by Tim Isbell (#charity, #donate)
Tax laws provide favorable treatment for donating items with long-term capital gains to charitable institutions. For churches, this takes the form of people giving stocks. Such gifts have a substantial impact on many church's ongoing operating expenses, as well as playing a significant role in financing new ministry thrusts, buildings, and land purchase. This post explains what pastors and church leaders need to know about this form of financing.
When someone donates stock shares with long-term gains (currently defined as stock held at least 12 months and a day), the donor receives a tax deduction for the full market value of the shares as of the “gift date”, AND does not declare the long-term capital gain as income!
For situations where the donor has held the stock for long enough to have substantial capital gain, the advantage is essentially a double tax deduction! In effect, this allows a donor to give more money for less pain than if they sold the stock and donated the after-tax proceeds. Charitable deductions for gifts of stock and other appreciated property may be utilized up to 30% of a person's adjusted gross income in the year of the gift. If the donor exceeds this, they can carry over the remainder of the contribution to subsequent years.
For this to work, the donor must NOT sell the stock and donate the proceeds. That would trigger a tax event for the donor on their gain. The tax advantage comes when the donor gives the shares to the church. The donor gets the deduction, the church receives the stock, and when the church sells it the church does not pay tax (it's a non-profit). So the church receives the full value of the shares. This is a VERY EFFICIENT way of donating money to a church.
The most common use of this process occurs when someone gives shares of a publicly-traded stock to a church. Some donors give their tithes several months to a year ahead using this method. Unless the donor indicates otherwise, the church presumes the total gift is for Tithes/General Offerings. But donors often identify specific percentages to go to Missions, Local Compassion, a youth program, a children's program, a building program, etc.. Especially when a donor tithes in the form of stock gifts, the church want to spread their use of the donation over a period. So it helps when the donor discloses how long this gift is intended to last. For example, if a donor gives $12,000 worth of stock as their tithe over the next 12 months, it helps the church to know how to plan if they know that the gift is intended to be spread over the next 12 moths.
Just to put this sort of giving in perspective, I have seen stock gifts from $1,000 to $90,000 donated to local churches.
To receive donated stock, the church needs a full-service brokerage account, preferably with an office near the church, to efficiently receive the shares. (I don't know of a discount or online brokerage that can handle this. The process is complex enough that it can frustrate a donor unless there's a pretty high level of customer service.)
The process begins when a donor contacts the pastor (or designate) and explains the desire to donate a certain number of shares of a particular stock to the church. The church provides the donor with the needed details: the name of the church’s brokerage company (let’s say it’s Morgan Stanley), the exact name of on the church's account at Morgan Stanley (let's say it's XYZ Church), the church’s contact person at Morgan Stanley (let’s say her name is Mary Smith), the church’s account number so the donor knows where to direct the shares (let’s say it’s #123456), and Morgan Stanley’s DTC number (let’s assume it’s 0015). This number allows the shares to transfer electronically. It’s also a good idea to give the donor the church’s Federal and State Tax ID numbers (some brokerage houses require this).
For most stock gifts, the shares are held by the donor’s broker (let’s assume the donor's shares are at Charles Schwab). So the donor instructs the Schwab broker (in writing) how many shares of what stock to transfer from the donor’s account into the XYZ Church's account number 123456 at Morgan Stanley. The donor’s broker also needs Morgan Stanley's DTC number 0015, and the contact information for Mary Smith. They may also need the XYZ Church’s Federal and State Tax ID number. The two brokers can handle it from there.
As soon as the donor triggers the transfer with his/her broker, it is helpful to inform the pastor/designate of the details so that that the church can be looking for the arrival of the shares into their account. Also, be sure the pastor/designate knows how to distribute the money among the church’s internal categories. A transfer from one brokerage account to another brokerage account usually takes about five business days. Once the shares arrive in the church’s account, the church sends a letter to the donor verifying the number of shares and the “gift date.” The gift date is the date the stock reached the church’s account. This donation letter should not state the transfer price. It should ONLY include the kind of stock, the number of shares, and the gift date. This satisfies the IRS.
Sometimes a donor’s shares are not held by a broker but instead are in certificate form. This can occur with founder’s shares as in a startup company. The process for certificates is a bit trickier and varies depending on the church’s brokerage house. One thing is for sure: do NOT sign the certificates until you are sure of the process. And also be clear as to what date the certificates were physically handed to either a representative of the church or the church’s broker. This is the gift date. If it was handed over after the close of the stock market, the gift date becomes the next day that the market opens.
For tax purposes, the donor’s valuation price is as the average between high and low price on the gift date. For Over the Counter (OTC) stocks, it is the average of the closing bid and the asking price on the gift date. A good way for the donor to establish the share price of the donation is to have the church’s broker, Mary Smith, or the donor's broker document the price as of the gift date. Another way to establish the donation price is to clip out the stock page of the newspaper, being sure to leave the gift date attached. The donor can also find historical stock prices of any stock on many websites, print it out, and file it with their tax information. IRS Form 8283 is used to claim deductions for non-cash charitable contributions. See also "IRS Publication 561: Determining the Value of Donated Property."
If the shares were received through some sort of stock grant or stock option from an an employer, there are usually ways to turn most or all of the increase into long-term capital gains. Such shares are candidates for this same donation strategy. See your tax adviser for details, as there are many forms of employee stock remuneration.
The church needs a policy for what to do with the shares when they arrive in the church’s account! Usually this policy is established by the Church Board (or whatever is the highest level governing body of that local church or non-profit). Most churches are uncomfortable managing an investment portfolio of donated money, nor do they want to burden a person or small committee with such a financial responsibility. So it is common for churches to sell the shares immediately.
If your church is sophisticated enough to manage market risk, I suggest that you set up a policy something like this (as we did at New Life):
If the church’s broker (let's call her Mary Smith) recommends "sell", then sell it within five business days. At least every 90 days, all donated stocks still owned by the church are reevaluated and either sold or the stop loss moved to 10% of the current market price. Regardless of whether the church keeps the stock invested or not, it is good practice to immediately credit the church income categories with the donation amount identified by the donor (such as Tithes/General Offerings, missions, local compassion, building fund, etc.). Use the value of the stock on the gift date to define the exact amounts to go in each category. Any increase or decrease in the value of the shares after the gift date is absorbed by the general church funds. If these funds grow to become substantial, the church will want to establish a separate Investment Fund until the Lord makes it clear what he wants this money used for. This approach worked very well at New Life. Some donors gave stock which we did not need to sell for operating expenses, so we chose to hold it. It rose nicely and generated a good sum that we eventually put toward the costs of a new building.
Every year (or 3 or 6 months) the church provides giving statements to all contributors of record. Stock donations should appear on this giving statement, but should not show the dollar value of the gift. The data should include the number of shares, the kind of stock, the gift date, and any distributions directed by the donor. By including this on the donor’s regular giving statement, even if the donor loses the confirmation letter that the church sent at the time of the transfer, the donor is reminded in time for tax filing.
This web page includes my best, current understanding of the tax treatment of donating long-term appreciated stock (as of 10/07/2010) to churches. I am certainly not a professional tax adviser so please contact yours.