Why an Aperio Loss Harvesting Account May Be a Logical Source for Charitable Donations

For many people, the end of the year is a season for giving, a time to focus less on ourselves and more on our communities and the causes that are important to us. Many of us also find ourselves looking for ways to save on taxes at year-end. Fortunately, the two objectives are not mutually exclusive—it’s possible to support charitable causes while reducing the donor’s overall tax burden.

Some charitable donation strategies are inherently more tax efficient than others.¹ For example, cash donations may represent a suboptimal donation strategy from a tax perspective. For charitably inclined clients, donating highly appreciated stock from an Aperio loss-harvesting account and replenishing with cash may be a more favorable method for accomplishing both goals.

The benefits of donating appreciated stock

Contributions of appreciated stock may allow donors to support charitable causes while realizing two important income tax benefits: the donor receives a fair market value charitable deduction and avoids capital gain taxation on the unrealized appreciation.² Charitable donations may also provide estate tax savings for wealthy donors with taxable estates. Tax-efficient donations reduce the cost of giving, and individuals may choose to pass on the tax savings and increase their overall charitable impact.

For these reasons, a charitable-minded investor’s highly appreciated securities should be considered for donation. Active tax management that involves systematic tax-loss harvesting and the avoidance of realizing capital gains can lead to situations where a portfolio has very highly appreciated tax lots. Such a process makes a loss-harvesting account a compelling source for selecting appreciated securities to donate to charity.

Cash that would have otherwise been donated to charity can be used to replenish the equity account, providing an extra benefit of increasing the cost basis of the overall portfolio and facilitating additional future loss-harvesting opportunities. This infusion of cash can be especially beneficial for highly appreciated accounts offering fewer tax loss-harvesting opportunities at this point of their life cycles.

Donating appreciated stock and replenishing with cash may have other benefits as well. For example, oftentimes, the most highly appreciated securities represent overweight positions, so fresh cash may help to reduce overall risk that is measured as portfolio tracking error. Such a strategy may also enable clients to tax-efficiently eliminate positions that don’t align with their values or go against a desired factor tilt.

From an administrative standpoint, publicly traded stock is simple to value, easy to transfer, and widely accepted by nonprofits. Some charities may be unable or unwilling to accept donations of more complex or illiquid assets.

The mechanics of donating from an Aperio account

Advisors can request a donation analysis on the Aperio portal that optimizes for both highly appreciated positions and the impact on portfolio tracking error. Clients specify the relevant account, the amount to gift, and any intention to replenish with cash. Aperio prepares a recommendation of tax lots to donate and sends it to the client’s advisor. The advisor initiates the transfer of securities, and Aperio reconciles the account following the securities journal. If necessary, Aperio will rebalance the account post reconciliation.

Although an advisor can transfer securities out without first receiving a donation analysis from Aperio, such an approach may not factor in all relevant considerations, such as the impact on tracking error, values-aligned tilts, or any desired factor exposures.

’Tis the season

For many investors, year-end is a season for philanthropy … and tax planning. Although donating appreciated securities to charity is not a new strategy, evidence suggests that many high-income investors are still not taking full advantage of it. To learn just how underutilized this strategy is – and possible reasons why – read our “Mining for Gold: Charitable Donations” post, which reviews the available data.

Of course, donating appreciated securities from a loss-harvesting account is not the only available tax-efficient giving strategy.³ However, it remains a compelling option for those looking to make an immediate charitable impact while lowering their tax bill and monitoring other important portfolio objectives.

For more information about how Aperio can help you advance your clients’ charitable giving and tax management goals, see our “Charitable Donation Analysis” info sheet.

Send questions or comments to aperio.blog@blackrock.com.

Important notes:

Aperio Group, LLC, provides this material for informational purposes only and for the sole use of the recipient. The information contained herein is provided with the understanding that we are not engaged in rendering legal, accounting, or tax services. We recommend that all investors seek out the services of competent professionals in these areas. The strategies and/or investments referenced may not be suitable for all investors, because the appropriateness of a particular investment or strategy will depend on an investor’s individual circumstances and objectives. None of the examples should be considered advice tailored to the needs of any specific investor or a recommendation to buy or sell any securities. The fees and expenses Aperio charges may be higher than the fees and expenses of other investment advisors and may offset profits. Additional information about the firm, and our fees and expenses, is included in our Form ADV.

Investing involves risk, including possible loss of principal. Asset allocation and diversification may not protect against market risk, loss of principal or volatility of returns. There is no guarantee that any investment strategy discussed herein will work under all market conditions. Many factors affect performance, including changes in market conditions and interest rates, as well as other economic, political, or financial developments.

You should not assume that investment decisions we make in the future will be profitable or will equal the investment performance of the past. With respect to the description of any investment strategies, simulations, or investment recommendations, we cannot provide any assurances that they will perform as expected and as described in our materials. Past performance is not indicative of future results.

Any tax information provided herein is for illustrative purposes only and does not constitute the provision of tax advice by Aperio. Due to the complexity of tax law, not every single taxpayer will face the situations described herein exactly as calculated or stated, i.e., the examples and calculations are intended to be representative of some, but not all, taxpayers. Since each investor’s situation may be different in terms of income tax, estate tax, and asset allocation, there may be situations in which the calculations would not apply. Please discuss any individual situation with tax and investment advisors first before proceeding. For those clients using tax advantaged indexing, taxpayers paying lower tax rates than those assumed, or without taxable income, would earn smaller tax benefits from tax-advantaged indexing (or even none at all) compared to those described.

¹ When evaluating the tax efficiency of donation strategies, actually “doing the math” can be invaluable.

² In general, only securities held for longer than one year should be considered for donation. For donations of appreciated long-term capital gain property, the charitable income tax deduction may be limited to 30% or 20% of adjusted gross income, depending on the type of charity.

³ Lincoln Fleming and Slava Malkin, “CRUTs as Tools for Advanced Risk Management,” Aperio, July 2022.

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