The success of a charity often hinges on its ability to diversify its fundraising strategies. Among traditional development methods lies a less traveled but immensely potent path: soliciting gifts of stock. A new study of nonprofit tax returns demonstrates both the potential of this approach and the sad reality that fewer charities are treating it as the strategic imperative it should be.
All nonprofits (other than churches) are required to fill out an annual IRS Form 990 and disclose gifts of publicly traded securities on Schedule M. The online will-writing company, FreeWill, reviewed the Schedule M data from 13,000 nonprofits and published their findings in the “2023 FreeWill Stock Report.”
Before delving into the research, it’s important to begin with a cautionary note. Crafting your will online might not be an appropriate strategy for many families. Your last will and testament conveys your final words to the world. It’s a document that only surfaces after you’ve departed so you won’t be able to rectify any inaccuracies or oversights. Further, many estates often benefit from the creation of a trust. Consulting with an attorney or estate-planning professional for tax and legal advice specific to your situation is a wise decision for most folks. Nevertheless, examining the data collected by FreeWill offers some valuable insights.
The rationale for establishing a program to solicit stock gifts is compelling. A contribution of a publicly traded security can be significantly more beneficial for both the donor and the nonprofit as compared to a cash gift. While the donor receives the normal charitable deduction for the full market value of the stock, they also have the additional benefit of completely avoiding the capital gains tax that might have otherwise been collected by Uncle Sam. It’s essentially a dual deduction! Consequently, some of a charity’s largest donations come in the form of highly appreciated shares of publicly traded companies. Creating a robust program to solicit these kinds of contributions opens a nonprofit organization to an entirely new class of gifts coming from donors that tend to be more affluent than the average family.
Perhaps the most surprising conclusion in the report is that the performance of the stock market apparently doesn’t correlate with the value of stock gifts as much as most nonprofit professionals like me originally thought.
“Contrary to our expectations, the analysis did not reveal a direct correlation between yearly growth in the stock market and overall giving,” noted the report. “Despite variations in the stock market, stock giving trends didn’t necessarily follow suit, suggesting that other factors might be influencing donors’ decisions.”
This is both counterintuitive to a layperson and inconsistent with what most nonprofit professionals believe. Yet the data is the data. In 2019 when the S&P 500 returned a whopping 31%, gifts of stock were actually down 9%. Similarly, 2020 saw an 18% gain in the S&P 500 while stock contributions fell another 14%. Then in 2021, when the S&P 500 increased by 28.7%, stock donations increased by a whopping 43%. Perhaps those fluctuations in stock gifts had something to do with the COVI-19 crisis, yet at least one full year’s data predates that. Maybe the increase in the standard deduction is influencing it, but that was enacted in 2017, before the years studied. The simple truth is that while the data cannot identify any direct correlation between the investment performance of the stock market and the value of stock gifts to charity, we really don’t yet understand why that’s the case.
I suspect that once someone does a longitudinal analysis, we may see that stacking multiple good (or bad) years in the market in a row will tend to influence gifts of stock simply because the benefit of avoiding capital gains tax only works if you’ve had a significant capital gain. Regardless, the good news for nonprofit organizations is that the success of a program to solicit stock gifts isn’t dependent on a single year’s performance of the S&P 500.
Yet the report also documented one significant problem. While the total value of stock gifts increased during the study period, the number of charities reporting a gift of publicly traded securities on their tax returns actually declined.
“The filings from 2018 through 2020 show a decline in the number of nonprofits receiving stock gifts, highlighting the need for organizations to actively incorporate strategies for soliciting stock gifts into their fundraising efforts,” the report noted.
If your charity doesn’t already have a program to solicit gifts of stock, you really need to create one soon.
Bret Bicoy is President & CEO of the Door County Community Foundation. Contact him at [email protected].