Years of experience have taught you how easy it is to give cash, or even appreciated securities, to your favorite charities. But what if you'd like to donate an interest in a limited partnership? Chances are, you'll need professional help to accomplish such an act of philanthropy.
Donations of such "complex assets" are on the rise. We're talking about things including commercial and residential real estate, privately held company stock, artwork, and even patents and mineral rights. Experts who handle these kinds of transactions have seen such unusual donations as Canadian Maple Leaf coins, bushels of soybeans, timber deeds, Web domain names, red wine and a partial interest in the Minnesota Vikings.
But you can't just hand over a share in your family business -- it's not something a typical charity wants in its portfolio. You usually need an expert to make sure there's a buyer, liquidate the holdings and hand over the cash to the charity.
The benefit for donors: big tax savings. Assuming you have owned the asset for more than a year, you'll earn a charitable deduction of the current fair market value of the property. You can deduct up to 30% of adjusted gross income in the year of the gift, and any excess can be carried forward for five years.
Of course, you also avoid paying the capital-gains taxes that would be due if you sold the asset rather than gave it to charity. Many of these assets are highly appreciated -- for the owner of a small business, the original cost of shares in a company could be zero.
The increase in donations of complex assets is driven in part by retiring baby boomers. "The aging baby boomers have grown their businesses and many are looking to sell" and give part of their interests to charity, says Karla D'Alleva Valas, managing director of the complex asset group at Fidelity Charitable, a large donor-advised fund. In the first half of 2014, donations of complex assets to Fidelity Charitable more than doubled, to $100 million, compared with the same period a year earlier.
Most small charities do not have the know-how to handle gifts other than donations of cash and stock. Depending on the type of asset, the easiest route to donate illiquid property is through a donor-advised fund or a community foundation that has expertise in accepting donations of complex assets, including handling the legal review of documents and IRS reporting. "We receive the asset, do the compliance and get it sold," says Bryan Clontz, president of Jacksonville, Fla., consulting firm Charitable Solutions, which is the administrator of the Dechomai Foundation, a donor-advised fund. Charitable Solutions also helps process complex-asset donations for smaller charities.
In the case of artwork or certain types of real estate, some museums or universities will accept direct donations. But you will still need an expert to help with the valuation and transfer.
The Rules Are Complex
You can blow the tax break if you don't follow the rules precisely. Say you intend to give a charity part of your interest in a small company that you're selling. If you have a buyer lined up, seek advice of an expert before signing on the dotted line. The IRS requires that an owner of a closely held business must donate the shares before there is a signed purchase and sale agreement. "You can't give the assets away after there's been a done deal," Valas says.
Donors also need to follow the rules on appraisals. For noncash gifts worth more than $5,000, you need a qualified appraisal, which must be dated no earlier than 60 days before the date of the donation and no later than the filing date of your tax return for the year of the gift. You'll need to attach Form 8283 to your Form 1040 to document the fair market value.
In many cases, a donor will give just a fraction of an asset to charity. Say you have $12 million in shares in a small business that you own and you want to donate $4 million worth of the shares to a donor-advised fund. The charitable group first reviews the governing documents of the business to make sure there are no restrictions on the sale and donation. For the year of the donation, you will get a charitable tax deduction for the shares' fair market value. Meanwhile, you sell the remaining $8 million in shares and pay capital-gains tax on any profit. The donor-advised fund sells the donated shares you have given it, and you direct how the proceeds will be distributed to your favorite charities.
A donor-advised fund or community foundation will not take just any asset. The charitable group wants to make sure there's a market for the asset before it will accept it. "We want to liquidate the asset as fast as we can," says Kate Guedj, vice-president for development and donor services for the Boston Foundation.
If the owner doesn't have a buyer in mind, the charitable group will often help find one. Guedj recalls the case of a shareholder of a family business who was retiring and wanted to donate the value of his interest to a local nonprofit. The nonprofit did not have the expertise to handle complex assets, and it asked the foundation to engineer the sale of the donor's interest. "With these kinds of businesses, the retiring shareholder wants to sell to remaining members of the family," Guedj says. "We had to make sure the other shareholders were interested."
Sometimes the sale falls through after the donor-advised fund or foundation gets the property. The donor still gets the tax break based on the fair market value at the time of the donation, but it becomes the charity's problem to manage and sell the property. "We have real estate we've owned for eight years," Clontz says. "It was supposed to sell in 30 days."
In many cases, you can make the donation of property directly to the charity. Bobby Stover, a certified public accountant who advises family businesses for Ernst & Young in Houston, helped arrange the donation of mineral rights to a university foundation in Texas. Stover says the foundation has staff that specializes in handling mineral rights, which generate a stream of income for the university.
When it comes to artwork, the size of your tax deduction depends on the charity's mission. A donor can generally deduct the full fair market value of the artwork if the charity uses it for its charitable purpose, such as a museum exhibiting a donated painting. If instead you give the painting to a homeless shelter that then sells it, your deduction is the lesser of the market value or the amount you paid for it.