Strategic Giving: How Direct Indexing Could Enhance Charitable Contributions

Executive summary:

  • Although cash donations are appreciated, donating securities may be more impactful for both the charity and the donor
  • Investors receive tax benefits from donating securities and the charity receives the full value of the securities
  • Using a Direct Indexing strategy may provide even more potential benefits, including avoiding capital gains taxes on highly appreciated securities

As we start to prepare for the year-end holidays, many of your clients may be getting into the spirit of the season and thinking about making a charitable donation or increasing their charitable giving.

While most charitable donations made by individuals in the U.S. are made in cash and there can be tax benefits to doing so, there may be an even more impactful approach to donating. Rather than donating cash, an investor can donate appreciated securities to their chosen charity. The charity is then free to sell the investment or hold onto it and potentially benefit from further appreciation. Charities don't have to pay federal income taxes on gifts, so that's a win for them.

Meanwhile, the investor can deduct the gross value of those securities from their income tax (subject to certain limitations), as well as avoiding the capital gains tax they would have paid if they had sold the shares for cash. We see that as a double win for the investor.

Using a Direct Indexing strategy can provide even more potential benefits beyond the tax savings.