Timing is crucial in this sort of donation, and it's never too early to start the discussion with clients. This is important for advisors who want to work with high-net-worth individuals whose businesses are a major component of their wealth. Donors trying to sell their business to interested buyers might often be in a hurry, and the charity might be thirsty for donation dollars. But the assets have to be donated at a point in the negotiations when there is still a good chance that the deal could fall through for the IRS to OK it, not after the deal is done, at which point it has become a taxable event for the donor. More specifically, the gift should be given in the deal negotiation stage and before the terms are finalized, the terms being things like shareholder approval, the price per share, the closing date and closing conditions, indemnities, earn-outs and escrow arrangements, etc. Otherwise, the agency may consider the gift to be an anticipatory assignment of income to the charity. So advisors have to start talking with the charitable organization early, giving the charity time to perform its due diligence, including the review of all relevant documents-shareholder agreements, partnership agreements and draft M&A documents, says Karla Valas, managing director of Fidelity Charitable's Complex Asset Group.
"The key is that the donor must have completed an irrevocable legal transfer of the complex asset before a corporate transaction is considered a 'done deal'" says Valas. Moreover, the donor can't exert control over the asset once the donation is considered complete, including decisions by the charity about whether to and/or how and when to dispose of the contributed asset.
If a client is selling his business, an extremely likely event as wealthy baby boomers retire, advisors need to start this conversation early in anticipation of the several weeks or so of vetting required.
Schwab and Fidelity both say this method allows the donor to take a difficult-to-value asset at a time a donor might need an exit strategy from his business, and then divide up proceeds among several charities that don't have the due diligence apparatus to handle such gifts on their own. Instead of one big charity getting it, it's possible many small ones can.
Donor advised funds often see unusual assets donated, anything from parts of sports teams, coin collections, artwork, wine collections, pieces of land and other things that are difficult to value. Once a donor even gave away a seat on the New York Stock Exchange.
Advisors more finessed in these techniques will like find themselves better positioned with high-net-worth clientele, says Danforth.
"What we have seen is an increase in advisors who are becoming more knowledgeable in this area," she says. "And if you follow the ultra-high-net-worth research, business ownership and exit planning for business is growing as a practice, and the philanthropic element of that is part and parcel of that planning."