Summer Reading Series 3 of 3 - Strategies for Concentrated Stock

Donating Concentrated Stock to a Private Foundation
Presented by Beata Dragovics

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Holders of concentrated stock positions typically understand the complexities and risks associated with owning these shares; however, they sometimes struggle to determine the best course of action for reducing those risks. For those with philanthropic intent, funding a private foundation with their concentrated stock positions may be worth considering, as this can provide benefits both to the shareholder and to charitable organizations.

What is a private foundation?
A private foundation is a charitable entity that does not qualify as a public charity and that is established and funded by a single individual or family. It is a tax-exempt entity with the primary purpose of making grants to qualified charities.

Benefits of a private foundation
Because the private foundation is tax exempt, shares donated to it can be sold without having to pay associated capital gains taxes. When the shares are donated, the donor receives an immediate charitable income tax deduction equal to the fair market value of the stock. An additional tax benefit is that the donated shares are removed from the shareholder’s taxable estate.

Once the private foundation has been funded, the donor can control where charitable grants are made and how assets are invested. The foundation can also provide an effective framework for creating a philanthropic legacy through the appointment of family members to its board.

Example: Private foundation*
Ms. Jones owns a highly appreciated position, currently worth $3 million, in XYZ Corporation. Ms. Jones is very philanthropically minded and is looking to create a charitable legacy for her family. She would like to fund a private foundation with $1 million of XYZ shares that have a cost basis of $200,000.

When the shares are donated to the foundation, Ms. Jones may receive a $1 million charitable income tax deduction. The shares will then be sold by the foundation—without incurring capital gains tax—and allocated into a diversified portfolio by Ms. Jones’s financial advisor. Ms. Jones and four additional family members will be named to the board of directors. The foundation will carry out Ms. Jones’s charitable intent by providing grants to causes that board members believe are worthy of support.

Considerations
Private foundations require legal expertise to establish and administer, which can lead to significant expense. They also require strict adherence to complex reporting requirements and IRS compliance. Therefore, while they can be excellent charitable planning tools, private foundations are most appropriate for those who intend to make very large donations.

*This is a hypothetical example and is for illustrative purposes only. No specific investments were used in this example. Actual results will vary. There can be no assurance of positive performance from the portfolio.

This material has been provided for general informational purposes only and does not constitute either tax or legal advice. Although we go to great lengths to make sure our information is accurate and useful, we recommend you consult a tax preparer, professional tax advisor, or lawyer.

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Beata Dragovics is a financial advisor located at 376 Boylston Street, Boston, MA 02116. She offers securities as an Investment Adviser Representative of Commonwealth Financial Network®, Member FINRA/SIPC, a Registered Investment Adviser. Advisory services offered through Freedom Trail Financial, LLC are separate and unrelated to Commonwealth. Freedom Trail Financial, LLC does not provide legal or tax advice. You should consult a legal or tax professional regarding your individual situation. Beata Dragovics can be reached at 617 247-1112 or at [email protected].

© 2018 Commonwealth Financial Network®