Most people give to charities out of their checking accounts. But our next guest says there could be more effective donation strategies to consider that may also help you rebalance your investment portfolio while avoiding capital gains taxes. Mike Switzer interviews Peter Pigeon, a certified financial planner at Hobbs Group Advisors in Columbia, SC.
TRANSCRIPT:
Switzer: Hello and welcome to another edition of the South Carolina Business Review. This is Mike Switzer. Most people give to charities out of their checking accounts, but our next guest says there could be more effective donation strategies to consider that may also help you rebalance your investment portfolio while avoiding capital gains taxes. Peter Pigeon is a certified financial planner. He joins us by phone now from his office at Hobbs Group Advisors in Columbia. Peter, welcome back to the program.
Pigeon: Mike, thank you for having me again.
Switzer: So let's just dive right into this topic. Where would you like to start?
Pigeon: Sure. So we talk to our clients about the most effective ways for doing their charitable gifting. Certain people do this towards the end of the year. Certain people gift to charities throughout the year. But what we typically find is that most of our clients are giving out of their bank assets. And in many cases, they would benefit by using their actual highly appreciated securities, stocks, for example, to provide those gifts because of the advantages associated with it.
Switzer: All right, well, walk us through the mechanics of this then.
Pigeon: From a background standpoint, some people realize this and some don't, but we've been in a bull market, really, for the last 17 to 18 years. What we see with brokerage accounts, with what we would consider after tax, investment accounts, especially if people have owned United States tech stocks, there are stocks that are a very large percentage of their portfolio, and they have a substantial amount of gains, which is a great thing. But at the same time, when we come across a portfolio, and we realize that there might be a concentration of certain securities, most of the time the client tells us they don't want to sell those because they don't want to pay capital gains tax. A potential solution for that is to gift those securities to a qualified charity or to what's called a donor advised fund. By doing that, the client gets to take the deduction for the charitable contribution, just like they would from using a check from their bank account. But also they do not have to pay tax on the gain. Charitable organization can receive the stock, they can sell it. And because they are a nonprofit organization, they pay no tax on the gains associated with it either. So in many cases, the client gets to satisfy a charitable contribution. They get to avoid paying capital gains tax on the appreciation of the particular stock. And in some cases, they get to reduce the allocation that they have in their portfolio, which may be a good thing if they're overly concentrated in particular stocks.
Switzer: Okay, so how complicated is this to call your investment advisor, your broker, your banker, whoever's holding your investment portfolio, and ask them to take so many shares of this and send it to this charity.
Pigeon: I don't mean to say that it's not complicated, but it is rather common for broker for a custodian to handle these contributions. And most charities, other nonprofits have some experience in this because they have clients who ask or brokers who ask for their clients. So in other words, some, charitable organizations we work with will have a brokerage account open, in the name of their organization for the purpose of receiving these shares. So there is a little bit of work to be done, but we think the value far outweighs the work.
Switzer: All right, you mentioned donor advised fund. Tell us what that is.
Pigeon: A donor advised fund is like an endowment. It's almost like a little mini endowment for clients to where they can make contributions into a donor advised fund, which is a irrevocable gift. And the money has to go to a charity at some point in time, but it allows the donor to control how much they are making in the form of a tax deductible gift for a particular year. So for example, we cuss the assets at Fidelity. A client can set up a donor advised fund at Fidelity. They can move that highly appreciated stock that we just talked about into a donor advised fund. It can turn around and sell that particular stock in the donor advised fund. It qualifies for a charitable contribution. And then they can actually make those gifts to charities in the current year or later. So they can control when they give the money to their respective charities. But it does allow for some tax planning when you're thinking about, you know, you'd like to reduce the amount of stock, you would like to, get that charitable contribution, but you're not sure exactly when or how or which charities you want to fund. You can set up a donor advised fund and take care of the contribution part and also the deduction part on your tax return. But then you have some time to figure out where you send the money to the charities.
Switzer: Well, Peter, as always, great information. Thanks for sharing.
Pigeon: Thank you again, Mike. Always a pleasure to be on.
Switzer: Peter Pigeon is a certified financial planner at Hobbs Group Advisors in Columbia. And remember, you can hear this show again at our webpage, South CarolinaPublicradio.org and you can find us wherever you find podcasts with the South Carolina Business Review. This is Mike Switzer.
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