Philanthropy Opportunity for Executives: Donate IPO Shares and Restricted Stock

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1 Philanthropy Opportunity for Executives: Donate IPO Shares and Restricted Stock March 31, 2017 by Barbara Benware of Schwab Charitable For charitably-inclined clients who are business executives or investors, investment assets that have appreciated in value can be among the most tax-advantaged items to give to charity. Often, the most appreciated investments are shares of an initial public offering or concentrated holdings of restricted stock in clients companies. By donating a portion of these appreciated assets, executives can enjoy a current year tax deduction and potentially eliminate capital gains tax liability on the sale of the asset while allowing the charities they support to receive the most money possible. Donating IPO Shares to Charity With the initial public offering market expected to rebound this year following a relatively sluggish 2016, you may have clients facing long-term capital gains tax on the sale of highly appreciated shares after an IPO. These clients including executives, affiliates, and early investors in companies going public may realize a much more favorable income tax result and charitable impact by donating a portion of their IPO shares (either during or after the lock-up period) directly to charity. If your client sells the stock first and then donates the cash proceeds to charity, the client may be subject to capital gains taxes on the proceeds from the sale of the stock. But if the client contributes the IPO shares directly to charity or to a donor-advised fund, he or she can usually deduct the fair market value of the donation without realizing any capital gain. Hypothetical Example Assuming initial investment made more than a year before IPO shares sold or donated Page 1, 2018 Advisor Perspectives, Inc. All rights reserved.

2 With a direct donation to charity or a donor-advised fund account, the donor s federal income taxes are reduced by an additional $13,960 and the charity receives $10,000 more. Additional Considerations When Donating IPO Shares Before discussing the benefits of donating IPO shares to charity with clients, consider the following frequently asked questions. 1. For how long must shares be held? In order to realize the significant tax savings from the charitable donation of IPO stock: The initial investment(s) must have been made more than a year before the shares are donated and the shares should have appreciated in value from the time of the initial investment(s). Donating stock held for less than a year or depreciated stock does not carry the same tax advantages. Clients must transfer shares directly to charity or a donor-advised fund and should not sell the stock first. They should not enter into any arrangement that would legally require the recipient charity to dispose of the stock upon receipt. This kind of "pre-arranged sale" could reduce or eliminate the tax benefits to the donor of making the donation. 2. Are the shares subject to a lock-up period? Page 2, 2018 Advisor Perspectives, Inc. All rights reserved.

3 This is commonly the case and the decision of whether and how charitable gifts of shares may be made during a lock-up period is determined by the issuer s counsel. In cases where gifts can be made during a lock-up period, the fair market value will be the market value at the time of contribution less a discount based on the holding period specified in the lock-up agreement (or any other restriction on sale). For shares subject to any restrictions that materially affect the value of the shares to the donor or prevent the shares from being freely traded, clients must engage a qualified appraiser to determine the discounted fair market value. 3. What happens when the lock-up expires? In general, the charity or donor-advised fund controls the sale process. Upon receipt of the stock, the organizations generally sell contributed securities promptly, but they reserve the right to sell at any time. 4. Is my client considered an affiliate of the issuing company? If your client is a 10% shareholder, a director, or otherwise deemed to have insider status (i.e., in possession of influential or non-public information), it does not impede the gift, but does require extra steps and may take additional time. Consult with a specialist to discuss the specifics. 5. Are there other potential tax issues inherent in the gift? Every individual tax situation is unique. Before proceeding, it may be best for a qualified tax advisor to review the details of your client s specific situation to make sure such a gift is structured and timed appropriately. Donating Restricted Stock to Charity While some clients may benefit from making charitable contributions of IPO shares, other clients who have concentrated holdings of restricted stock in their companies can also make tax-advantaged gifts to charity. Restricted stock holdings may have a low cost basis and significant current market value that will result in large capital gains taxes when sold. By donating a portion of their appreciated restricted stock held for more than one year to a public charity (including a donor-advised fund), executives can enjoy a current year tax deduction and potentially eliminate capital gains tax liability on the sale of the asset while giving more to charity. Contributions of similar assets to a private foundation would generally be deductible at the lower of cost basis or market value. Considerations include: If your client is subject to Rule 144 public sale restrictions, and/or is considered a "control person" in the company, the company's general counsel must give permission to transfer the shares. The charity will later sell the shares at acceptable times. Donations of restricted stock to charity or a donor-advised fund account are generally deductible at fair market value on the date of contribution. 1 By contrast, contributions of restricted stock to a private foundation are generally deductible at the lower of cost basis or market value. A qualified Page 3, 2018 Advisor Perspectives, Inc. All rights reserved.

4 appraisal is typically required to substantiate fair market value. Case Study Contribution of Restricted Stock A senior executive of a media firm has a large concentrated holding of restricted stock with low cost basis. The restricted stock is subject to strict lock-up periods and trading windows. As it is his most appreciated asset, he would like to contribute a portion of the stock to charity in order to support various philanthropic causes while minimizing taxes associated with any eventual sale or liquidation. The executive decides to establish a donor-advised fund and gains approval from his firm to contribute a portion of his restricted shares. The donor-advised fund holds the shares until the lock-up period expires, and then sells them. The executive can then recommend grants to charities of his choice over time. He claims a fair market value deduction (as determined by a qualified appraisal). This is the third article in a series on donating non-cash assets. For more information on this topic, see Why Your Clients Investments, Not Cash, Make the Best Charitable Gifts, and Charitable Tax Planning Opportunity: Donate Appreciated Stock to Charity. The next article in this series will discuss donating real estate to charity. Visit schwabcharitable.org for additional ways to help clients have more impact with their charitable giving while maximizing their tax benefits. *This value is hypothetical, for illustrative purposes only, and does not account for possible valuation discounts due to restrictions on the shares, if any. It should not be used in connection with considering whether to buy, sell, or hold appreciated securities. Assumes cost basis of $5,000, that the investment has been held for more than a year and that all realized gains are subject to the 20% federal long-term capital gains tax rate. Does not take into account any state or local taxes, or potential Medicare net investment income surtax. Assumes no restrictions on the sale of the contributed shares. If there are restrictions, the value of the deduction will be reduced. Certain federal income tax deductions, including the charitable Page 4, 2018 Advisor Perspectives, Inc. All rights reserved.

5 contribution, are available only to taxpayers who itemize deductions, and may be subject to reduction for taxpayers with adjusted gross income (AGI) above certain levels. In addition, deductions for charitable contributions may be limited based on the type of property donated, the type of charity, and the donor s AGI. Charitable contributions to public charities of capital gain property held for more than one year are usually deductible at fair market values. Deductions for capital gain property held for one year or less are usually limited to cost basis. Assumes donor is subject to the 39.6% federal tax. Does not take into account state or local taxes. Certain federal income tax deductions, including the charitable contribution, are available only to taxpayers who itemize deductions, and may be subject to reduction for taxpayers with adjusted gross income (AGI) above certain levels. In addition, deductions for charitable contributions may be limited based on the type of property donated, the type of charity, and the donor s AGI. 1 2 May be subject to discount based on the specific restrictions. Hypothetical case study, for illustrative purposes only. Assumes cost basis of $50,000, that the investment has been held for more than a year and that all realized gains are subject to the 20% federal long-term capital gains tax rate plus the 3.8% Medicare net investment income surtax. Does not take into account any state or local taxes. 3 Gifts to charity of restricted stock are typically deductible at fair market value. For gifts of more than $10,000, the donor must obtain a qualified appraisal. Such valuation may be discounted to reflect the lack of immediate marketability and other restrictions. Such discounts vary widely, depending on the nature of the specific restrictions. A 20% discount was assumed for this example. The example assumes full deductibility (gifts to public charities of property held longer than one year are generally limited to 30% of AGI with a 5-year carryover of unused amount). 4 Assumes donor is subject to the maximum 39.6% federal tax and does not account for state or local taxes. Certain federal income tax deductions, including the charitable contribution, are available only to taxpayers who itemize deductions, and may be subject to reduction for taxpayers with adjusted gross income (AGI) above certain levels. In addition, deductions for charitable contributions may be limited based on the type of property donated, the type of charity, and the donor's AGI. Schwab Charitable Page 5, 2018 Advisor Perspectives, Inc. All rights reserved.