If you are a savvy investor, it is likely that your portfolio, despite occasional corrections, has increased in value over the past several years. Investment advisors agree that rebalancing a portfolio at a certain frequency is a smart practice. They recommend considering the age(s) of the account owners, risk tolerance, other assets, family situation, and goals to help decide what percentage of a portfolio will be invested in equities and what percentage in fixed-income instruments. To maintain these percentages, it is necessary to rebalance the account at regular intervals.

Suppose, for example, that a couple has decided their taxable securities portfolio should consist of 35% equities and 65% of fixed-income investments. Because their stock investments have performed exceedingly well recently, the equity portion of their portfolio has crept up to 40%. If they stick with their disciplined approach, they will sell some equities and purchase fixed-income securities to ensure their portfolio continues to be appropriate for their risk tolerance and investment goals.

Because all of their equities, especially the best performing ones, have considerable capital gain, rebalancing will entail a tax cost. Their dilemma is whether to incur taxes at the price of reducing risk to the predetermined level or to keep the portfolio intact, figuring that avoiding or postponing taxes might at least partially compensate for a future market adjustment.

Rather than making their regular annual gift to support our work with cash, they make a gift with some of the stocks they planned to sell to rebalance their portfolio. They receive a double benefit: a charitable deduction for the current fair-market value of the stocks, assuming the stocks have been owned more than one year, and not being taxed on the capital gain. They then use the cash they would have contributed to purchase some of the lower-risk securities they would have acquired as a result of rebalancing.

It’s also possible that they are considering a more substantial legacy gift but, in the meantime, would like to have an account, such as a self-directed IRA, where adjustments to the portfolio would not result in realization of taxable gain. That is possible with a charitable remainder unitrust (CRUT). They would transfer to the trust some highly appreciated stocks from their taxable portfolio, bringing the equity percentage of that account closer to their 35% target.

The trustee of the CRUT, which could be themselves, could sell the contributed stock and purchase whatever securities seem advisable. Possibly, these securities, at least initially, might be more low risk—though the investment allocation of trust assets can be adjusted from time to time. The gain in the stock transferred from their brokerage account is not taxed to them when the stock is transferred to the trust, and the gain in securities owned by the trust is not taxed to the trust when sold by the trustee.

Another benefit is a charitable tax deduction for the present value of the trust assets that will be distributed to help further our mission at the death of their survivor. Meanwhile, they receive trust income that will be a percentage of their trust assets as redetermined yearly. Annual gifts made with appreciated stock can enable you, to some extent, to rebalance your portfolio without a tax cost. The portfolio of a CRUT can be regularly rebalanced without a tax cost because the trust is tax-exempt.