Most of us are accustomed to donating cash, checks or credit cards to make gifts to our favorite causes. But, cash equivalent donations are usually the least effective of all giving options. They create a higher tax bite for donors and result in less money for the receiving charities.

Assets that have appreciated in value can be among the most tax-advantaged items to contribute to charity because they both enable a current-year tax deduction and allow donors to avoid payment of capital gains taxes on their sale. The donor pays lower taxes and the charities they support receive the most money possible.

Annual tax planning and life transitions – including wealth creation, a change in jobs or retirement – can put assets in motion and create a tremendous opportunity to address philanthropic goals with various asset types. Unfortunately, not all charities have the resources or capabilities to accept gifts of appreciated investments directly.

That’s where donor-advised fund accounts can come in handy. These charitable accounts, offered by many financial institutions and community foundations, allow donors to more easily convert appreciated investments into tax-effective charitable contributions. This is because the sponsoring charity may have more experience with these types of gifts and can be in a better position to evaluate prospective contributions of appreciated property and liquidate the property once it is donated.

If you simply transfer the investment into the donor-advised fund account, you obtain a fair market value tax deduction on the date of transfer. Donors pay no capital gains tax when the investment is liquidated, and the cash proceeds can then be invested and you can recommend grants to your favorite charities immediately or over time at your convenience. At Schwab Charitable, one of the largest national donor-advised funds, 65 percent of contributions in the last fiscal year were in the form of appreciated assets.

Publicly Traded Securities

Shares of appreciated publicly traded securities, such as stocks and mutual funds, are straightforward assets to donate to charity. For maximum tax benefit, shares must be held for more than one year and should be transferred directly to the charity or donor-advised fund account. Selling the stock first will trigger capital gains taxes. Appreciated securities held for more than one year are generally deductible at fair market value without recognizing any capital gain. 

Shares in an initial public offering are treated similarly, and can make a tremendously effective charitable gift since they are often highly appreciated. Discounted valuations can apply depending on the associated lock up period and timing of the gift.

Donated, publicly traded partnerships – in particular master limited partnerships (MLPs) – are an important exception to the typical fair market value deduction for long-term gain securities, as the charitable deduction must be reduced by the amount of ordinary income that would have been realized if the property had been sold at fair market value on the date contributed. For MLPs with substantial accumulated depreciation, this can greatly reduce the charitable deduction. Additionally, if the partnership carries debt (often the case with MLPs), the donor may be liable for taxes if the contribution is treated as a “bargain sale.”

Restricted Stock

Executives with concentrated and restricted positions in public company stock may think about donating shares to help protect against tax exposure in their portfolios. If the executive is subject to Rule 144 public sale restrictions, and/or is considered a “control person” in the company, the company’s general counsel must give permission to transfer and later sell the shares at acceptable times.

Contributions of restricted stock to a charity or donor-advised fund account are generally deductible at fair market value on the date of contribution, but may be subject to discount based on the specific restrictions. If donated to a private foundation, contributions of restricted stock are generally deductible at the lower of cost basis or market value. A qualified appraisal is generally required to substantiate fair market value.

Real Estate

According to the U.S. Federal Reserve’s 2013 Survey of Consumer Finances, more than 40 percent of Americans with the highest net worth own residential property other than their primary home. More than a third have interests in commercial property. It can make sense to donate real estate that meets the following criteria:

•       The property has been held for more than a year and has appreciated significantly.

•       The property is generally debt-free, marketable and relatively easy and cost-effective to liquidate.

•       The owner is willing to transfer the property irrevocably to the donor-advised fund, which will negotiate the sale price and control the sale, often using an experienced intermediary.

These criteria most often apply to donations of a primary or secondary home or other residential property held for some time. While commercial real estate may also be donated under certain circumstances, the donation may involve legal complications if tenant or lease issues are involved.

Contributions of real estate to a charity or donor-advised fund account avoid capital gains tax on the sale and are generally deductible at fair market value—as determined by an independent qualified appraiser—on the date of contribution. Contributions of real estate to a private foundation are generally deductible at the lower of cost basis or market value.

Privately Held Stock (C-Corp And S-Corp)

Sales of family businesses or privately held companies can create tax planning and philanthropic opportunities. Donating a portion of the shares to a charity or donor-advised fund account before the sale can help to reduce the tax burden and enable more to be given to charity.

You must obtain a qualified appraisal of the shares to substantiate the charitable deduction claimed. Appraisals must be obtained no earlier than 60 days before the date of donation and no later than the date of the donor’s tax return (including extensions) for the year of the gift. Appraisals depend on the facts and circumstances at the time of contribution and may be discounted for lack of marketability or the presence of a minority interest. Indebted interests may trigger negative tax consequences for donors and recipients.

The company’s shareholder agreements and other governing documents must be reviewed to understand transfer restrictions, timing, and process to complete the charitable transfer. The terms of the sale should still be under negotiation. The documentation must not have proceeded to the point at which the IRS would consider it a prearranged sale. That could result in the donor bearing the tax liability for any gain on the sale. If the sale is not completed, the charity or donor-advised fund account controls the contributed shares.

After a gift of S-Corp stock is made but before the sale is completed, the charity or donor-advised fund account will generally be subject to unrelated business income tax on its gain from the sale and any income generated during its ownership. The charity or donor-advised fund provider will generally use the proceeds of the sale to pay these taxes, and may escrow a portion of the proceeds in a separate account for three years to match the IRS “look back” period, during which the IRS can challenge the cost basis of the shares and the taxes paid.

Contributions of privately held stock to a charity or donor-advised fund account are generally deductible at fair market value on the date of contribution, whereas such contributions to a private foundation are generally deductible at the lower of cost basis or market value.

Limited Partnerships Or Limited Liability Corporations (LLCs)

Limited partnerships and limited liability corporations generally have the same deductibility rules, holding-period considerations, and adjusted-gross-income limits as privately held stock. Illiquidity and minority discounts may apply to the appraisal.

Unless the interest can be sold back to the entity, a sale may be difficult to arrange. If the interest can be sold, the charity or donor-advised fund provider will negotiate the sale price and control the sale using an experienced intermediary. Partnerships and multi-member LLCs are taxed as flow-through entities; thus, if they engage in an active trade or business or have acquired assets with debt, the income earned by the charity or donor-advised fund account may be subject to unrelated business income tax. The complexities of flow through entities make it important to consult a tax advisor prior to donating an interest in one.

As with publicly traded partnerships, gifts of indebted interests may trigger negative tax consequences for donors and recipients, and the charitable deduction must be reduced by the amount of ordinary income that would have been realized if the interest had been sold at fair market value on the date contributed. 

Private Equity, Venture And Hedge Fund Investments

By donating highly appreciated alternative investments to a charity or donor-advised fund account, you can take a full, fair-market-value tax deduction—as determined by a qualified appraisal—for the donation while also avoiding capital gains tax on the sale. Contributions of similar assets to a private foundation would generally be deductible at the lower of cost basis or market value.

The charity or donor-advised fund provider should be able to redeem or sell the interest. Most hedge fund interests can be redeemed periodically at net asset value. Minority limited partnership interests in private equity funds are highly illiquid until fully realized and redeemed by the general partner. Sales of these interests in the secondary marketplace are often subject to steep discounts.

Some charities and donor-advised fund providers may be able to hold private equity or venture fund interests until scheduled termination dates in order to realize full value of the investment. The charity or donor-advised fund provider will generally not assume liabilities associated with these investments. Individuals should plan to contribute sufficient liquid assets to cover granting as well as private equity fund open commitments, unrelated business income tax, or other liabilities.

Collectibles And Artwork

Gains on sales of collectibles and artwork by individuals are currently taxed at a higher rate than other long-term capital gains. A donation can help you avoid this tax liability. If the receiving charity puts the artwork or collectible to a use related to its charitable mission, such as an art museum displaying a donated piece of art, the gift may be deductible at the fair market value. Gifts to charity or donor-advised fund accounts for an “unrelated use,” such as selling a collectible for cash proceeds, are deductible at the lesser of the cost basis or fair market value.

Gifts of appreciated property can involve complicated tax analysis and advanced planning. The general overview of these issues above is not intended to provide tax or legal guidance but to highlight the idea that giving appreciated assets (rather than cash) to charity can be an important component of a tax-smart financial plan. With the appreciation in asset values over the last few years, it’s a good time to turn that good fortune into generosity.

Kim Laughton is president of Schwab Charitable, a donor-advised fund that facilitated $928 million in grants to 48,000 charities in 2014.