Q&A: Why and How to Donate Non-Cash Assets Part I: Why Help Clients Donate Appreciated Assets?Learn more about this firm
Non-cash assets provide a powerful way for clients to increase the impact of their charitable giving and maximize tax benefits at the same time. However, many investors are still confused about the advantages of donating non-cash assets such as publicly traded stock or real estate, instead of giving cash, a check or by credit card. Offering expertise on this topic presents an opportunity to educate clients, deepen your relationships with them and help them increase their giving by as much as 20%.
To discuss how to take advantage of these opportunities, Fred Kaynor, Schwab Charitable’s Vice President of Business Development and Marketing, sat down with Denise Schuh, Director of Charitable Strategies. Below is Part I of the conversation, which focuses on how donating non-cash assets can fit into a broader financial plan, and considerations for clients to keep in mind before donating. Next week, Part II will dig into more nuanced considerations when donating specific types of non-cash assets, such as restricted stock and private company stock.
Denise, how exactly do non-cash assets maximize the impact of charitable giving and philanthropy?
If clients contribute non-cash assets to a donor-advised fund or other charity, in most cases, the full fair market value is tax deductible and there’s no capital gains tax when the asset is sold, compared to selling the assets first and paying capital gains tax. This means clients can donate up to 20% more to their favorite causes, and that creates a much bigger impact than just donating the cash from the sale.
Are there any other reasons to help clients give non-cash assets to charity instead of cash?
Definitely. There are three main benefits that generally attract donors: diversification, estate planning, and managing the taxes that result from a windfall.
First, diversification. It’s a benefit that donors often mention because much of America’s wealth is in non-cash assets. It’s not in cash and those assets may be illiquid, especially for wealthier individuals. For example, business owners often have a significant portion of their wealth concentrated in private business. At some point, they generally want to diversify that wealth, either for estate planning, or simply because they don’t want all of their eggs in one basket. Since interests in private businesses are usually highly appreciated, selling those assets generates capital gains tax. Working with a business owner client to contribute a portion of the assets to a donor-advised fund or another charity helps manage the taxes and simultaneously supports their favorite causes.
Estate planning is another big benefit. Moving assets from a client’s estate when they’re illiquid or expensive to maintain can reduce taxes and the financial complications for heirs. Common examples include art collections and real estate. If you have a client with a taxable estate and a significant amount of wealth in real estate holdings, you may consider helping them contribute part of those holdings to fund their charitable legacy while reducing their taxable estate. That way their heirs won’t have to sell illiquid holdings in a fire sale to pay estate taxes.
Finally, windfalls. You may have business owner clients who are planning an initial public offering, merger, or acquisition, and all of those create wealth and generate taxes. Advisors who see a liquidation event on the horizon for clients may consider helping them contribute a portion of their ownership stake to a donor-advised fund in order to help offset any capital gains tax. Typically, donor-advised funds will help manage the liquidation of non-cash assets for donors and then deposit the proceeds into their donor-advised fund account.
Now that we understand the rationale from a financial planning perspective, is there anything advisors and donors need to keep in mind if they plan to give non-cash assets to charity?
Yes. Once again, three is the magic number. In this case, the main considerations are timing, debt, and appraisals.
First, timing is important. Donors cannot have a legally binding agreement to sell the asset to a particular buyer before the asset is donated. The Internal Revenue Service (IRS) calls this a prearranged sale, and if it does fall into that definition then the IRS may require the donor to report the income from the sale, and so they lose the benefit of potentially avoiding capital gains tax. If a sale is expected, the terms of the sale should still be under negotiation. And to obtain full tax benefits, the assets really need to be held for more than one year before they’re donated. The more highly appreciated the assets, the better for charitable giving. Donating client assets held for less than a year or depreciated assets does not have the same tax advantages.
The second consideration is debt. Clients may ask about donating real estate, and some of that real estate may have a mortgage or a lien. The thing to remember is that debt is not tax deductible. Any debt on a donated asset, like a mortgage, will need to be reported by the donor as income. Then, only the equity in the property can be used to claim the client’s deduction.
The third consideration is that clients will need a qualified appraisal of the non-cash asset. This takes time to arrange and they can’t pay for it out of a donor-advised fund. There are specific requirements that the IRS has for both the qualified appraisal and the appraiser who is performing it. Make sure your clients are following those requirements in order to claim their deduction.
Stay tuned for Part II of this Q&A to learn about considerations for donating specific types of non-cash assets, and how advisors can use charitable planning to deepen client relationships and grow the practice.
Schwab Charitable is an independent 501©(3) non-profit whose mission is to increase charitable giving in the United States. Visit schwabcharitable.org for more ways to help clients have more impact with their charitable giving and maximize their tax benefits.