Putting It Together: Why Giving Should Be Included in Your Investment Strategy
If you’re like the average person I encounter, you’ve probably never been advised to give away your investment assets. That’s probably because your advisors are focused on helping you grow your investment accounts and neither of you bring up the topic of giving. A conversation on giving with a Christian will take the conversation to a spiritual level and that’s not the foundation of those relationships. From the standpoint of the advisor, a conversation on giving requires a larger investment of time and ultimately may only bring more administrative work without any additional revenue. Unfortunately, by ignoring the role giving can play in an investment strategy, many people are missing a key piece of the puzzle that could help grow their accounts faster or increase the amount they are able to give away.
Lessons from a Parable
Before we get into the details of this giving strategy, let’s take a minute to explore why strategic giving is important in our role as God’s stewards. The Bible provides us with a lesson in The Parable of the Shrewd Manager (or the Dishonest Manager as some Bibles name it), which is found in Luke 16. This is a parable that has confused a lot of people at first glance, including me. It’s a story about a manager (steward) that was reported to have been wasting his wealthy master’s money. It appears the steward was guilty because instead of trying to defend himself, the steward went straight to work on a plan to secure his future because he knew he would otherwise be ruined when he was ultimately fired. His plan was to pull off one more scheme at his master’s expense and set himself up for life by having other wealthy men indebted to him. He won those future favors and secured his future by reducing the debts of the people that owed his master money.
When the master discovers what his manager has done, we would expect something like a public beating or even death to be his sentence. Instead, the master surprisingly commends the steward for his shrewdness. It was as if he threw up his hands and admitted to being outplayed. Note that he praised the steward’s wit and ingenuity, not his dishonesty. The ending of this parable is as shocking today as it was when Jesus told it. We’re left wondering how this dishonest person can be commended and what biblical lesson we’re supposed to draw from the story.
To understand the lesson, we first need to recognize that Jesus told this parable to his disciples, so the lesson was given for the benefit of Christians. Luke 16:8 reveals our lesson when Jesus says, “For the sons of this world are more shrewd in dealing with their own generation than the sons of light.” When we read this verse, we have to ask ourselves if this is a negative reflection on the “sons of light”?
We can see brilliance paired with great skill and resourcefulness in the world around us as we watch unbelievers trying to secure their retirement and build as much wealth as possible for this life. Some of these efforts are honest and some are not, but the work and thought that’s devoted to making money is impressive. As followers of Christ, we have a different perspective and motive. We’re not just planning for this life, but for eternity, and unfortunately, we’re often put to shame by the efforts of the secular world. Surely, as “sons of light” with an eternal motive, we should be more resourceful and wise with our time and abilities. We have a bigger hope and a bigger payoff as we store up treasures in heaven that will never end. The steward in this parable only had this life to worry about and look how intelligent he was in this one fleeting moment of opportunity that he had to secure the rest of his life. We need to be as wise and intelligent in how we use our resources in light of eternity.
Verses 9-13 then go on to tell us how to use our money to help others, to faithfully steward all of our resources and to serve God, not money.
I use this parable as an introduction to strategic giving because it answers the question of “Why”. As “sons of light”, we shouldn’t be outmatched by the intelligence of the ungodly around us. We should be more motivated to use our skill and intelligence for God’s glory and the good of those around us. That includes using wisdom in how we give our money away. If there are ways for us to have a greater impact with our resources, we need to be aware of them.
To be efficient givers, we need to understand how to use the tax laws to our benefit. Charitable giving provides several opportunities to pay less taxes or direct what would have gone to the IRS to a non-profit of our choice. One such strategy involves giving appreciated assets instead of cash and that is what I will focus on today.
Appreciated assets are simply assets that have gone up (appreciated) in value. These assets can be stocks, bonds, mutual funds, real estate, etc. The difference between what you paid to buy it and what it is worth is known as a capital gain and that will be taxed when you decide to sell the asset. Tax rates on capital gains are lower than on income and currently max out at 20% to which you add state and local taxes.
The assets will need to be held for at least a year for this strategy to work and also not held in a retirement account. Rather than trying to explain the details, let me first give a couple of examples.
Example #1 – What to Give?
Mr. and Mrs. Donor currently own a stock valued at $10,000 that they originally purchased for $4,000 10 years ago. They are planning to make a cash gift of $10,000 to their church before the end of the year, but want to know if there is a more efficient way of making the gift. Here are their options:
1. Give cash – They could write a check to their church and get a $10,000 tax deduction for their gift.
2. Sell the stock and give cash – They could sell the stock and give the proceeds to their church. By selling the stock, they would incur up to 20% in federal capital gains tax (current capital gains rates as of 2016) on the $6,000 of gains. That could cost them $1,200 in taxes, netting them $8,800 in sale proceeds. They would then add $1,200 of additional cash to bring the total gift to $10,000. They would get a $10,000 tax deduction for their gift.
Summary of Sale
|Investment Value||Cost||Gain||Taxes (@ 20%)||Net Value|
3. Give the stock – The other option is to give the stock directly to their church. The church can then sell the stock and receive the full $10,000 free of taxes since they are not subject to capital gains tax as a non-profit entity. The donor receives a $10,000 tax deduction based on the full value of the stock gift.
Solution: Give the stock. By giving the appreciated stock, the donor is able to avoid the $1,200 capital gains tax on their investment and their church still receives the full $10,000 gift.
This simple strategy allows a donor to give the same value to a non-profit at a lower cost to them since they are essentially giving $1,200 to charity now instead of $1,200 to the IRS at some point in the future.
Example #2 – Efficient Investing
Mr. and Mrs. Donor currently have a diversified investment account with various mutual fund holdings. They would like to keep their current investments, but they are generous givers and open to more efficient ways of giving if it helps them to be better stewards. They are currently planning to make a $5,000 gift to their favorite ministry.
Upon review of their account holdings, it was discovered that Mr. and Mrs. Donor have a mutual fund they’ve held for several years with considerable gains. $5,000 worth of shares of this mutual fund have $3,000 of untaxed capital gains.
Solution: Instead of giving cash to the ministry, they should consider donating $5,000 of that mutual fund. Since they would like to continue to own this fund, they can contribute the cash they were planning to give to the ministry into the investment account. They can then use the $5,000 of cash to repurchase shares of the fund they gave away. By repurchasing the fund, their account holdings will be the same as they were before except that the new shares will be worth $5,000 and have a cost of $5,000, so there are no longer any gains in those shares to be taxed at a later time. The original $3,000 in gains were erased by giving them to the charity, thus reducing their future tax burden. Assuming a 20% tax rate, this would be a $600 future tax savings.
Here’s what the investment holdings look like before and after utilizing this strategy:
|Investment Value||Cost||Gain||Taxes (@ 20%)||Net Value|
|Investment Value||Cost||Gain||Taxes (@ 20%)||Net Value|
This strategy is one of my favorites. Capital gains often cause Investors to hesitate and not make investment changes because of the tax cost of selling an asset, even when a change is the best decision. By routinely giving appreciated assets from their investment accounts, individuals are able to steadily reduce the amount of untaxed gains so that when they want to make a change, there is less tax cost in doing so. As in this example, individuals will sometimes simply replace the assets they gave away by contributing cash to repurchase the same investment. For others, they will give away an investment they wanted to sell and then use the cash to buy something else.
The same strategy used in these examples can also apply to other appreciated assets, such as real estate. Taxes are a major drag on investment returns, so when we can reduce or eliminate their impact, there will be more left for us to either use or give away. It’s a true win-win for the investor and for the ministry.
Things to Consider
As with most good things, we also need to consider some of the details that could affect this strategy. Here are a few of them:
Deduction Limits – When giving cash, a donor is able to deduct up to 50% of their Adjusted Gross Income (AGI). However, when giving appreciated investments, the limit will likely be 30% of AGI.
Ability to Repurchase – If you are wanting to repurchase the same investment you’re giving away, make sure that option is available to you before making the gift. Some investments may not be available for purchase, so you will need to consider that into your decision.
Transaction Costs – There could be trading fees or commissions involved in purchasing replacement assets in your investment account and those will need to be factored into your decision since they will decrease the benefits of the strategy.
As always, each situation is unique, so please consult your own tax and investment professionals to get personalized advice.
In our attempt to be shrewd stewards, we need to work to make the most of the resources we’ve been given. This includes doing research and asking questions to discover the most efficient ways to give. After all, we have an eternity that we need to be investing in and we don’t want to be outdone by a world that has no hope beyond this temporary life.
Brad Graber, CFP® has been working with clients on personal financial planning and investment issues since 1996. He invests his time mentoring and educating individuals on ways to be better stewards of the resources God has entrusted to them.
***Disclaimers: The investment and tax information contained in this article is general in nature, is provided for informational purposes only, and should not be construed as investment or tax advice. I am not an accountant and cannot guarantee that such information is accurate, complete, or timely. Federal and state laws and regulations are complex and subject to change. You should consult an accountant regarding your personal tax situation.
Fascinating. One day when I’m a big boy and have investments to give away, this will be super useful.
This is all a little overwhelming. Or a lot. Thank you for breaking it down with easy to understand examples!