- Selling complex assets—such as private C- and S-corporation stock, privately held interests in an LP or LLC, or restricted stock—can generate hefty capital gains taxes.
- By donating complex assets to charity prior to a liquidity event (either voluntary or forced), you may potentially reduce or eliminate the burden of capital gains taxes while qualifying for a fair market value income tax deduction of the donated asset.*
- Using a strategic giving vehicle such as a donor-advised fund may help you make the most of your non-cash assets, enabling you to save and give more to charity.
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 capital gains triggering significant capital gains tax as well as the 3.8% net investment income tax. Contributing complex assets to a public charity, however, can enable the donor to potentially eliminate capital gains taxes while taking an income tax deduction equal to the fair 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 Nathan Daley, Vice President and Head of the Complex Asset 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, the sale of an appreciated asset may trigger capital gains taxes, reducing the 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 with 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 account at a DAF specifically to donate complex assets because of the potential tax-saving strategies that DAFs can offer donors with complex assets. Specifically, deductions on donations of complex assets to a private foundation are generally limited to the lessor of fair market value (FMV) and cost basis, and they are also limited to 20% of AGI. DAFs, however, generally allow for the deduction of FMV for an appreciated complex asset, and they can usually offer a deduction of up to 30% of AGI.
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 fair market value of the asset* and potentially 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 foundations 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 Daley. "Donating appreciated assets, even if there is no forced capital gain trigger event, allows a donor to 'give away' the appreciated asset and potentially avoid the capital gains."
The first step is to talk with your tax professional. 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
Explore the Fidelity Charitable® Giving Account®
Take a few minutes to learn more about the Fidelity Charitable® Giving Account®.
Use the Charitable Contribution Calculators & Tools
Identify potential long-term appreciated securities that you might consider contributing to charity.
Get the latest insights
Access articles, webinars, and ideas on wealth planning and investment strategies.