have simultaneously maximized the benefit of a charitable gift while avoiding the payment of capital gains tax on the highly appreciated asset.  Finally, you have not given up the benefit you received from the underlying asset as you have converted it into an income stream for a period of time.

Obviously, this is a fairly sophisticated planning tool so you will need to determine if it makes sense by discussing it with your trusted professionals.  You, along with your trustee, should seek guidance in the establishment of such a trust from your financial advisor, attorneys, and accountant.  Many charitable institutions will assist in the creation of such a trust if you are naming them as the ultimate beneficiary.  In the right circumstance, using a charitable trust can provide income tax savings by eliminating capital gains and providing a charitable deduction while also allowing you to retain the value of the underlying asset for a period of time.

Article written by Barbara Doyle Frantz, Esq.

Partner at Phelan, Frantz and Ohlig, LLC

This article is for informational purposes only.  This information is not intended to be a substitute for specific individualized tax, legal or investment planning advice as individual situations will vary. For specific advice about your situation, please consult with a lawyer or tax professional. The views stated in this letter are not necessarily the opinion of Westfield Financial Planning and should not be construed, directly or indirectly, as an offer to buy or sell any securities mentioned herein. Investing involves risk including the potential loss of principal. No investment strategy, such as rebalancing and asset allocation, can guarantee a profit or protect against loss. Rebalancing investments may cause investors to incur transaction costs and, when rebalancing a non-retirement account, taxable events will be created that may increase your tax liability.  Indexes are unmanaged and investors are not able to invest directly into any index. Past performance is no guarantee of future results. In general, the bond market is volatile as prices rise when interest rates fall and vice versa. This effect is usually pronounced for longer-term securities. Any fixed income security sold or redeemed prior to maturity may be subject to a substantial gain or loss. The payment of dividends is not guaranteed. Companies may reduce or eliminate the payment of dividends at any given time. © 2019