Legacy Planning with Appreciated Stock: Deciding Which Shares Belong to Charity and Which Belong to Family
Successful investors often spend decades building wealth through a business or a concentrated stock position. When it comes time to think about legacy planning, the conversation usually centers around two questions:
How do I leave more to my family?
How do I support the charities I care about?
The better question may be:
Which assets should go to my family, and which assets should go to charity?
For many families, the answer can save hundreds of thousands—or even millions—of dollars in taxes while increasing both the inheritance left to heirs and the impact made through philanthropy.
The Hidden Difference Between Charities and Heirs
The tax code doesn't treat every beneficiary equally.
Public charities generally pay no capital gains tax when they sell appreciated securities. Individual heirs may ultimately pay capital gains taxes—or income taxes—depending on the type of asset they inherit.
That simple distinction creates planning opportunities that are often overlooked.
Strategy #1: Donate Appreciated Stock Instead of Cash
Everyone knows this one but I see it overlooked quite often. Sure, a $1m gift to your alma mater will certainly be made with your appreciated AAPL shares, but what about the $100 per week you give to your church? The sporadic $500 checks you write to Meals on Wheels and the Red Cross? There's also the charitable events your sponsor to the tune of several thousand dollars each year.
You're pulling cash from the bank to fund these "small" amounts when the reality is you may be missing out on tens of thousands of dollars in opportunity each year.
A donor-advised fund (DAF) allows you to make one large charitable contribution today, receive the tax deduction immediately, and distribute grants to charities over many years.
You can take those same appreciated AAPL shares and donate them to a DAF. You aren't taxed on any capital gains, and you've now got a slush fund to make charitable contributions from. You also receive a charitable income tax deductions (subject to applicable limitations). Bonus points for removing assets from your taxable estate if you're above the lifetime exemption amount.
Strategy #2: Gift Appreciated Stock Instead of Cash
Similar to the strategy above, this isn't rocket science but is often executed poorly.
Grandma and Grandpa have ten grandchildren in their 20's and 30's. Some single, some with budding families, all could use some cash.
Rather than use their precious money in the bank to make a gift to each grandchild, shares of that appreciated AAPL stock can be transferred to them. The cost basis carries over and if the grandchildren are in a lower capital gains tax bracket than the grandparents, the family may pay less tax overall once the shares are eventually sold.
Here's another reason I really like this strategy: It's an opportunity to begin teaching younger generations about investing, taxes, and responsible stewardship of wealth. A gift doesn't have to end with the transfer—it can become the beginning of a financial education.
Strategy #3: Intentional Beneficiary Designation
"Location, location, location" doesn't just apply to real estate. What you own and where you own it can have profound downstream impacts.
The taxability of inherited assets change based on the asset type and the beneficiary type.
Most beneficiaries of a traditional retirement account will have 10 years to distribute those assets and will pay income taxes at their marginal rate on those distributions. Inherited Roth assets don't carry the income tax liability.
Inherited stock usually comes with a step up in basis unless it's held in an irrevocable trust. The same is generally true for real estate.
It's not uncommon to see wills, trusts, and beneficiary designations created in the name of "fairness," or an equal and proportional division of all assets.
For example: "30% for each of my three children and 10% to the Church" across the board sounds pretty simple, but if you've got $5m in appreciated stock, $3m in a Traditional IRA, and $1m in a Roth IRA with children that have dramatically different financial realities, your beneficiary designation may not be optimized.
Charities can be great beneficiaries of Traditional IRAs--they don't pay income taxes! The opposite is true for Roth IRA assets, you're wasting an opportunity to have a high-income heir inherit an asset that won't add to their income tax liability.
A short and oversimplified summary of the strategy is: "Leave the traditional IRA to charity, leave the brokerage account (and Roth IRA) to family."
Appreciated stock often presents a unique opportunity because it can accomplish multiple goals simultaneously. By thoughtfully allocating assets between charitable organizations and heirs, families may be able to maximize both their legacy and their impact.
In order to create a strategy that considers the important tax and logistical implications, ask yourself the following two questions: Who do you want to give to, and when do you want to give? Only after those questions are answered can you craft a strategy around what to give.
Important Disclosure
This isn't tax, legal, or investment advice. My blog posts are always meant to be educational with the understanding that each situation is unique. If there were truly "one-size-fits-all" strategies, I may be out of a job!
Tax rules governing charitable contributions, gifting strategies, and estate planning are complex and subject to change. Staying on top of those nuances and changes is a significant undertaking. You should consult tax, legal, and other advisors regarding your specific circumstance before implementing any planning strategy.
I am happy to have a conversation if any of the above resonates with you.
