Strategic giving: Think beyond cash

Make a bigger difference by donating complex assets—and save on taxes, too.

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When you imagine giving to charity, you probably think of writing a check or perhaps donating appreciated securities. But for charitable-minded executives or business owners, donating privately held assets—such as private C- and S-corporation stock, restricted stock, and limited partnership or LLC interests—may be a particularly tax-efficient and effective alternative.

Such so-called complex assets often have a relatively low cost basis. Indeed, for company founders, the cost basis may be zero. Selling complex assets can generate hefty capital gains taxes. Contributing them to a charity, however, can enable the donor to eliminate capital gains taxes while taking an income tax deduction equal to the full current market value of the donated asset, not just the cost basis. And there can frequently be additional tax benefits at the state level as well.

“This strategy can be a win-win situation for the giver and the charity,” says Karla Valas, managing director of the complex assets group at Fidelity Charitable®, an IRS-qualified 501(c)(3) public charity with a donor-advised fund program. "We are seeing a significant increase in donors—including those going through mergers and acquisitions—who are leveraging a broader spectrum of their assets, such as restricted stock and privately held securities, for charitable purposes.”

How to donate complex assets

People who want to donate complex assets quickly find that their options are limited. Many charitable organizations are not well equipped to handle complex assets, and therefore might require that a donor first sell them and then contribute the proceeds. But this would likely trigger capital gains taxes, reducing the net amount available for the charity. Moreover, in this situation, the donor would be able to take a charitable deduction only for the cash contribution, not the fair market value of the asset prior to liquidation.

Another option is creating a private foundation. This approach has its advantages, such as the ability for family members to sit on charitable boards and receive compensation. But setting up a private foundation can be complex and costly, reducing the amount of money that eventually reaches the donor’s chosen charities. Moreover, charitable deductions are generally limited to the cost basis of the donated asset rather than its current (or fair) 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 .2

For many donors, a better way to donate complex assets to charity is with a donor-advised fund (DAF), to which you can make a charitable contribution—and take a tax deduction—in one year, but recommend grants to qualified charities over time. Using a DAF can be cheaper, simpler, and more flexible than a family foundation, while offering potentially larger net proceeds dedicated to charity and potentially more tax benefits for the donor.

Even donors with private foundations may wish to consider establishing a complementary DAF specifically to donate complex assets.

Donating complex assets via a DAF

In the specific case of donating complex assets, a sponsoring charity of the DAF, such as Fidelity Charitable, accepts responsibility for liquidating the assets in compliance with IRS rules and regulations. This enables operating charities to which donors recommend grants from their DAF to focus on what they do best—fulfilling their charitable mission—rather than undertaking an often-complicated process and being responsible for getting the charitable contribution right for both the donor and themselves.

As mentioned, the donation of these complex assets to a public charity typically means that donors themselves pay no capital gains tax and get a tax deduction based on the full market value of the asset.1 This helps ensure that the highest possible percentage of the funds from the sale of the asset or assets are irrevocably dedicated for charity.

“Giving cash is generally a more expensive and less tax-efficient way to donate,” says Valas. “Talk with your advisor. Make smarter choices that can have a potentially more tax-advantaged impact while empowering you to make more of a difference.”

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1. As determined by a qualified appraiser and in compliance with IRS rules and regulations.
Fidelity Charitable is the brand name for Fidelity Investments Charitable Gift Fund, an independent public charity with a donor-advised fund program. Various Fidelity companies provide services to Fidelity Charitable. The Fidelity Charitable name and Fidelity are registered service marks of FMR LLC, used by Fidelity Charitable under license.
The information contained herein is general in nature, is provided for informational purposes only, and should not be construed as legal or tax advice. Fidelity does not provide legal or tax advice. Fidelity cannot guarantee that such information is accurate, complete, or timely. Always consult an attorney or tax professional regarding your specific legal or tax situation.
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