The Concentrated Position and the Charitable Ask
A client, Rosa, 61, holds $1.4 million of a single stock (cost basis $180,000) that is 62% of her $2.25 million portfolio. The rest is a diversified mix of bond and equity funds. She is charitably inclined and wants to give $100,000 to her alma mater this year. She also needs $60,000 of cash next year for a home renovation. Rosa is in the 32% federal bracket, 15% long-term capital gains, and 5% state income tax; she does not itemize carefully and her advisor warns that the standard deduction may absorb small gifts. She is worried about 'locking in' a gain and about the stock's volatility.
1. Compare selling the stock, donating cash, and donating appreciated shares for the $100,000 gift.
Read the worked answer
Sell then donate cash: Selling $100,000 of stock realizes a gain of roughly $100,000 × (1 − 180,000/1,400,000) = ~$87,100. Tax at 15% federal + 5% state ≈ 20% → ~$17,400 of tax, leaving only ~$82,600 to give if she wants a net $100,000 gift. She also loses the deduction benefit on the tax paid.
Donate cash, keep stock: She preserves the low-basis stock (deferring gain) but forgoes the chance to eliminate the embedded gain. Deduction is the same fair-market value.
Donate appreciated shares (the right answer): A gift of long-held appreciated stock to a public charity yields a deduction at full fair market value ($100,000) and avoids the capital gains entirely - the charity is tax-exempt and sells without tax. Compared with selling, she saves ~$17,400 of gain tax and still gets the full $100,000 deduction. This is the classic 'donate the appreciated asset, sell the diversified asset' move.
Caveats: Must be held >1 year for FMV deduction; the deduction is limited to 30% of AGI for appreciated property to public charities (60% for cash), with a 5-year carryforward. She must confirm the charity can accept securities and that the transfer happens before year-end.
2. How should she fund the $60,000 renovation and reduce concentration without a tax disaster?
Read the worked answer
Funding the renovation by selling concentrated stock realizes gain at 20% combined - ~$51,000 of gain on $60,000 of proceeds (basis ratio ~12.9%) → ~$10,000 of tax. Better sequencing:
- Use the charitable gift to do double duty. If she donates $100,000 of stock and simultaneously sells $100,000 of the diversified bond/equity funds to rebalance, she has effectively reduced concentration without realizing the concentrated gain.
- Fund the renovation from the diversified side or cash flow, not from the low-basis stock, to avoid realizing gain for a short-term need.
- Systematic diversification: set a multi-year plan to trim the position (e.g., 10% per year) using a donor-advised fund for the charitable slice, harvesting losses elsewhere to offset gains, and possibly an exchange fund or collar for the remainder if she wants to defer without selling.
- Concentration risk: 62% in one stock is well beyond prudent limits; the volatility concern is legitimate. The plan should reduce to a target (e.g., <20%) over 3–5 years, prioritizing tax-efficient exits (charity, gifting to family, loss harvesting) before taxable sales.
Bottom line: Donate stock for the gift, sell diversified assets for the renovation, and stage the rest.