When a client is over-concentated in a particular asset, and also has a pattern of making regular charitable contributions in cash, Steven Merkel’s antennae go up.
When Merkel, an advisor with Naples, Fla.-based Ciccarelli Advisory Services, sees this particular situation, he has a go-to fix that allows the client to keep giving and removes the overweighted assets: He recommends that the charity be given some of those assets, rather than the client’s cash.
Merkel had one client who came to him owning “a huge concentration” in stock of the Muscatine, Iowa-based office-furniture maker HNI Corp. “He had accumulated the HNI stock while he worked for the company, and then bought more of it after he left,” Merkel recalls. The client received some of his shares at no cost as part of his compensation, and bought additional shares at historically low prices.
The client also made annual cash contributions to a church in his previous hometown in Illinois, as well as his new one in Florida. Tying together the client’s overweighted HNI stock and his charitable leanings, Merkel advised the client to start offering his churches gifts in stock, instead of in cash. By doing so, the client could continue to satisfy his charitable impulses while at the same time rebalancing his portfolio without having to pay high capital gains taxes from the sale of HNI stock.
In instances such as these, Merkel puts each client on a schedule that is based both on rebalancing considerations as well as the client’s commitment to charity. In this case, that meant a seven-year plan that called for the client to donate his HNI stock according to a schedule based on the price paid for the stock. The shares that the client had bought at the lowest price were earmarked as the first to be donated to the church. If these had been sold outright, they would have led to the highest capital gains tax.
Judith McGee, chairwoman and CEO of Raymond James-affiliated McGee Wealth Management, in Portland, Ore., has a similar strategy. But McGee often recommends the clients donate through a charitable remainder trust, which will assign the assets to a beneficiary. Under such an arrangement, the client may continue to receive dividends from the stock, but won’t face the potentially heavy tax burden associated with selling it.
Clients, even those with overweighted stock in their portfolio and resources to spare, may hesitate about giving money away, Merkel says. He’s very careful about suggesting someone become a benefactor. But he does occasionally explain to a client: “You won’t get any of the satisfaction of knowing that a charity is benefiting from your contribution when you are dead.”
Miriam Rozen, a Financial Planning contributing writer, is a staff reporter at Texas Lawyer in Dallas.