An insightful philanthropic plan and tax strategy takes into account the full breadth of a donor’s portfolio, including all non-cash and complex assets. With a thoughtful approach, these types of assets can be used to maximize charitable impact while minimizing tax liability.
Many portfolios contain less conventional forms of non-cash assets beyond marketable securities such as stocks, bonds and mutual funds. These are known as complex or illiquid assets and can include investments such as a partnership stake in a private company, a hedge fund interest or a real estate holding.
There are even less conventional sources, such as intellectual property or a painting by a famous artist.
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Unfortunately, most charities cannot directly accept illiquid assets (such as private company shares) and require a conversion of the asset into cash. However, liquidating an asset before donation negates a portion of the potential tax benefit to the donor.
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When a donor contributes an asset directly to a 501(c)(3) public charity, in addition to qualifying for a charitable tax deduction, they also avoid capital gains tax on the sale of the asset.
Fortunately, a donor-advised fund (DAF) with the expertise and scale to support complex liquidation can receive the asset, substantiate it and then liquidate it for granting to another charity.
There are several benefits to contributing complex assets into a DAF:
- Lessen capital gains on highly appreciated assets
- Rebalance your portfolio in a tax-efficient way
- Receive a tax deduction based on the asset’s appraised valuation
- Simplify the paperwork and administrative tasks that go along with complex asset donations
An example of what a DAF can do
Here’s a hypothetical example comparing liquidating assets and donating the proceeds to charity vs contributing the assets directly to a DAF for charitable giving.
Let’s say an individual owns shares of a private company worth $10 million with a cost basis of $1.5 million. In this scenario, if the individual liquidated the assets, they would likely owe more than $2 million in capital gains taxes. (This scenario was calculated by multiplying the capital gains of $8.5 million by the long-term capital gains tax rate of 23.8%.)
Alternatively, by contributing directly to a DAF, the donor would pay nothing in capital gains, in most cases.
Considering the financial impact, independently liquidating the assets and paying capital gains would reduce the charitable deduction to about $8 million, whereas using a DAF would allow for the full $10 million charitable deduction.
How to donate complex assets with a DAF
Contributing marketable securities and other traditional non-cash assets into a DAF is a relatively straightforward process. Stocks or bonds, for example, are valued at the average of the high and low selling prices on the date of contribution multiplied by the number of units donated.
Contributing complex assets is a bit more individualized depending on the asset. In most instances, the DAF sponsor —such as Vanguard Charitable, where I am the chief financial officer — plays an active role, ensuring dollars are quickly and appropriately liquidated and available for grantmaking.
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Once contributed and liquidated by the DAF sponsor, donors can then recommend grants to public charities they wish to support.
Funds in the DAF are fully committed and available for grantmaking and, since they are invested in the market, will continue to grow over time, further extending philanthropic impact.
How it would work
For example, take an individual with a limited partnership in a private company interested in liquidating this asset for charitable giving. Vanguard Charitable would work with the donor to begin the process and conduct due diligence before transferring ownership to the DAF sponsor, allowing the donor to receive a tax deduction.
As part of its process, Vanguard Charitable would develop a timeline to liquidate the asset at the earliest opportunity. The donor could then recommend grants to qualified charities that align with their philanthropic goals.
In any scenario, donors should consult with their tax adviser to ensure the right strategy is in place.
Find the right partner to navigate complex assets and charitable giving
Different complex asset types may have different contribution requirements and terms, due to market size, timeframes for liquidation and costs incurred by the recipient organization.
The right DAF partner can help navigate the nuances of contributing illiquid assets and incorporate all considerations into an effective giving strategy.
Complex assets are already a part of many financial portfolios, making them the perfect addition to an investor’s philanthropic plan.
A DAF allows donors to assess their entire portfolio for charitable giving opportunities and minimize the tax impact of giving, ensuring more of their money goes toward charitable giving.
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This article was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You can check adviser records with the SEC or with FINRA.
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