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.