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Charitable Planning 201: Donating Complex Assets

Many wealthy individuals and families, who hold highly appreciated publicly traded securities in their portfolios, have discovered that they can increase the tax efficiency of their donations to charity by giving these securities directly to the charity, rather than selling the securities and giving the cash proceeds of the sale to the charity. A gift of appreciated securities has two key advantages over a gift of cash. First is the fair market value (FMV) tax deduction which gives donors the ability to donate appreciated securities held for more than one year to a public charity (501(c)(3) nonprofit organizations) and take a charitable income tax deduction for the full market value of these securities. Second is the fact that charities do not pay capital gains taxes. The charity that receives the securities can sell them and will generally not have to pay capital gains tax, thus increasing the size of the charitable gift substantially. The more appreciated the securities, the greater the tax efficiency.

 

Here is a hypothetical example of how this tax efficiency works. Let’s say that a couple purchased XYZ stock 10 years ago for $50,000 and now this holding has a FMV of $200,000. If they sell the stock and donate the cash proceeds to charity, they will pay a combined federal tax and surtax of $35,700 (23.8% combined rate) on the $150,000 of long term capital gain. After paying the tax and surtax, the couple will have $164,300 remaining to give to charity and this amount will be their income tax charitable deduction. If, however, the couple donated the stock directly to a charity, the charity will in all likelihood not have to pay capital gains tax when it sells the shares. The couple can take a charitable income tax deduction for the full $200,000 value of the stock. The charity also receives the full $200,000 in value, so an additional $35,700 goes to the charity (and the donors’ tax bill is reduced by the same amount).

 

Donating publicly traded stocks can certainly increase the impact of an individual’s charitable giving, but may not be that person’s most efficient way of doing so since these assets may not be the most appreciated assets they own. Given the entrepreneurial success of the baby boomer generation and the proliferation of alternative investments available to individual investors in recent years, the most appreciated asset in a portfolio will often be a non-publicly traded asset. This asset group (often called “Complex Assets”) includes private C corporation stock, S corporation stock, limited partnership interests, LLC interests, real estate, oil and gas interests and in the venture capital and private world, “carried interest”. Donating complex assets requires more work than donating cash or publicly traded securities, but has several advantages. These assets often have a very low cost basis (original cost) and a significant current market value, which would generate a large capital gains tax if sold. For entrepreneurs who have founded companies, the cost basis may be close to zero. When an asset like this is donated to charity, the donor not only eliminates his or her capital gains tax exposure (as in the sale of a publicly traded security), but is also generally entitled to a tax deduction for the full current market value based on a qualified appraisal.

 

Not all charities have the administrative resources to accept and liquidate non-publicly traded assets. Those charities that can accept these assets and also have a donor-advised fund (DAF) program (like the charitable arms of Fidelity and Charles Schwab and most community foundations) offer a particularly cost effective and flexible solution for donors. Donors can take advantage of the tax efficiencies associated with making the donation and can diversify grants from one charitable donation to as many different public charities as they want. The charity receives a grant from the DAF without having to deal with the complications involved in a complex asset donation.

 

There is additional benefit of using a DAF when donating a complex asset to charity when the alternative is using a private foundation (many potential donors of this type of asset have formed a private foundation, believing that a privately held asset would be the ideal contribution to the foundation.) If a complex asset is given to a private foundation, the donor’s charitable tax deduction would generally be limited to his or her basis in the asset, not its FMV. For a business founder or early investor, the tax basis in such an asset is often negligible. In the case of most complex asset donations, a DAF is a much better vehicle since the donor can fully leverage all the available tax advantages.

 

Much of the wealth transferred in the U.S. is held in non-publicly traded assets. Until recently, these assets have represented a largely untapped source of funding for charitable activity. Yet the tax advantages of donating this type of asset may allow the donor to give substantially more than they otherwise could. Because a donation of complex assets is one of the most impactful ways to give, we are going to explore the subject in future blogs through a series of case studies designed to help identify circumstances that represent good candidates for this type of giving.

IMPORTANT DISCLOSURE

 

Altium Wealth Management LLC (“Altium”) is an SEC registered investment adviser with its principal place of business in the State of New York.  Registration does not imply a certain level of skill or training.  For information pertaining to the registration status of Altium, please contact Altium or refer to the Investment Adviser Public Disclosure web site (www.adviserinfo.sec.gov).  This document is provided for informational purposes only and represents only a summary of the topics discussed.  The contents should not be construed as personalized investment advice or recommendations.  Rather, they simply reflect the opinions and views of the author(s).  You should seek advice from a financial advisor that is familiar with your individual circumstances before taking any action based on the contents herein.  Past performance is no guarantee of future results.  there can be no assurance that any particular strategy or investment will prove profitable.  Investing in the stock market involves gains and losses and may not be suitable for all investors who risk the loss of all amounts invested.  Information presented herein is subject to change without notice.

 

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