- Selling privately held assets—such as private C- and S-corporation stock, restricted stock, and limited partnership or LLC interests—can generate hefty capital gains taxes.
- By donating complex assets to charity prior to a liquidity event (either voluntary or forced), you can eliminate the burden of capital gains taxes while taking an income tax deduction equal to the full current market value of the donated asset.
- With the December 2017 changes to the tax laws, it may now be time to revisit your charitable giving strategies to see if they continue to meet your tax and philanthropic goals.
When you imagine giving to charity, you probably think of writing a generous check or perhaps donating appreciated securities to an organization whose mission is close to your heart. But for charitable-minded investors, C-suite executives or business owners, founders and entrepreneurs, 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 funding source 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 (and forced) capital gains triggering significant capital gains tax as well as the 3.8% net investment income tax.1 Contributing complex assets to a public 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. Additional tax benefits at the state level may be available to those who gift complex assets to a donor advised fund.
"This strategy can be a win-win situation for the giver and the charity," says Karla Valas, managing director of the Advanced Planning Group at Fidelity Charitable®, an IRS-qualified 501(c)(3) public charity that sponsors a donor-advised fund program. "We continue to see a significant increase in complex asset donors—including business owners and executives who are 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 find that their options are extremely limited, especially if time is of the essence, whether because of looming exit strategies or year-end charitable giving deadlines. Many charitable organizations do not have gift acceptance policies that permit complex assets; others do not have professionals on staff equipped to review and approve the gifting of certain complex assets. This can result in added professional service fees typically paid by both the charity and the donor.
Charities often advise donors to sell the asset, then contribute the after-tax proceeds to the charity. However, any sale of assets triggers capital gains taxes, reducing the net amount available for the charity. Moreover, in this situation, the donor is only able to take a charitable tax deduction for the amount of the post-sale and post-tax cash contribution, not the fair market value of the asset prior to liquidation.
For many donors and the charities they support, complex asset donations to a public charity through a donor-advised fund (DAF) program can be much more efficient for all stakeholders versus giving these assets directly to one or more charities. With one complex asset donation to a DAF, there is one set of charity acceptance criteria, one set of paperwork supporting the legal transfer, and one set of paperwork for any subsequent sale of the donated asset. This "one-stop shopping" can benefit all the stakeholders: the donor, the governing body of the complex asset (for example, the company or partnership), the lawyers overseeing legal transfers and sale strategies, and the multiple charities that might not have had the ability to accept the complex asset.
In addition, donating complex assets to a DAF and then recommending multiple grants to charities on your own timetable minimizes significant overhead costs that would be incurred by these stakeholders.
While private foundations may offer similar one-stop shopping efficiencies, donors with private foundations may wish to consider establishing a complementary DAF specifically to donate complex assets because of the tax savings strategy—i.e., a fair market value tax deduction for a complex asset gifted to a public charity with a DAF as compared to a cost basis deduction for those gifted to private foundations.
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 of getting the charitable contribution right and liquidating the asset in accordance with tax rules and regulations.
The donation of these complex assets to a public charity typically means that donors themselves are eligible for a tax deduction based on the full market value of the asset2 and pay no capital gains tax or net investment income tax upon the subsequent sale by the charity. This double tax benefit allows the highest possible percentage of the asset's value to go to the charitable causes. On the other hand, donations to private charities are limited to a cost basis deduction.
"Giving cash is generally a more expensive and less tax-efficient way to donate to charity when there are other assets, especially appreciated assets, to choose from," says Valas. "Donating appreciated assets, even if there is no forced capital gain trigger event, allows a donor to 'give away' the appreciated asset tax-free. Cash donations almost always have some underlying implicit tax burden associated with them. For example, with cash it costs you $100 to give away $100 as compared to giving away $100 worth of an appreciated asset to a DAF that may only cost you $82 because you didn't have to pay any capital gains taxes."
The first step is to talk with your tax advisor. They can help you make smarter tax-advantaged charitable giving choices while also empowering you to support the causes that the matter most to you.
Next steps to consider
Call 800-262-6039 to speak with a giving specialist at Fidelity Charitable.
Plan how to include charitable giving as part of your investment portfolio.
Complete courses available from the Fidelity Learning Center.
This information is intended to be educational and is not tailored to the investment needs of any specific investor.
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 logo and Fidelity are registered service marks of FMR LLC, used by Fidelity Charitable under license.
The tax information provided is general and educational in nature, and should not be construed as legal or tax advice. Fidelity Charitable does not provide legal or tax advice. Content provided relates to taxation at the federal level only. Charitable deductions at the federal level are available only if you itemize deductions. Rules and regulations regarding tax deductions for charitable giving vary at the state level, and laws of a specific state or laws relevant to a particular situation may affect the applicability, accuracy, or completeness of the information provided. As a result, Fidelity Charitable cannot guarantee that such information is accurate, complete, or timely. Tax laws and regulations are complex and are subject to change; changes may have a material impact on pre- and/or after-tax results. Fidelity Charitable makes no warranties with regard to such information or results obtained by its use. Fidelity Charitable disclaims any liability arising out of your use of, or any tax position taken in reliance on, such information. Always consult an attorney or tax professional regarding your specific legal or tax situation.
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