Pre-Sale Gift of Stock: Possible Benefits For Monsanto Shareholders
Bayer’s acquisition of Monsanto is a cash purchase of stock for $128 per share. From a tax-planning and charitable-giving perspective it’s a great time to thing about making a gift of Monsanto stock to a charitable entity before the final date of the reorganization. Doing so can offer certain tax and other advantages, including the following:
- A Tax Deduction– Donors are entitled to a substantial charitable income tax deduction based on the full fair-market value of the stock on the date of contribution. It is a deduction that can be carried over into future tax years – typically, five years.
- Avoid Capital Gains Taxes – Donors avoid paying capital gains taxes because the tax- exempt charity sells the stock.
- Philanthropy With Low Out Of Pocket Cost – Donors make gifts at the lowest out-of-pocket cost many will ever see.
- Support A Favorite Cause or Charity – The stock’s eventual sale proceeds get put to work doing good through the charity.
Let’s Take A Look at the Numbers:
An Example of Out-of-Pocket Cost of Charitable Giving with These Assets
Basic Assumptions: Your client holds 10,000 shares of Monsanto with a basis of $25/share. The final offer is $128 per share cash. Stock is trading at $115 in advance of the sale. This is the price used for the gift transfer value. Shareholder itemizes deductions and has sufficient ordinary income at a combined income tax rate (federal and state) of 44% to take advantage of this gift in full in the year of the contribution. Shares are all long-term capital-gains property and subject to the 28.8% combined capital gains tax (federal long-term capital gains taxes, the 3.8% Medicare surtax and Missouri income taxes).
Calculating Proceeds of Outright Sale with No Charitable Gift
Sale Proceeds ($128 x 10,000 shares) $1,280,000
Original Cost Basis of Stock ($25x 10,000 shares) $ 250,000
Shareholder’s Gain ($103 x 10,000 shares) $1,030,000
Capital Gains Tax (.288 x $1,030,000) $ 296,640
After-Tax Proceeds to Client $ 983,360
Calculating Tax Savings of a Pre-Sale Charitable Gift of $10,000
Gift Value ($115 x 10,000 shares) $1,150,000
Tax Savings of Charitable Income Tax Deduction $ 506,000
(i.e., 44% of the date of gift value)
Calculating the Out of Pocket Cost of Gift to Charity by Contrasting Sale vs. Gift
After Tax Proceeds of an Outright Sale $ 983,360
Tax Savings of Charitable Gift $ 506,000
Out of Pocket Cost of Gift $ 477,360
In this example it “costs” the donor $477,360 to give $1,150,000 to charity, or about 41 cents per dollar given.
Give enough Stock to Cover Your Capital Gains Tax with a Charitable Deduction
Instead of making a charitable contribution of all or none of one’s appreciated stock in Monsanto, one might instead consider donating enough stock so that his or her charitable contribution deduction would offset his or her capital gains taxes on the merger proceeds of the retained portion of the Monsanto stock. Using the same facts as in the prior examples, one would need to donate approximately 3,709 of the 10,000 shares to accomplish such a result. The potential results of this strategy would be as follows:
Income Tax on Sale of 62.9% of Shares
Sale Proceeds ($128 x 6,291 shares) $ 805,248
Original Cost Basis of Stock ($25x 6,291 shares) $ 157,275
Shareholder’s Gain ($103 x 6,291hares) $ 647,973
Capital Gains Tax (.288 x $647,973) $ 186,616
Income Tax Deduction for Gift of 37.1% of Shares
Gift Value ($115 x 3,709 shares) $ 426,535
Income tax deduction (.44 x $ 426,535) $ 187,675
Net Proceeds of Sale and Gift
Sale Proceeds ($128 x 6,291 shares) $ 805,248
Less Capital Gains Tax (.288 x $647,973) ($186,616)
Plus Income Tax Deduction (.44 x $ 426,535) $187,675
Net Value $806,307
Disclaimer re: Tax, Legal and Accounting Advice
This memorandum was prepared for purely educational purposes for a hypothetical situation and many simplifying assumptions (both stated and unstated) have been used for purposes of helping illustrate certain key points. The St. Louis Community Foundation does not provide tax, legal or accounting advice. Any person should seek such advice from his own counsel, CPA or other appropriate advisor prior to engaging in a particular transaction.
 The amount of charitable deduction a natural person may claim in any one year is limited to a percentage of your contribution base, generally your adjusted gross income with certain modifications. For gifts of cash to public charities, the limit is 50% of a natural person’s adjusted gross income. For gifts of long-term capital gain property, the limit is 30%. In both cases, any deduction that exceeds the amount a natural person can claim in the year of his or her gift due to these limitations can be carried over up to five additional tax years. Also, Section 68 of the Internal Revenue Code acts to reduce itemized deductions for certain taxpayers.