Donating non-cash assets is an attractive option for high-net-worth individuals who want to be charitable during a period when prudent financial planning calls for cash preservation.
Often referred to as alternative or complex assets, non-cash assets such as real estate, restricted stock and collectables offer donors creative options for fulfilling their philanthropic goals, maintaining liquidity, reaping tax benefits and unloading the trappings of the previous decades’ conspicuous consumption.
In a conversation with Bryan Clontz, president and co-founder of Charitable Solutions, LLC—a planned giving risk management consulting firm— and an expert on the receipt and disposition of non-cash assets, we examined this underused giving strategy.
When does it make sense to use non-cash assets in charitable giving?
It makes the most sense when a charitably inclined person has long-term capital gain assets with very low adjusted tax basis. It is nearly always better to give these assets than cash. In short: cash is bad; highly appreciated, long-term-gain assets are good.
What kinds of assets can donors give?
Assets like real estate tend to represent about 65% of all the non-cash donations (including LLC and LP interests holding real estate). Although real estate represents nearly 50% of privately held wealth, only 2% of all charitable gifts are real estate. Closely-held stock represents about 25% and then miscellaneous assets—like artwork, collectables, oil and gas interests, etc.
One common myth is that advisors think the donors have to give the entire interest away. In my 20 years, about 75% of the donations are partial interests. So a donor might give a 35% undivided interest in a farm, or a 3% interest in a closely held business.
What kinds of charities accept non-cash assets? Are there particular assets that are considered more attractive to organizations?
The vast majority of non-cash assets are received by the top 1% of charities (e.g. hospitals, universities, commercial donor-advised funds, etc.). These are typically larger, more sophisticated organizations with considerable experience handling these types of assets.
Most of these organizations are interested in assets that can be converted into cash very quickly, meaning that there are no management, environmental or other complicated issues with which the organization will need to contend. For example, charities do not want to spend precious resources maintaining a collection.
What factors should donors consider prior to donating non-cash assets?
Donors need to make sure that the tax consequences of the donation are clear prior to going forward with it. They should also be clear on the recipient organization’s process and fees for handling the donation. The fact of the matter is that most charities take about two months to complete the entire acceptance process. When donors are not expecting such a lengthy procedure they can become frustrated and may decide not proceed with the gift. In the case of real estate, donors need to make sure that they do not have a legally binding contract in place to sell the property prior to making the donation. Donors should also consider the timing of the donation. If the asset has the potential to greatly appreciate in the future, donors might want to hold off on making the donation immediately. Finally, the donor needs to work with an experienced charity or consultant specializing in non-cash asset gifts to make sure their process and due diligence is thorough and tax compliant but not overly burdensome.
What are the tax implications for such donations?
For the majority of the cases, these assets are treated pretty much like publicly traded stock. The donor is able to receive a full fair market value deduction subject to 30% of AGI in the first year, and any excess can be carried forward an additional five years. And, of course, there is no capital gains tax at the time of sale. The major exceptions to this rule are tangible personal property donations, S-corp shares and other partnership interests with debt. But donors should realize that these assets can still work well in many cases.
For example, one of the most commonly donated assets is artwork. Donors receive a cost basis deduction, but their real motivation for giving is downsizing stuff, eliminating the 28% capital gains tax on collectables (plus state income taxes) and using the sales liquidity to pre-fund future giving. So a donor could give a $200,000 painting to a museum and receive the full fair market value deduction. She could also donate the painting to a donor-advised fund and receive a $50,000 deduction but then eliminate the gains tax and have $200,000 in a liquid giving fund after the sale. Many donors choose the latter option.
Similarly, S-corporations are complicated because of unrelated business-income tax on any pre- and post-contribution capital gain as well as any income during the holding period. We actually created a public donor-advised fund in trust form as a way to reduce the typical unrelated business-income tax from a typical 40% if received by a corporation to only 7.5% in the more tax-efficient trust structure.
At first glance, these gifts might not seem conducive for donations, but once all the goals or planning strategies are put together, they can still be extremely beneficial.
How should such donations be documented —both for the client’s tax purposes and to ensure the donation is used appropriately by the recipient organization?
To substantiate the charitable income tax deduction, the donor must hire a qualified appraiser to complete an appraisal within a defined time period. The appraiser will complete Form 8283 so the donor can attach it to the 1040. The charity will provide a tax acknowledgment letter describing the property and the date contributed. If the property is sold within three years, the charity must complete the “tattle-tale” Form 8282 informing the IRS of the gross sales price.
For donations of tangible personal property—anything you can touch and move—the charity must provide an additional letter saying that they intend to use the property exclusively to support its charitable mission (e.g., paintings to a museum for display).
Cash is Not Always King
Recent surveys of high-net-worth clients by Fidelity Charitable have indicated that while the affluent are concerned about wealth preservation and supporting their lifestyles in retirement, the vast majority plan to maintain, and in some cases even increase, the amount they give to charity in the coming year. Unfortunately, too many of them are unaware of the non-cash strategies they could use to advance their philanthropy without affecting their cash flow or lifestyle. In fact, Clontz asserts that 97% of charitable gifts are made out of cash. With increased education about the potential for non-cash assets to be used for philanthropic purposes, advisors can achieve a “win-win” for clients looking to maximize tax benefits while benefiting the causes they care about.
Meg Lassar is an advisor with Strategic Philanthropy Ltd., a global philanthropic advisory practice based in Chicago serving clients worldwide. The firm works with individuals, families, and closely held and family-owned businesses to help them plan, assess and manage their charitable giving.