Navigating a charitable client’s concentrated stock position
A message from the CICF Collaborative, including Central Indiana Community Foundation, Hamilton County Community Foundation, IMPACT Central Indiana, the Indianapolis Foundation, and Women’s Fund of Central Indiana
Clark Collier, CAP®, CICF Director of Giving Strategies
Whether you’re a CPA, financial advisor, or estate planning attorney, you’ve likely encountered at least a handful of clients over the years whose situation has been complicated by a concentrated stock position. You may have a vague sense that charitable giving techniques can help under these circumstances, but you are not exactly sure how it works, or even how to bring it up. Here is a likely scenario to help paint the picture. And of course, the CICF Collaborative stands ready to help!
When retired executive David arrives for his annual review meeting, you immediately notice the tension behind his easy smile—and you know the reason. At 68, David owns a substantial concentrated position in his former employer’s stock, representing well over half his investable assets. Although David’s career was remarkably successful and he retired with plenty of resources, over the last couple of years, David has become increasingly worried that so much of his future financial security is tied to the fortunes of a single company. David fears that a sharp downturn could jeopardize his retirement plans. His concern doesn’t stop there. Not only is David worried about market risk, but he is also aware of the looming tax bill if he were to sell the stock.
Of course, you, David, and David’s other advisors are aware that, in general, having too large a portion of one company’s stock can expose an investor to increased risk, and that reducing a concentrated position over time can protect wealth without unduly eroding value. The challenge for most investors is that selling a large block of any highly appreciated stock at market price could trigger a very large capital gains tax. It’s not unusual for this factor alone to prevent an investor from taking steps to diversify. This is exactly what’s going on with David, who admits that he knows diversification is wise but fears losing a large portion of his gains to taxes if he sells shares outright.
This is where charitable giving comes in. You’ve worked with David for many years, and you know he regularly supports several favorite charities. So, you shift the conversation to philanthropy. David’s face lights up as he talks about the causes that are dear to him, particularly supporting local education and health initiatives.
At this point in the conversation, you explain that giving appreciated stock to a donor-advised fund could be one of the most tax-efficient ways for David to reduce his concentrated position, avoid capital gains tax, and still stay connected (in a non-controlling role) with the proceeds from the stock sale. This is because when he donates his appreciated shares to a qualified charity, the donor generally avoids capital gains tax on the appreciation and may also claim a charitable deduction for the fair market value of the shares. This dual benefit helps with diversification while keeping more of the overall economic value working either for the donor’s retirement security or for charitable impact.
David is intrigued and asks how this would work with his donor-advised fund at a community foundation. You explain that a community foundation can accept gifts of appreciated stock into the donor-advised fund, turning ownership of the shares into charitable resources. You also emphasize that working with a community foundation would help ensure the gift is processed correctly and aligned with David’s philanthropic intent.
David looks puzzled and asks a thoughtful question: “Why can’t I just donate all the shares to my donor-advised fund right away and get the full deduction while reducing my concentration risk?” You clarify that while donor-advised funds at the community foundation indeed accept stock gifts, the timing matters. “Let’s structure a plan for you to donate shares gradually over a few years to manage tax implications and avoid suddenly ‘saturating’ your charitable deductions,” you say. “It is my responsibility to keep track of the AGI limits on your charitable deductions.”
Over the next few weeks, you and David review how different giving scenarios would affect David’s tax picture and his portfolio diversification timeline. You also keep the chosen community foundation in the loop along the way, helping David plan for charitable gifts from his donor-advised fund as the stock proceeds flow in.
This case study has a happy ending! By the time you and David meet for the next annual review, David feels both financially and personally satisfied. He has taken meaningful steps toward reducing risk in his investment portfolio in a tax-efficient manner, and he has deepened his engagement with the community through philanthropy. And you, as his advisor, executed a textbook example of how combining tax-aware diversification and charitable giving can create a strategy that honors both a client’s personal financial goals and the client’s commitment to the community.
As always, please reach out to our team at CICF Collaborative anytime! It is our pleasure to assist in situations that involve clients’ concentrated stock positions, or any other circumstance where a client is exploring options for combining tax planning with supporting charitable causes. We look forward to hearing from you!
About the Author
Clark Collier is CICF’s director of giving strategies, working with individuals, families, and their advisors to structure meaningful and impactful philanthropy. As a Chartered Advisor in Philanthropy ®, Clark provides gift planning support and counsel to the CICF Collaborative and nonprofit organizations throughout the region. He previously served as a philanthropic advisor for CICF and in development roles for both local and global organizations.
About the CICF Collaborative
CICF Collaborative is a partnership of philanthropic organizations working together to strengthen communities across the region. Each entity within the CICF Collaborative (including the cornerstone entities, Central Indiana Community Foundation, Hamilton County Community Foundation, IMPACT Central Indiana, the Indianapolis Foundation, and Women’s Fund of Central Indiana) brings deep knowledge, strong relationships, and its own individual, focused mission. The CICF Collaborative unites the entities by providing shared services, allowing the entities to operate more efficiently and effectively. By leveraging what we each do best, we’re able to better serve our communities and create more lasting impact, together. Learn more »
