How donating a portion of your private equity interests before a liquidity event can mean a greater gift to charity
Do you own private equity interests in a portfolio company nearing a liquidity event or a fund currently winding down? Donating a portion of your interests to charity could result in two significant benefits:
There’s another upside to donating private equity to a public charity with a donor-advised fund program, such as the Fidelity Charitable Giving Account—the opportunity to recommend how the contribution is invested and potentially grow it tax-free, ultimately providing greater charitable/philanthropic support.
1Fair market value of the appreciated securities as determined by a qualified appraisal, held more than one year.
2This assumes all realized gains are subject to the maximum federal long-term capital gains tax rate of 20% and the Medicare surtax of 3.8%, and that the donor originally planned to sell the stock and contribute the net proceeds (less the capital gains tax and Medicare surtax) to charity.
Consider this example. Ellen is a managing director at a private equity firm. The firm that she works for distributes portfolio company stock to their managers as part of their structure. As such, among other assets she owns, she has non-publicly traded stock3 from ABC Company (a portfolio company of the firm). Her firm is getting ready to sell ABC Company, and Ellen would like to donate a portion of her interests before the sale.
3This assumes C-corp stock with no Unrelated Business Income Tax (UBIT).
4This assumes all realized gains are subject to the maximum federal long-term capital gain tax rate of 20% and the Medicare surtax of 3.8%. This does not take into account state or local taxes, if any.
5Fair market value of the appreciated securities as determined by a qualified appraisal, held more than one year.
Building upgrades and new books for a library and community center in an underserved community.
Supporting a free after-school program, serving at-risk kids.
Ellen loves giving back and wants to find the most efficient way to make a difference to a whole community. As a managing director at a private equity firm and the general partner (GP) for several PE funds, she’s in the perfect position to do it.
Ellen’s firm is preparing to exit ABC Company. She owns four distinct non-publicly traded assets that may be candidates for charitable giving:
From her four options, Ellen chooses to donate shares in ABC company before it is sold. These shares are part of a privately held C-corporation.
She calls Fidelity Charitable well in advance of the sale to arrange the donation. Her contribution of non-publicly traded assets offers two significant tax efficiencies. First, her gift is magnified by minimized capital gains taxes. Instead of giving $3.8 million, she’s able to contribute $5 million, all because she chose to donate pre-sale shares. She will also be entitled to a fair market value tax deduction on the shares.6
Working with Fidelity Charitable allowed her to support a free after-school program, in addition to a brand new community center. This one simple change will affect the lives of families for years to come.
6Fair market value of the stock as determined by a qualified appraisal, held for more than one year.
This hypothetical case study is provided for illustrative purposes only. It does not represent an actual donor, but is meant to provide an example of how a donor-advised fund can help individuals give significantly more for the causes they care about.