Gifting Appreciated Assets through Direct Indexing (DI)

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Overview

Gifting appreciated assets, such as stocks, through direct indexing (DI) offers a tax-efficient way to support charitable causes, transfer wealth, or reduce taxable estates. Direct indexing enhances this strategy by providing flexibility in customizing and managing portfolios for gifting purposes.

Benefits of Gifting Appreciated Assets via DI

– Avoid Capital Gains Taxes

  • Donating appreciated assets directly avoids triggering capital gains taxes on unrealized gains, unlike selling the asset first.

– Tax Deduction

  • Gifts to qualified charities may be deductible at the asset’s fair market value, providing a significant tax benefit for the donor.

– Estate Planning Benefits

  • Reduces the taxable value of an estate, making it a valuable strategy for high-net-worth individuals.

– Alignment with Values

  • Use DI to create a portfolio that reflects personal or charitable values, such as ESG priorities, ensuring a meaningful impact.

How DI Enhances Gifting

– Custom Portfolio Creation

Direct indexing allows you to build portfolios aligned with a donor’s preferences or the goals of the recipient. For example:

  • Exclude certain industries (e.g., tobacco, fossil fuels).
  • Focus on ESG or thematic investing.

– Flexible Asset Selection

  • Choose specific securities with high unrealized gains to gift, ensuring maximum tax benefits.

– Tax Optimization

  • Pair gifting strategies with tax-loss harvesting to offset gains elsewhere in the portfolio.

– Strategic Gifting for Family

  • Transfer appreciated securities to family members in lower tax brackets, enabling them to pay reduced or no capital gains taxes if they sell.

Steps to Gift Appreciated Assets Using DI

– Identify Appreciated Securities

  • Use the DI platform to identify holdings with the highest unrealized gains.

– Determine the Recipient

  • Decide whether the gift will go to a charity, a donor-advised fund (DAF), or an individual.

– Transfer the Asset

  • Work with a financial advisor or DI provider to transfer the shares directly to the recipient.

– Rebalance the Portfolio

  • Adjust the remaining holdings to maintain alignment with your investment strategy and goals.

Example Scenario

– Portfolio with DI

  • Market Value: $1,000,000
  • Cost Basis: $600,000
  • Unrealized Gains: $400,000

– Charitable Gift

  • Donor gifts $50,000 worth of stock with high unrealized gains.
  • Avoids $10,000 in capital gains taxes (20% rate).
  • Receives a $50,000 tax deduction if they itemize deductions.

Conclusion

Gifting appreciated assets through direct indexing is a powerful, tax-efficient way to meet philanthropic or wealth transfer goals. It maximizes the impact of charitable giving while minimizing tax liabilities, providing flexibility and alignment with personal values.

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