Americans have always been known for their generosity and devotion to giving. But many people with charitable intentions tend to make donations via cash or check and are often unaware that donating certain tax-advantaged assets instead of cash may enable them to make a larger impact. So it may be helpful to think outside the box when it comes to putting together a personal giving plan.
Typically, cash and appreciated publicly traded securities—such as stocks, bonds, and mutual funds—are the two types of assets used in individual charitable giving, but donating certain complex assets may be a better option in some cases. For many, charitable contributions of illiquid assets—such as private C- and S-corporation stock, restricted stock, limited partnership interests, and other privately held assets—may be an effective and tax-efficient method of giving. These types of complex assets often have a relatively low cost basis (i.e., original cost) for the donor—and for entrepreneurs who have founded companies, the cost basis may effectively be zero. They may also have a significant current market value that would result in large capital gains taxes if sold.
"We are seeing a significant increase in donors—including those investors going through mergers and acquisitions—leveraging a broader spectrum of their assets, such as restricted stock and privately held securities, for charitable purposes. This is a sign of more strategic charitable planning on the part of those who are charitably inclined," said Sarah Libbey, president of Fidelity Charitable.
Libbey believes this is an exciting trend because these types of assets can have powerful tax advantages, and donating them to a donor-advised fund, makes the process easy, and typically more financially advantageous, for the receiving charities.
Options for donating complex assets
Complex assets that can be donated to charity
- Private company stock
- Restricted stock
- LLC and limited partnership interests
- Real estate
- Pre-IPO shares
- Personal property
- Other miscellaneous capital assets
- Certain alternative investments
Once the privately held assets to be donated have been identified, investors and their advisers typically devise a detailed plan that outlines immediate and long-term charitable goals, and then decide upon the best method for donating the assets.
Investors often quickly find that their options are limited. Many nonprofit organizations are not well equipped to handle complex assets, and therefore might require that a donor first sell the assets and contribute the proceeds. A donor in this situation may have taxable income, and thus would not, in most cases, choose to donate the entire amount of the proceeds. Rather, the donor might deduct his or her “cost” to liquidate (including both the selling costs and the incurred tax) and then donate the net proceeds—thereby reducing the total amount of the charitable contribution. In this situation, the donor would be able to take a deduction only for the amount of the resulting cash contribution rather than the fair market value of the contributed asset prior to liquidation.
When such an asset is donated to a public charity in this manner, the donor not only can minimize any potential capital gains exposure, but is generally also entitled to a tax deduction of the full current market value,1 not just the original cost basis. This tax treatment offers significant benefits at the federal level and frequently at state and local levels.
Contributing complex assets to charity, however, is complicated and fraught with technical requirements and potential pitfalls. Fortunately, there are organizations that can help guide investors and their advisers through this process, and offer valuable planning and technical assistance. One of the largest of these organizations is Fidelity Charitable, an IRS-qualified 501(c)(3) charity with a donor-advised fund program.
Furthermore, while some charitable organizations might have limited experience in handling contributions of complex assets, the cost to the charity to outsource the compliance and liquidation work can be considerable. So, although the donor would still obtain a fair market value deduction, the net result to the charity would once again be significantly reduced.
Donors who look into creating a private foundation often find the setup fraught with complexities, even more obstacles, and higher costs—similarly reducing the amount of money that eventually reaches the donor’s chosen charities. Moreover, contributions of most illiquid assets to a private foundation are generally limited to the original cost basis for deduction purposes, rather than the current market value. Donating these types of assets to private foundations is further complicated by IRS rules and regulations related to “self-dealing,” “jeopardizing investments,” and “excess business holdings.”
In many cases, an optimal method for donating complex assets to charity—measured by cost, flexibility, simplicity, and tax benefits to the donor, as well as by maximizing the net proceeds ultimately made available to charitable organizations—may be to make the contribution to a charity with a donor-advised fund program.
Most of the larger donor-advised fund programs in the United States, including Fidelity Charitable, have the requisite expertise and dedicated professional resources to work directly with donors and their advisers in order to maximize the giving power of these assets. Most acceptance decisions can be made within a few days, once the necessary information is received.
How a donor-advised fund works
For those who may not be familiar with the concept, some public charities have donor-advised fund (or “DAF”) programs. In a donor-advised fund program, donors make irrevocable contributions to the charity, and the charity then establishes an account from which the donor is able to recommend grants to other eligible charities—generally speaking, IRS-qualified 501(c)(3) public charities—from the balance in their DAF account.
The benefits of the donor-advised fund are numerous. First, donors are able to make a charitable contribution and are eligible for a tax deduction on that contribution in a specific year while spacing out their grants over a period of years. Donors are permitted, of course, to make further contributions at any time, but having the balance in place in their DAF means that they can engage in longer-term charitable giving, allowing them to maintain a certain level of giving regardless of changing financial circumstances—a critical point for both donors and their recommended charities during challenging economic times.
Second, individuals who create a donor-advised fund are typically also able to recommend how those funds should be invested. Many DAFs offer a variety of investment pools that allow donors to recommend the investment style that fits best with their time horizon for recommending charitable grants—growth, fixed income, money market, or blended investments. The funds that have been contributed to the DAF have the opportunity thereafter to grow tax free.2 In addition, DAF programs provide consolidated tax reporting for the year’s contributions, eliminating paperwork for the donor, and simplifying and improving compliance with IRS requirements.
Donor-advised funds are more flexible and cost-effective than many other charitable giving options. They help donors achieve strategic, thoughtful giving for themselves and in many cases for their entire family. Often, in fact, donor-advised funds are established in the name of a donor’s family; by planning for charitable contributions and grants over a period of time—one year, five years, 10 years, or more—families can make a continuing difference.
Donating complex assets via a donor-advised fund
In the specific case of donating complex assets, the sponsoring charity of the DAF accepts responsibility for liquidating them in compliance with IRS rules and regulations—including handling all legal review of documents and IRS reporting. This enables the grant-receiving charitable organizations to focus on what they do best—fulfilling the organization’s charitable mission—rather than overseeing an often-complicated financial process and being responsible for “getting it right” both for the donor and for themselves.
As mentioned, the donation of these complex assets to a public charity means that donors themselves realize no capital gain, and thus pay no capital gains tax. This helps ensure that the highest possible percentage of the funds from the sale of the asset or assets actually goes to the chosen charitable organizations.
Perhaps best of all, by donating complex assets to establish a DAF, these donors are able to diversify their giving with one asset in that they are able to recommend multiple grants to many different charities, as opposed to donating the asset (or assets) to one nonprofit organization—or going through a transfer agent to break up the asset to facilitate multiple gifts. The experienced charitable giving professionals at the DAF program are able to do this work for the donor.
- Learn more about donor-advised funds.
- Call a Charitable Planning Specialist at 800-262-6039 for more information.