Charitable Planning Opportunity: Donate Private Equity Fund Interests

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Private equity funds often incur significant value over time, and may face taxable distribution. For philanthropically minded clients, illiquid assets such as these that have appreciated in value can be among the most tax-advantaged items to contribute to charity.

By donating highly appreciated private equity fund interests to a public charity, including a donor-advised fund, clients can take a full, fair market value income tax deduction—as determined by a qualified appraisal—for the donation while also potentially eliminating tax liability on fund distributions. Contributions of illiquid assets to a private foundation would generally be deductible at the lower of cost basis or market value.

Depending on the size and complexity of the private equity fund, it may be possible to donate a limited partnership interest in the fund directly to a donor-advised fund, yielding maximum benefits to charity. These donations must be approved by the private equity fund’s general partner and accepted by the donor-advised fund provider. Upon completion of the gift, donors are eligible for a fair market value income tax deduction, as determined by a qualified appraisal.

The following considerations are important to keep in mind when donating private equity interests to charity:

  • Private equity fund general partners typically oversee transferability of fund shares, and clients, or their advisors, who wish to donate a portion of their investment to charity can work with the general partner to achieve this goal. In some cases, general partners have established charitable giving programs to enable their investors to achieve their philanthropic goals by permitting charitable transfers of partnership interests or distribution of portfolio company stock prior to a sale. Such programs require the active involvement of the fund’s general partner, may be complex, and take time to establish, so initiating discussions well in advance of a liquidity event is critical.
  • The charity or donor-advised fund provider will generally not assume liabilities associated with these investments. Clients should plan to contribute sufficient liquid assets to cover granting as well as private equity fund open commitments, unrelated business income tax (UBIT) or other liabilities.
  • The donor's fair market value tax deduction will be determined by a qualified appraisal of the contributed interest.
  • In order to realize the full value of the investment, the charity or donor-advised fund provider must normally be able to hold the private equity interests until the scheduled termination date or liquidity event. Sales of these interests in the secondary marketplace prior to this may be subject to steep discounts.
  • If the fund carries debt, the donor may be liable for taxes if the contribution is treated as a bargain sale.

Case Study—Contribution of Seasoned Private Equity Fund

A successful entrepreneur retires from his firm to dedicate himself full time to preserving wild spaces in America. He meets with his advisor to identify portfolio holdings he can tap to fund his philanthropic effort. His advisor suggests donating limited partnership interests in several private equity funds which have completed their investment stage and will soon begin realizing and distributing gains on long-held portfolio companies. By donating these fund interests directly to charity, the entrepreneur can potentially eliminate capital gains tax liability on the distributions, thereby preserving a larger amount for his philanthropy.

The advisor recommends that the client open a donor-advised fund with a provider that is willing and able to accept this type of asset and hold it until fully liquidated. The entrepreneur follows this advice, and his advisor coordinates the transfer of ownership to the donor-advised fund account. The following month, two of the funds make substantial distributions and the entrepreneur begins to recommend grants to charitable environmental programs. He is eligible for a fair market value deduction (as determined by a qualified appraisal).

This is the sixth article in a series on donating non-cash assets to charity. For more information on this topic, read about donating appreciated stock, IPO shares and restricted stock, real estate, and private business interests. Visit schwabcharitable.org for additional ways to help clients have more impact with their charitable giving while maximizing their tax benefits.

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Gifts of appreciated private equity can involve complicated tax analysis and advanced planning. The above article is meant only to be a general overview of some of the considerations and is not intended to provide tax or legal guidance. If you would like to consider a donation, please consult with your tax advisor. *Hypothetical case study, for illustrative purposes only. Assumes cost basis of $2,000,000, that the investments have been held for more than a year and that all realized gains are subject to the 20% federal long-term capital gains tax rate plus the 3.8% Medicare net investment income surtax. Does not take into account any state or local taxes. †Gifts to

*Hypothetical case study, for illustrative purposes only. Assumes cost basis of $2,000,000, that the investments have been held for more than a year and that all realized gains are subject to the 20% federal long-term capital gains tax rate plus the 3.8% Medicare net investment income surtax. Does not take into account any state or local taxes. †Gifts to

†Gifts to charity of private equity fund interests are typically deductible at fair market value, as determined by a qualified appraisal for donated interests with a value exceeding $5,000. Such valuations may be subject to discounts or premia depending on the current market for the interests and projected cash flow. Such discounts/premia vary widely. A 10% discount was assumed for this example. The example assumes there are no liabilities associated with the interests. The example assumes full deductibility (gifts to a public charity are generally limited to 30% of AGI with a 5-year carryover of unused amount).

‡Assumes donor is subject to the maximum 39.6% federal tax and does not account for state or local taxes. Certain federal income tax deductions, including the charitable contribution, are available only to taxpayers who itemize deductions, and may be subject to reduction for taxpayers with adjusted gross income (AGI) above certain levels. In addition, deductions for charitable contributions may be limited based on the type of property donated, the type of charity, and the donor's AGI.

**Donor tax savings = value of deduction minus capital gains tax paid.

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