Donating Complex Assets to Charity
By Karla D'Alleva Valas, Managing Director, Complex Asset Group, Fidelity Charitable
An Effective and Tax-Efficient Way to Make More of a Difference
Americans have always been known for their generosity and devotion to giving. But most Americans donate cash when there are more tax-advantageous assets to give — assets that will enable individuals to make a larger charitable impact. That's why 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 that isn't always the case. Increasingly, donors are leveraging a broader spectrum of their assets, such as restricted stock and privately held securities, for charitable purposes. In addition, continued strength in the mergers and acquisitions market also is a sign of more strategic charitable planning on the part of donors and their advisors. This is exciting, as these types of assets have powerful tax advantages.
For many, charitable contributions of illiquid assets — private C- and S-Corp stock, restricted stock, limited partnership interests, and other privately held assets — may be an effective and tax-efficient method of giving. These types of assets, also referred to as complex assets, often have a relatively low cost basis (i.e., original cost) for the donor — and in the cases of entrepreneurs who have founded companies, the cost basis may effectively be zero — and a significant current market value that would result in large capital gains taxes if sold. When such an asset is donated to a public charity in the correct and optimal manner, the donor not only minimizes any potential capital gains exposure, but is also generally entitled to claim a tax deduction of the full current market value1 (and not just the original cost basis). This tax treatment offers significant benefits at the federal level, and frequently at the state and local levels as well.
Contributing complex assets to charity, however, can be complicated and is fraught with technical requirements and potential pitfalls. Fortunately, there are organizations that can help guide donors and their advisors through this process, as well as offer valuable planning and technical assistance. One of the largest of these organizations — and one offering several unique advantages — is Fidelity Charitable, an independent public charity with a donor-advised fund program ("DAF"). Donating complex assets to a DAF, like Fidelity Charitable offers, makes the process easy and typically more financially advantageous for the receiving charities.
Options for Donating Complex Assets
Once the privately held assets to be donated have been identified (see the call-out box below for a list of assets in this category), donors and their advisors typically devise a detailed plan outlining immediate and long-term charitable goals, and then consider what would be the best method for donating the assets to realize these goals.
They often quickly find that their options are limited. Many nonprofit organizations, being primarily mission- and program-focused, are not well equipped to handle this type of contribution, and therefore might require that a donor first sell the assets and contribute the proceeds. A donor in this situation would have taxable income and thus would not, in most cases, choose to donate the entire amount of the proceeds, but rather would deduct his/her "cost" to liquidate (including both selling costs and the tax incurred) and then donate the net proceeds — thereby reducing the total amount of the charitable contribution. In this situation, the donor would also only be able to claim a deduction for the amount of the resulting cash contribution, rather than the fair market value of the contributed asset prior to liquidation. Furthermore, while some charitable organizations might have some limited experience in handling contributions of complex assets, the cost to the charity to outsource the compliance and liquidation work can be considerable. Although the donor would still be eligible to claim a fair market value deduction, the net result to the charity would once again be significantly reduced.
Some donors also consider creating a private foundation, but find even greater complexity, 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 — is to make the contribution to a charity that offers donoradvised funds. Most of the larger donor-advised fund programs in the United States, including the one offered by Fidelity Charitable, have the requisite expertise and dedicated professional resources to work with donors and their advisors directly 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 DAF Works
For those who may not be familiar with the concept, some public charities have DAF programs. In a DAF 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 years2. 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.
Types of 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 (Artwork, Collectibles3)
- Other Miscellaneous Capital Assets
- Certain Alternative Investments
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 free4. 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.
DAFs are simple, fl exible, and cost effective. 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, ten years, or more — families can make a continuing difference.
Donating Complex Assets via a DAF
In the specific case of donating complex assets, once they are contributed, the sponsoring charity of the DAF, as the legal owner of the assets, has the responsibility for liquidating the complex assets 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 and legal process and being responsible for "getting it right" both for the donor and for themselves. Also, and as previously mentioned, the donation of complex assets to a public charity means that donors themselves realize no capital gain, and thus pay no capital gains tax5. 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.
Fidelity Charitable and Its Mission
Fidelity Charitable offers the nation's largest donor-advised fund program and is one of the nation's largest public charities6.
The Fidelity Charitable mission is to further the American tradition of philanthropy by providing programs that make charitable giving simple and effective. Among DAF providers, Fidelity Charitable has one of the lowest annual fees (currently 0.6 percent) and one of the lowest minimum initial contribution requirements (currently $5,000, though it can be higher for complex asset donations). Fidelity Charitable does not charge a direct fee7 for helping its donors contribute complex assets (only unrelated business income tax, if applicable, actual carrying and maintenance costs, and certain tax preparation consultancy costs are taken from the proceeds of the sale of the contributed asset). Quite apart from fees, however, Fidelity Charitable offers a level of expertise in this area matched by few organizations in the United States.
The goal of Fidelity Charitable is to make charitable giving as easy and painless as possible, both for the donor and for the donor's lawyers and/or advisors. This is especially relevant in connection with contributions of complex assets — and, according to our donors and their advisors, we are succeeding at this goal.
What Fidelity Charitable Donors and Their Advisors Say8
One of these advisors is Joseph Crocker, CFP®, CIMA, and Managing Director of Chess Financial Corporation, who worked with Fidelity Charitable to help accept a donation of private S-Corp stock on behalf of his entrepreneur client. According to Crocker, "This was my and Chess's first foray into this type of transaction and, working with Fidelity Charitable, it was a smooth process from beginning to end — smooth, above all, because of the follow-through at every step of the way by Fidelity Charitable. Nothing fell through the cracks. The knowledge and experience Fidelity Charitable brought to the table helped turn a transaction that I think can be a nine or a ten, in terms of difficulty, into about a three."
Steven C. Mayer, a Fidelity Charitable donor, is the chief executive officer and co-founder of CoGenesys, a biotechnology company located in Maryland. In his words, as he prepared to sell his interest in the privately held company, "I wanted to create an ongoing charitable concern, something to serve as a legacy for me and my whole family. I thought first of establishing a private foundation, but found there were two problems: one, that donating privately held stock to a private foundation is not a tax-efficient option; and two, that the administrative challenges were considerable and expensive. Establishing a DAF at Fidelity Charitable was absolutely the best option. Throughout the donation process, which went very smoothly, and afterwards as Fidelity Charitable worked with the company to liquidate its shares in the corporate transaction, Fidelity Charitable distinguished itself as a top-tier organization. I look forward to a long association."
When it comes to helping donors and their advisors donate complex assets to charity, Fidelity Charitable is an ideal option. Its dedicated Complex Asset Group provides the support and technical expertise to get the job done correctly, promptly, and with all appropriate follow-through, as well as the scale to be able to offer individual assistance to donors or to their advisors or legal counsel
1 As determined by a qualified appraiser in compliance with IRS rules and regulations.
2 Subject to program's grantmaking policies.
3 Related use needed to claim a fair market tax deduction.
4 Of course, investing also involves risk, including risk of loss to the charity and the individual donor-advised fund.
5 Assumes that the donor does not have an anticipatory assignment of income issue.
6 Source: The Philanthropy 400, The Chronicle of Philanthropy, October 21, 2010 (based on contributions from individuals, foundations, and corporations).
7 Fidelity Charitable charges an annual administrative fee.
8 The testimonials and the statements and opinions expressed in this article are based on interviews with Joseph Crocker, who provided permission to use his name and that of Chess Financial Corporation, and Steven C. Mayer, who provided permission to use his name and that of CoGenesys. These testimonial statements are not indicative of future services and may not be representative of the experience of all donors/advisors.
Information provided is general and educational in nature. It is not intended to be, 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. Availability of certain federal income tax deductions may depend on whether 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. Charitable contributions of capital gain property held for more than one year are usually deductible at fair market value. Deductions for capital gain property held for one year or less are usually limited to cost basis. Consult an attorney or tax advisor regarding your specific legal or tax situation.
To ensure compliance with Treasury Department Circular 230, you are hereby notified that: (a) any discussion of federal income tax issues in this article is not intended or written to be relied upon, and cannot be relied upon, by you for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code; (b) such discussion is being used in connection with the promotion or marketing (within the meaning of Circular 230) by Fidelity Charitable of the matter addressed herein; and (c) you should seek advice based on your particular circumstances from an independent tax advisor.
Fidelity Charitable is the brand name for the Fidelity® Charitable Gift Fund, an independent public charity with a donor-advised fund program. Various Fidelity companies provide services to Fidelity CharitableSM. The Fidelity Charitable name and logo are service marks, and Fidelity is a registered mark, of FMR LLC, used by Fidelity CharitableSM under license.
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