Donating illiquid assets can translate to sweet tax breaks
By Dian Vujovich
Special to the Daily News
WHAT IS AN ILLIQUID ASSET?
Just as the investment arena has changed in the past five years, so have the kinds of gifts many charities will accept.
A recent trend has been giving gifts that are considered illiquid assets. They are sometimes referred to as "complex assets" because gifting them, finding their valuations and getting the appropriate tax deduction can be tricky.
Nonetheless, there may be some handsome tax breaks for anyone who wants to step out of the box that typically has limited their charitable donations to only gifts of cash, stocks or bonds.
That said, Rule No. 1 is to consult your accountant and tax adviser if you're considering donating an illiquid asset to charity.
While what's considered an illiquid asset can be as imaginative as gifting a plane, or soybeans, here's a list of typical illiquid assets:
- Private C- and S-Corporation stock
- Restricted stock
- LLC and limited partnership interests
- Pre-IPO shares
- Deeds and mortgages
- Mineral rights including oil and gas partnerships
- Royalties
- Existing trusts
- Insurance policies
- Hedge funds
- Real estate
- And any number of other privately held assets
As a reminder, donating any complex or illiquid asset is more complicated than, say, shares of a publicly traded company or mutual fund. Plus, not all charities will accept them and the IRS might want a professional appraisal of the gift.
So don't forget Rule No. 1: See your tax adviser or accountant to clarify what, if any, benefits there may be for you when considering giving an illiquid asset.
With 2012's end just a few months away, it's a good time to think about charitable giving. Particularly for those who can think outside the box.
Palm Beachers are well-versed in the tax benefits of donating generously to qualified nonprofit organizations.
But one area where they might fall behind the eight ball when it comes to giving is in the kinds of assets donated. Most donations fall under the headings of cash, stocks and bonds when, in fact, there is an entire array of other giving opportunities referred to as illiquid assets.
But you wouldn't necessarily know that based upon the typical behavior of Palm Beach givers.
"In my 20 years as executive director, we've received some gifts of appreciated stocks, which we sell immediately. But I can't think of a single example of a donor giving illiquid assets," says Pamela Henderson, executive director of the Rehabilitation Center for Children and Adults.
Henderson's experience is not unique.
Ervin Duggan, president of The Society of the Four Arts, said the majority of gifts received during his tenure have been in the form of cash. "During my experience as president, we've never received a donation of any type of illiquid asset."
Duggan also knows the value of the adage "The more you ask, the more you receive." No changes, additions or developments of any kind can begin on The Four Arts 10-acre campus before they've received all monies required to pay for them.
Even Richard Rampell's years of experience as the accountant for many local residents has shown that cash is pretty much king when it comes to charitable giving. As for donating illiquid assets? "It happens from time to time," he says.
So what exactly are illiquid assets?
Here are a few of the unique illiquid assets individuals have donated -- or tried to donate -- in the past. See the box for a more comprehensive list.
Rampell tells a story about a client who wanted to donate an island he owned off the west coast of Florida. The man had no use for it and hoped his alma mater could use it in some type of marine research capacity.
He also recalled a story about a gentleman who wanted to donate a gift of stock to a charity. Stock as in livestock: cows. "They, the charity, took it but realized the gift was more trouble than what it was worth and decided to change their policies of what's appropriate as a donor gift going forward."
Eileen Heisman has been president and CEO of the National Philanthropic Trust for 14 years. During that time, she's accepted donations of vintage surfboards -- and turned down a chain of porn shops, as well as stock in a gaming company.
Not every illiquid asset is a fit, makes sense or will be accepted by a charitable organization. Falling under this broad "illiquid asset" heading, three things donors need to be mindful of are:
- Not all illiquid assets make good gifts. Professional and qualified appraisal values are often required by the charity and depending upon the gift, the IRS may require them as well.
- Not all charities accept illiquid assets as gifts because they often don't have the staff or resources to cover the paperwork and costs of appraisals and valuations. "I always say to donors to pick the right assets," Heisman says. "If you give a charity an asset that they have a hard time liquidating, or is complicated, it's going to be more expensive for the charity and may not serve them or you well."
- The organization accepting the gift has to use it for its exempt purpose or the gift's deduction value can be lost. In the case of the Rampell's island story, "a big charitable contribution like this island wouldn't count as a charitable contribution if the university wasn't able to use it for its exempt purpose."
So if you want to donate a case of fine wines or even a bottle of Chateau Mouton-Rothschild 1945 because your tastes have changed, or a fourth home you don't use any longer that's paid for, here are a few different ways to donate those goods -- rather than to sell them outright and then give the money to charity.
Contact the charity and ask if the illiquid asset is a gift it would accept; create a private foundation of your own, funding it with your asset(s); work with various well-established donor-advised funds such as the Fidelity Charitable Gift Fund; or visit the Community Foundation and work with it to create a Donor Advised Fund of your own.
Additionally, The National Philanthropic Trust has created the NPT Charitable Asset Trust, which specializes in helping donors with illiquid asset gifts.
While the tax benefits of gifting the unusual may be substantial -- and could include deducting the full fair market value of your assets, avoiding all capital gains tax, and the ability to carry forward deductions for six years -- the devil is in the details.
Therefore, because each donor, their gifts and tax status varies, working with your tax accountant or tax adviser is the first step in making sure a gift of illiquid assets is properly received.
"The two people who know about taxes in your professional life are your accountants or tax attorneys," Heisman says.
And the bottom line? While donating gifts or cash, stocks or bonds are a whole lot simpler, Rampell says: "They are not always the most tax-efficient way to make a donation, or the most financially efficient, either."
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