Q&A: Why and How to Donate Non-Cash Asset Part II: The Opportunity for AdvisorsLearn more about this firm
Discussing how to donate non-cash assets with clients provides an opportunity for advisors to help increase the impact of a client’s charitable giving and maximize their tax benefits at the same time. In Part I of this Q&A, Fred Kaynor, Schwab Charitable’s Vice President of Business Development and Marketing, and Denise Schuh, Director of Charitable Strategies, discussed how donating non-cash assets can fit into a client’s financial plan.
In Part II of the conversation, they cover considerations to keep in mind when helping clients donate restricted, IPO or private company stock. They also discuss how working with clients on charitable giving can help deepen relationships and grow the advisory practice.
Along with non-cash assets like publicly-traded stock or real estate, restricted stock and private company stock are among the types of non-cash assets that we receive from donors. Are there any additional considerations when donating these kinds of assets?
There definitely are. For private company stock, there are four additional considerations.
First, company shareholder agreements and other governing documents have to be reviewed to understand the transfer restrictions, timing, and the process to complete the charitable transfer. Every shareholder agreement is different and it’s important to understand what is in those documents.
Second, the deduction for gifts of pass-through entities, such as S-corporations, limited partnerships, and limited liability company interests may be reduced by any ordinary income that the donor would have realized if they had just sold the interest at fair market value on the date of the contribution. That’s definitely something to talk with clients about, or to suggest donors talk with their tax advisors about.
For S-corporation shares, the charity or donor-advised fund account will generally be subject to unrelated business income tax on its gain from the sale of the shares. And this is something that’s very different tax-wise when you’re comparing a contribution of an S-corp versus a C-corp. The charity can use the proceeds from the sale of those shares to pay the taxes and they also may escrow a portion in a separate account to match the IRS look-back period during which the IRS can challenge the cost basis and the taxes paid on those shares.
Fourth, it’s also worth mentioning a few details about appraisals. For gifts of privately-held stock greater than $10,000 or a pass-through interest like a limited partnership greater than $5,000, donors must obtain a qualified appraisal to substantiate the charitable deduction claim. They can get the appraisal no earlier than 60 days before the date of contribution and no later than the due date of the donor’s tax return, and that includes extensions for the year of the gift. Appraisals depend on the facts and circumstances at the time of the contribution, and they also may be discounted for lack of marketability and lack of control.
For IPO stock, there are also additional considerations. Shares in a company undergoing an initial public offering are commonly subject to a lock-up period. The decision of whether and how charitable gifts of shares may be made during a lock-up period is determined by the issuer’s legal counsel. So that would be where the charity would be in communication with the issuer’s counsel to confirm what that lock-up period is.
Now, in cases where gifts can be made during the lock-up period, the fair market value will be the market value at the time of contribution, but there may be a discount based on that holding period that’s specified in the lock-up agreement, or if there are any other restrictions on the sale. The fair market value may also be discounted for shares subject to other material restrictions that affect the value of the shares to the donor or prevent the shares from being freely transferred. The important thing to remember is to always review the tax implications with your client or suggest they get in contact with a tax advisor.
In general, the charity controls the sale process for non-cash assets. The charity will generally sell securities promptly after receiving them, but they usually reserve the right to sell at any time. If your client is a 10% shareholder, a director, or otherwise deemed to have insider status, which means he or she is in the possession of influential or non-public information, a donation of IPO stock will require extra steps that may take additional time.
With restricted stock, if the donor is subject to Rule 144 (public sale restrictions), or is considered a control person in the company, the company’s general counsel must give permission to contribute the shares to charity. Any time a client wants to make a contribution of any type of privately-held company stock or pass-through interest, you always want to allow sufficient time for the contribution so that the date of contribution is at the proper time for your client to claim a deduction.
In all of these cases, donations to a charity or donor-advised fund are generally deductible at fair market value on the date of contribution. By contrast, the donation of similar assets to a private foundation would generally be deductible at the lower of cost basis or fair market value. Even if it’s at the lower of cost basis or fair market value, an appraisal still may be required.
The list of considerations for more complex non-cash assets shows that there is an opportunity for financial advisors to help simplify the process and add value to their client relationships. Can you give us your thoughts on why an advisor might want to work with a donor-advised fund?
I think you are absolutely right that donations of more complex assets create an opportunity for advisors. But taking a step back, no matter what kind of assets are involved, charitable planning helps advisors grow their business. Advisors tells us they promote charitable advice as a way to stand out from competitors. It helps them start conversations that lead them to referrals, and it really broadens and deepens client relationships. When you talk about charitable giving with clients, you really focus on something that’s important to the family as a whole.
It’s an opportune time right now in the market to start those conversations about charitable giving because many clients have highly-appreciated non-cash assets that would make very tax-smart charitable contributions. And advisors can be encouraged by the fact that many of their clients are also in the later stages of wealth. According to the Schwab Independent Advisor Outlook Study that was completed in 2016, about 62% of assets under management with financial advisors are in the late states of the wealth lifecycle. This is important because clients with late-stage assets are also most likely to be charitably inclined.
We have also heard the estimates that trillions of dollars are moving to heirs in the coming years. Charitable planning is an important strategy in estate planning and it can help to serve as a bridge to the next generation of clients – to reach the children and the grandchildren of those clients. For many of Schwab Charitable’s donors, giving is a family affair.
All of these factors really help advisors set up the conversation about charitable planning with their clients. Once you’ve initiated the conversation, you may consider a donor-advised fund. Donor-advised funds help make it simple to maximize the impact and the potential tax benefits of charitable giving. At many providers, including Schwab Charitable, experts handle most of the administration around non-cash donations, access is convenient and available via mobile and online, and a team of professionals is available to help guide you through some of the more complicated considerations.
Thanks very much, Denise. We are committed to helping our donors maximize the impact of their philanthropy by offering a solution that is efficient, tax-smart, and allows them to give a variety of different kinds of assets.
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.