2023 Q3 Quarterly Market Review & Charitable Giving

By Schultz Collins Investment Counsel on November 14, 2023

The 3rd quarter was marked with uncertainty over whether higher interest rates would cause a “soft landing” or a recession. Stock and bond indexes we reviewed declined in the quarter but are still up over the trailing 12-month period.

Global stocks, as measured by the MSCI ACWI Index, fell 3.3% for the quarter, but rose 21.43% over the trailing 12-months. 

The S&P 500 Index of large US company stocks declined 3.27% for the quarter but is up 21.63% over the last 12 months. US small cap stocks have underperformed relative to US large cap stocks. The Russell 2000 Index of small US company stocks lost 5.13% in the 3rd quarter but gained 8.94% year-over-year. 

US real estate has also underperformed relative to US stocks, most likely due to the rise in mortgage rates. The Dow Jones US Select REIT Index of real estate investment trusts tumbled 7.40% in Q3 but is up 2.61% for the trailing 12-month period.

The MSCI EAFE Index measures large cap stocks of international developed countries, and it declined 4.05% for the quarter, but gained 26.33% in the last year. International emerging markets stocks, as represented by the MSCI Emerging Markets Index, dropped 2.79% in the 3rd quarter but rose 12.17% over the last 12 months. 

As bond yields continued to ascend in the 3rd quarter, bond returns fell. The Bloomberg US Aggregate Bond Index declined 3.23% in the quarter and is up 0.64% year-over-year. Global bonds, as measured by the FTSE World Government Bond Index, dropped 4.27% in Q3 but returned 1.04% over the trailing 12-month period. Corporate bonds, as proxied by the Bloomberg US Corporate Bond Index, fell 0.96% in the 3rd quarter but returned 4.11% over the last 12 months.

10-year Treasury Note yield continued to rise and was 4.59% on September 30th. The yield on the 10-year Treasury is hovering around its 15-year high. Higher yields make borrowing more difficult but help reduce the effects of inflation.

This quarter we’d like to talk about charitable giving.

Charitable Giving Strategies for your Portfolio

As we near the end of the year, tax deductible charitable giving may become a pressing issue for some investors. Today, we will touch on a few strategies for investors to consider, and on some of their benefits.

It is important to note that Schultz Collins does not provide tax advice, so our discussion of the tax effects of charitable contributions should be reviewed with your tax advisor.

IRA Assets & Required Distributions

Investors who are charitably inclined and subject to a required mandatory distribution (RMD) from an IRA might want to consider qualified charitable distributions (QCD). A QCD allows the IRA owner to distribute up to $100,000 of IRA assets directly to a qualified charity and apply the distribution towards the RMD for that year. Additionally, the amount distributed to the charity is not added to taxable income for the year. This differs from making a standard taxable distribution to the taxpayer from the IRA, then making a donation with the proceeds. The tax implications of the two methods differ, so consulting with a tax advisor to understand their differences is recommended.

For those not yet subject to an RMD but over age 70½, QCD’s are still possible and beneficial. A QCD from an IRA may reduce the balance of your IRA, thereby reducing future RMDs with their tax liabilities – which can have irksome effects on income tax brackets and Medicare premiums. For estate planning purposes, donating IRA assets may confer greater benefits than donating assets held in taxable accounts, like a revocable living trust account, because IRA assets must pass two tax wickets before anyone can use them: income tax and estate tax.

Donating Appreciated Securities to a Charity

We often hear of investors who have owned a single stock for many years, watching it grow to an uncomfortably large portion of their overall wealth. They know that individual stocks come with idiosyncratic risk that is mostly diversified away in stock mutual funds or ETF’s; but they have resisted selling the appreciated stock due to the capital gain taxes due upon sale. Donating the stock to a charity allows an investor to benefit from a substantial tax deduction (based on the market value of the stock at the time donated) while avoiding capital gains taxes on the donated position.

For those investors who have owned highly appreciated stocks for less than a year, the deduction rules are different and may be far less beneficial. Discussing the details of donating individual securities with a tax advisor is necessary.

It is worth noting that investments with unrealized losses may not be good candidates for charitable donations. It is probably better to sell such assets, harvest their losses for use against concurrent or future gains in other assets, and donate cash instead. Your tax advisor can review the benefits to this strategy.

Donor Advised Funds

Sometimes investors have not yet selected a charity but would like to lock in a charitable tax deduction. A donor advised fund (DAF) may be an answer. A DAF is an investment account to which investors can make irrevocable donations for the benefit of charities. Distributions from the DAF to the charities in question can be made at a future date. Investors can claim a tax deduction for the year of the donation to the DAF.

For investors looking to donate to charities over many years, a DAF allows the dollars held in the account to be invested in mutual funds or ETFs. The investments owned in the DAF may be selected by the investor, so as to reflect their risk preferences and charitable objectives. Investing the DAF assets increases the potential amount of benefit to charities over the years. It is important to understand that charitable tax deductions are based on the amount deposited to the DAF, not the amounts it distributes to charities.

The above advantages have led to growing demand for DAFs, so it should be no surprise that most investment firms offer these accounts.

You Can Still Own the Donated Investment

Sometimes investors hate the idea of parting ways with a particular investment. But reaping the tax benefits of giving a cherished highly appreciated investment to a charity or DAF does not mean the investor can’t continue to own it. It may be possible for the investor to use less desired assets, or use cash, to repurchase the desired investment, thus establishing a higher tax basis in the favored position. So, for those investors who fret over the idea of parting with a particular investment, there is an option.

Aggregate Annual Giving in a Single Year

In recent years, tax policy has changed, resulting in an increase in the standard tax deduction. Of course, this means there is a higher threshold that must be passed in order to benefit from itemizing tax deductions. Charitable donations are one of those itemized deductions. For some investors, tax deductible charitable donations may now be unreachable from one year to the next. Such taxpayers might consider aggregating multiple years of annual giving into a single year. To be clear, individuals can budget yearly donation amounts into savings, then make a large donation in a single year, so that itemizing taxes generates an overall deduction larger than the standard deduction.

Lastly, there are administrative steps needed to ensure charitable donations are completed easily or correctly, so as to ensure the desired tax benefits. We therefore recommend that investors plan – and trigger – charitable donations from their portfolios early in the year. If you have not completed your charitable giving from your portfolio, we urge you to contact your tax advisor and investment advisor as soon as possible.

Summary

There are many avenues to charitable giving and many benefits. We have covered a few here, and hope this information gives you reasons to consult your tax advisor and investment advisor to discuss gifting strategies that are suited to your objectives.

Thank you.

Disclaimer: Hightower Advisors, LLC is an SEC registered investment adviser. Securities are offered through Hightower Securities, LLC member FINRA and SIPC. Hightower Advisors, LLC or any of its affiliates do not provide tax or legal advice. This material is not intended or written to provide and should not be relied upon or used as a substitute for tax or legal advice. Information contained herein does not consider an individual’s or entity’s specific circumstances or applicable governing law, which may vary from jurisdiction to jurisdiction and be subject to change. Clients are urged to consult their tax or legal advisor for related questions.

Schultz Collins is a group comprised of investment professionals registered with Hightower Advisors, LLC, an SEC registered investment adviser. Some investment professionals may also be registered with Hightower Securities, LLC, member FINRA and SIPC. Advisory services are offered through Hightower Advisors, LLC. Securities are offered through Hightower Securities, LLC.

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Hightower Advisors, LLC is an SEC registered investment adviser. Securities are offered through Hightower Securities, LLC member FINRA and SIPC. Hightower Advisors, LLC or any of its affiliates do not provide tax or legal advice. This material is not intended or written to provide and should not be relied upon or used as a substitute for tax or legal advice. Information contained herein does not consider an individual’s or entity’s specific circumstances or applicable governing law, which may vary from jurisdiction to jurisdiction and be subject to change. Clients are urged to consult their tax or legal advisor for related questions.

This document was created for informational purposes only; the opinions expressed herein are solely those of the author(s) and do not represent those of Hightower Advisors, LLC, or any of its affiliates.