Guide to Accepting Gifts of Stock + Mutual Funds
Each month during 2021 I will be sharing a step-by-step guide to accepting a different non-cash asset. This month we’ll explore publicly-traded stock and mutual funds.
When charities decide to start accepting non-cash gifts they usually start with stock and mutual funds, because it’s the easiest to accept and liquidate. So, that’s where we will start.
First, let’s make sure we all understand the difference between public and private stock. When you buy stock you’re buying an ownership share in a business.
Public stock is available for just about anyone to purchase and its traded on exchanges like the New York Stock Exchange. If you want to buy shares of a publicly-traded company, you can just go out and buy it. Mutual funds are also available for virtually anyone to purchase, but are bought and sold a little differently than stock. We will cover that a little later on in this article.
Nearly all public stock and mutual funds is traded electronically these days. Almost no-one is working with physical certificates, but we will touch on how to accept those in a little bit.
Why Would Someone Want to Give Stock?
First, a gift of stock is one of the most financially beneficial gifts that someone could make. When you give stock, the income tax deduction is based on the fair market value of the shares on the day of the gift, regardless of what you paid for it (as long as it’s been owned for at least a year and a day). Simply put, if you paid $5.00 for a share of stock 10 years ago and today it’s worth $25.00, your deduction for a gift of that share of stock would be $25.00. That’s basically $20.00 of deduction for FREE!
Second, if someone owns stock, it’s probably worth more than their checking and savings accounts. People don’t keep a lot of money in cash anymore. According to research by Dr. Russell James, cash makes up less than 5% of America’s wealth. Interest rates are historically low and have been for a long time. It makes more sense to invest extra cash in something rather than keep it in a cash account earning almost nothing. When you ask for a gift of stock, it’s coming from a much bigger pot than if you ask for a gift of cash.
Step 1: Open a Brokerage Account
The first step to accepting stock is to open a brokerage account. This is sort of like a bank account, but instead of holding just cash, it holds stocks. This account will allow you to accept and liquidate stock electronically. You can open a DIY-type of brokerage account OR you can hire a broker to handle transactions for you. DIY accounts typically come with fewer transaction fees, but offer little to no support service. They operate from on-line platforms and are typically easy to access and easy to use. A professional broker will usually cost more, but you also receive professional service and support.
When deciding between DIY on-line account or a professional broker, it’s important to consider whether your staff has the time and expertise to manage a brokerage account on a day-to-day basis. Most charities operate under the policy that all non-cash gifts received are sold as soon as possible. That is very important when dealing with stock, because the value can rise and fall very quickly. It’s important to be able to monitor your stock account closely so that when gifts are received, you can quickly sell them. If your staff doesn’t have the time or expertise to monitor an account on a daily basis, it might be best to hire a professional to handle it for you. You may have to pay a little more in fees, but you reduce your risk of losing value in the stock if it happens to fall in price considerably between the time it arrives in your account and the time you sell it.
If you decide to hire a professional broker, it’s important to understand all the costs associated with that relationship and also to work with someone who understands institutional investing. When you receive and sell stock, your investment policy may require some or all of those sales proceeds to be re-invested into a board-approved portfolio for future growth. The broker should understand that investment policy and the needs of institutional investors. It’s a best practice to interview a few providers before choosing one to work with.
If your organization has an endowment fund, it may be invested with a professional investment manager that can also help you to accept stock gifts. Your relationship with that manager may already include this service, so getting set-up to accept stock gifts may be even easier than you think.
Step 2: Develop Procedures
Before you start advertising to donors that you can now accept gifts of stock, you should first know exactly how you will accept and liquidate the stock. These procedures don’t have to be complicated, but you want to appear as professional as possible to donors and their advisors when they approach you about a gift of stock.
Develop a stock gift instruction document you can share. This document tells a donor and her advisors how to make a gift of stock to your organization as well as your procedures. Here are some basic elements to consider when developing your instruction document and internal procedures.
1. Notify your organization that the gift is coming. Tell them exactly who to contact at your organization and how. Tell them to let you know many shares will be coming and the “ticker symbol” of those shares. The ticker symbol is a unique identifying code used to distinguish stocks from each other. I recommend including a section on the back side of the instruction sheet where the donor can write/type in the number of shares and ticker symbol. They can then send that document to you as a notification.
2. Provide them with your account information for electronic transfer. Your broker or DIY on-line account platform can provide you with these instructions. The donor will use those instructions to electronically transfer stock into your account. It is a very fast process and the stock will usually appear in your account within a few days.
3. Let them know what you will do with the stock. It’s important to be transparent with donors. If your policies require you to sell the stock immediately and re-invest into a board-approved investment portfolio, state that in your document. Whatever your intent, let the donor know what will happen.
4. Let them know how/when you will send them a gift receipt. In order to take a tax deduction for a gift of stock, the donor will need a gift receipt from you. That receipt should NOT list the value of the stock, but rather just the date of the gift, (day the stock is received in the charity’s account) the number of shares, and the ticker symbol. It’s up to the donor or her tax advisor to report the value of the stock on her tax return. Incidentally, the value of the stock for the purposes of an income tax deduction is the average of the high and low trading values on the day of the gift. IRS Publication 561 does a great job of outlining the valuation process.
Step 3: Advertise
Think of all the places you reach donors and be sure to mention your ability to accept stock in all those places.
Annual Appeals: When you send written appeals to donors, you probably list giving options such as “check” and “credit card”. Consider adding another option – “gift of stock” – and letting them know who to contact for instructions on how to do so.
Personal Visits: When talking to donors one-on-one, be sure to let them know that they can make gifts of stock. You may even want to develop a simple piece to leave with them that explains the benefits of a gift of stock. Don’t get too technical in that piece. The best thing to include is a story of a donor who has done it, why they did it, and how it made them feel.
Mutual Funds are basically a group of investments like stocks and bonds. They are packaged together by financial services companies and sold as a kind of “bundle” of investments. Mutual funds gained popularity as a way for investors to diversify their investment portfolios without having to spend a great deal of time researching stocks. The mutual fund company managers do that for you.
Charities can accept gifts of mutual funds, but the process is a little different. Some mutual funds are traded like stocks on the stock market. They can be received into your brokerage account. Some are only available to buy and sell directly from the mutual fund company. If a donor wants to make a gift of mutual funds, you’ll need to find out which kind you’re dealing with. Your broker or the donor’s financial advisor should be able to help you figure out which it is.
If the mutual funds can only be bought and sold from the mutual fund company, you’ll most likely need to open an account with that company first. Once the account is open, the shares can be transferred to that account where you can liquidate them. You may want to close that account right away, unless you expect to receive a lot more donations of mutual funds issued by that same company.
Gifts of mutual funds can take more time than gifts of stock. As you can imagine, it takes time to open a mutual fund account before the shares can be transferred, so just be ready for that and make sure the donor knows about that longer timeline as well.
Easier than you thought, right?
I hope this guide is helpful to you and has de-mystified gifts of stock and mutual funds. Now, it’s time to put these steps into action so your organization can start accepting gifts of stock!
Next month, we will focus on gifts from retirement accounts. Until then, HAPPY GIFT PLANNING!