Why Your Clients’ Investments, Not Cash, Make the Best Charitable Gifts

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What might a stock holding, a piece of real estate, shares in a privately held company, interests in private equity, venture or hedge funds, and fine art or collectibles have in common? Whether purchased for love or investment purposes, they can help your clients realize the maximum tax benefits from their charitable giving.

Before selling them, it's vital to understand how appreciated assets can be an important part of a philanthropic wealth management strategy. Assets that have appreciated in value can be among the most tax-advantaged items to contribute to charity because donors can enjoy a current year tax deduction and potentially eliminate capital gains tax liability on their sale. This allows clients to pay lower taxes and allows the charities they support to receive the most money possible.

Yet most Americans and many advisors may not be aware of the benefits of contributing these types of assets. Only 26% of high net worth households give appreciated investments to charity, while 93% make donations using cash or checks.*

This may be because 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 you to more easily convert appreciated investments into tax-effective charitable contributions. Donor-advised fund providers 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.

Once donors transfer investments to the donor-advised fund account, they generally qualify for a fair market value tax deduction on the date of transfer.1 They pay no capital gains tax when the investment is liquidated, and the cash proceeds can then be invested for potential growth. Donors can recommend grants to their favorite charities immediately or over time at their convenience.

If your clients are planning donations this year, consider exploring non-cash assets as a tax-smart way to fulfill their charitable goals. Here is some important information to keep in mind when donating appreciated assets to a charity or donor-advised fund account:

  • Publicly traded securities: For maximum tax efficiency, shares must be held for a year and transferred directly to the charity or donor-advised fund. When stock values are high, it may be an especially good time to donate stock.
  • Restricted stock: Your clients may have to seek permission from their company’s general counsel to transfer restricted stock and a qualified appraisal is generally required to substantiate fair market value.
  • IPO stock: The issuer’s counsel determines if charitable gifts of shares may be made during a lock-up period. Once the lock-up period expires, the charity or donor-advised fund controls the sale process.
  • Real estate: Homes or other residential property most often make the best candidates for charitable giving. If a sale is already under negotiation with a buyer, it should not have proceeded to the point at which the IRS would consider it prearranged.
  • Privately held business interests: Interests in C or S Corporations, Limited Partnerships, or Limited Liability Companies are generally appropriate to give to charity when a sale, exchange or buyback program will enable the charity to convert the illiquid interest to cash.
  • Private equity, venture fund and hedge fund interests: It may be possible to donate a limited partnership interest in a private equity fund directly to a donor-advised fund. These donations must be approved by the private equity fund’s general partner.
  • Collectibles and artwork: Gifts of collectibles and artwork to charity or donor-advised fund accounts for non-related use are deductible at the lesser of the donor’s cost basis or fair market value. Gains on sales of these assets by individuals are currently taxed at a higher rate than other long-term capital gains. A donation can help your clients eliminate this tax liability.

Watch for additional articles in this series on donating non-cash assets, and visit schwabcharitable.org for more ways to help clients have more impact with their charitable giving and maximize their tax benefits.

1 The article addresses gifts of appreciated assets that have been held for more than a year. The tax deduction for non-cash gifts to a public charity or donor-advised fund account may be used to offset up to 30 percent of adjusted gross income and can be carried forward for five years. The donor must file IRS Form 8283 for contributed securities valued at greater than $500. For gifts other than cash and publicly traded securities in excess of $5,000 ($10,000 for closely held stock), the donor must also obtain a qualified appraisal.

© Schwab Charitable

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