Are You Making The Most of a Booming Stock Market?

By Laurence A. Pagnoni, MPA and Jay Frost

The stock market has hit historic highs, and most of the gains have gone to a small number of extraordinarily wealthy and very philanthropic individuals. You can watch the full treatment of this critical subject on our recent webinar.

There’s an extraordinary opportunity at hand. Is your fundraising adapting to capture it? Charities should be taking dramatic measures to make it easier for donors to give.

Donor behavior has also been changing, and people are adopting different types and methods of donations. For instance, stock donations are quickly growing by high double-digit rates while other forms of giving are stagnant or experiencing less growth. The increase in stock donations can be attributed in large part to the wide range of benefits offered by this type of giving.

Upwards of 55% of families are invested in the stock market. The median value of their stock holdings is $40,000. However, most are invested through mutual funds and retirement plans. Only 15% own individual shares directly. Stock ownership is also skewed by income, ethnicity, and age. The top 10% of income earners own 70% of U.S. stocks, or roughly 10 times as much of the market as the bottom 60%. And while publicly traded stock comprises 24% of the wealth of white, non-Hispanic families, it makes up just 13% of African American wealth and 10% of Latinx wealth, according to the Federal Reserve’s Survey of Consumer Finances. Additionally, investors over 65 years old own 43% of the stock market.

How Can a Stockholder Support a Nonprofit Organization?

There are several ways in which a stockholder can support a nonprofit organization. Here a few of them:

  • The stockholder can make an outright major gift.
  • They can make a Planned Gift using their stock.
  • They can meet a challenge drive or start one of their own.
  • They can help you network and make vital connections with other donor prospects.
  • They can join your Development Committee or, once you research them and get to know them, possibly join your Board of Directors.

What Tax Benefits Should You Promote to Your Donors?

Below are some of the tax benefits to donors that you can promote:

  • Gifts of Appreciated Stock: The donor can give appreciated securities and deduct the Full Market Value (FMV) if the securities have been held longer than 12 months. They can also avoid taxes on long-term capital gains on any outright gifts. In addition, they can deduct the full FMV up to 30% of their Adjusted Gross Income (the excess, if any, may be subject to the carryover privilege).
  • Gifts of Depreciated Stock: If the donor sells securities and gives the proceeds to a nonprofit, they can take a tax deduction for the amount of the gift and a tax deduction for the capital loss.
  • Bargain Sale: The donor can sell an appreciated security to a charity at a price that is less than the FMV. If they do so, a deduction of the difference between the FMV and the price sold to the charity is available. (Some of the capital gains must be reported.)
  • Funding Charitable Remainder Trusts and Pooled Income Funds: The FMV of the security is the value of the asset transferred; capital gains tax is avoided at the time of funding but may be reported in the future when annual income is received.
  • Funding Annuities: The FMV of the securities is the value of the initial gift for an annuity. Capital gains tax is not avoided but rather is spread over the life expectancy of the annuitant.
  • Funding Bequests: The FMV of the securities transferred to a charity by the donor’s will is fully deductible for estate tax purposes.

Is Tax Deductibility Important to Donors?

This is an eternal American debate frequently refueled by changes in tax law. In 2005, Rob Reich wrote in the Stanford Social Innovation Review, “How much tax incentives matter also depends on who donors are. High-income donors seem to be more responsive to tax incentives than low-income donors. Economist Laura Tiehen, for example, reports that over 50% of donors with incomes over $100,000 cite tax incentives as a motivation to give, while only about 30% of donors with incomes under $50,000 cite tax incentives as a motivation to give.”

However, the “U.S. Trust® Study of High Net Worth Philanthropy, which is conducted in partnership with the Indiana University Lilly Family School of Philanthropy, regularly finds that the majority of wealthy donors are primarily motivated by philanthropy. The tax benefits of giving were cited by only 34% of respondents in the latest survey, with most respondents claiming they would give the same amount even if they didn’t receive an income tax deduction for the gift.”

Acknowledging a Gift of Stock

According to Hawkins/Ash CPAs, once a donation of stock has been received, a thank-you letter should be sent to the donor as soon as possible. This letter should acknowledge the gift of stock, such as the name and number of shares. It should not list the value of the stock received since the organization is not in the business of valuing stock. Also, the donor should have a record of the transaction from the broker. The stock becomes the asset of the organization once it is transferred to the organization, rather than when it is sold. Therefore, in accordance with generally accepted accounting principles (GAAP), once your nonprofit receives the stock, a contribution should be recorded at the fair value of the stock on the date received. If the donor would like to use stock to pay a pledge, your nonprofit will reduce the balance of the pledge receivable by the fair value of the stock on the date it is received. If the fair value of the stock upon receipt of the gift is greater than the pledge receivable balance, the organization will record a contribution for the difference.

Many organizations have a gift policy that requires that gifts of stock be liquidated upon receipt to minimize the risk associated with the stock market. If your organization has such a policy and received a donation of stock, the following will help ensure that the transaction is correctly recorded.

If the organization’s policy is to immediately sell the stock, any difference between the proceeds received from the sale of stock and the fair value recorded on the date the stock was donated will be recorded as a realized gain or loss on the organization’s books. If the organization incurs any fees related to the selling of the stock, that amount should be recorded as an investment fees expense.

It is important to make sure the organization is following its gift policy and properly records transactions related to the donation of stock and subsequent sale of stock.

Starting Conversations with Donors

Here are three examples of conversation starters about exploring donations of stock:

  • “I imagine reducing taxes is important to you. Would you agree?”
  • “Have you previously donated appreciated stock, and if so, how did that go?”
  •  “The donation you, Ms. Donor, make, and the deduction you’ll get are greater than they would be if you were to sell and donate the cash proceeds instead. That’s because when you donate shares, you avoid paying the capital gains tax.”

Will Inflation Cause the Market to Contract?

When inflation increases, purchasing power declines, and each dollar can buy fewer goods and services. Since purchasing power declines, this devalues what charities can do with the same amount of income.

Rising costs are more likely to be an issue for large charities. Inflation matters as donations that stay at the same level are essentially worth less in real terms each year. This means that over a 10-year period, a $50 donation gradually needs to rise to about $59 to keep up with inflation.

This is why integrating a moves management program into your email and postal mail processes is essential. It is highly unlikely that a donor’s giving will keep pace with inflation unless you ask for more. Incremental increased giving, or moves management, is key to countering inflation.

For example, between 2006 and 2012, people actually increased their giving by 2.7%. Remember what happened in 2008? There was a huge market contraction called The Great Recession. Inflation is a factor, but it can be overcome by active fundraising.

We welcome your comments about this post on the LAPA blog.

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