Can you donate stock to a private foundation?
Yes, it is possible to donate stock to a private foundation. If the donation is a publicly traded security, then the donor may receive a charitable contribution deduction equal to the fair market value of the security. In order to receive a deduction equal to fair market value, the donated security must be a long-term holding and it must be traded on an established securities market. If the security has been held by the donor for one year or less (i.e., short-term) then the charitable contribution deduction is limited to cost basis only. If the stock is privately-held, in contrast to being publicly traded, then the deduction is likewise restricted to cost basis only. For privately-held stock or short-term holdings with a low cost basis, you receive only a small tax deduction for donations to a private foundation—this is a bad tax result. Family businesses that have been built up with sweat equity frequently have a very low tax basis so they generate a very low tax deduction when donated to a private foundation. This is why donating privately-held businesses to private foundations is not very common. Instead of donating to a private foundation, a donor with appreciated privately-held stock should consider donating to a public charity or donor advised fund because such a donation generally allow for a deduction equal to the fair market value of the business.
Charitable Contribution Deduction Limitations for Individual Income Tax
The deduction for donating property including appreciated securities to private foundations is generally limited to 20% of the donor’s adjusted gross income (30% for cash donations). The tax deduction limit is higher for donations to public charities and donor advised funds—donating property to these organizations is generally limited to 30% of the donor’s adjusted gross income (60% for cash donations). Note that private operating foundations, which directly operate their own charitable programs, generally allow for the higher deduction limits available for donations to public charities and donor advised funds.
How Private Foundations Can Receive Donations of Public Securities
In order to receive donations of public securities, a private foundation must first set up financial infrastructure in the form of a brokerage account to receive the securities. The large brokerage houses like Charles Schwab, Fidelity, and E-trade offer brokerage accounts for non-profit organizations that are relatively straightforward to set up. The donation is accomplished by initiating a “broker to broker” transfer or gift from the donor’s account to the private foundation’s account. Typically, the donor contacts their own brokerage firm and initiates the transfer there. The donor usually needs to provide a letter of instruction with the donor’s account number, address, phone number, a description of the securities, and oftentimes a Medallion Signature Guarantee. The donor also generally needs information from the receiving broker including its name, address, and depository trust company number, as well as the private foundation recipient’s name, employee identification number, and brokerage account number. It is important that the securities are transferred in kind (i.e., without being sold) in order for the donor to avoid taxation on a capital gain.
Additionally, the foundation should have a procedure in place to verify cost basis of the donated securities because the foundation takes over the cost basis of the donor. Although, the cost basis can be provided to the foundation’s broker with the transfer of the security, the foundation should still acquire cost basis documentation from the donor—a monthly statement showing cost basis or a similar document is adequate. When the foundation sells the security, it will pay tax on the gain using the donor’s original tax basis. Private foundations are subject to an excise tax on net investment income of just 1.39% so the tax liability is typically quite small. Even so, it is possible to avoid paying tax on the gain by having the foundation donate the stock in kind to a public charity grantee. An in kind grant works to satisfy the 5% minimum distribution requirement and the foundation avoids paying the tax of 1.39% on the appreciation.
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