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More impact. Less cash.
A conversation about donating non-cash assets.

Non-cash assets provide a powerful way to increase the impact of charitable giving and maximize tax benefits at the same time. However, many people are still confused about the advantages of donating non-cash assets instead of giving cash, a check or by credit card. To discuss these opportunities, Fred Kaynor, Schwab Charitable’s Vice President of Business Development and Marketing, sat down with Denise Schuh, Director of Charitable Strategies.

Denise, let's start with an overview of exactly what are non-cash assets.

The most well-known non-cash asset is publicly-traded stock. Other examples are restricted and IPO stock, private business interests, and real estate.

In your capacity as a charitable strategies expert, you interact with donors and advisors all the time. What would you say are the top reasons that donors give non-cash assets as opposed to cash?

I think impact is very important to donors. People are motivated to give because they care about the mission of the charity, and they’re pleased to discover that they can make their charitable dollars go further with non-cash assets. They also make it easier on the end charity because it relieves the charity of the administrative burden of liquidating the illiquid assets.

Impact is such an important priority for us. How, exactly, do non-cash assets maximize the impact of charitable giving and philanthropy?

If you contribute non-cash assets to a donor-advised fund, 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 you can donate up to 20% more to your favorite charities, and that creates a much bigger impact than just donating the cash from the sale.

That’s efficient and it really does mean even more support for our donors’ favorite charities. Are there any other reasons to give non-cash assets to charity instead of cash?

There are three main benefits that generally attract donors: diversification, estate planning, and managing the taxes that result from a windfall.

So, first, diversification. 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 a 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 usually generates capital gains tax. Contributing a portion of the assets to a donor-advised fund or another charity helps manage the taxes and simultaneously supports their favorite causes.

Now, estate planning is another big benefit. Moving assets from an individual’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. Those typically are illiquid assets that are, again, more expensive to maintain. An individual with a taxable estate and a significant amount of wealth in real estate holdings may consider contributing 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. A lot of business owners may be planning an initial public offering, merger, or acquisition, and all of those create wealth and generate taxes. Investors who see a liquidation event on the horizon may contribute a portion of their ownership stake to a donor-advised fund in order to help offset any capital gains tax. Schwab Charitable 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 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, otherwise, like I said, some of the tax benefits of the charitable gift may be eliminated. 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 assets held for less than a year or depreciated assets does not have the same tax advantages.

The second consideration is debt. A lot of people 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 your deduction.

The third consideration is that donors will need a qualified appraisal of the non-cash asset. This takes time to arrange and they can’t pay for it out of their donor-advised fund. The IRS has specific requirements for both the qualified appraisal and the appraiser who is performing it. Donors need to make sure that they are following those requirements in order to claim their deduction. We have a team of experts here at Schwab Charitable that helps donors with those considerations.

It’s terrific that the team of experts is on-hand at Schwab Charitable to guide donors through some of the more complicated considerations we are discussing today. I know it is also important to consult a tax advisor. Let’s go back to an earlier comment you made. You said restricted stock and private company stock are among the types of non-cash assets that we receive from donors. I wonder if there are any additional considerations when donating these kinds of assets?

There definitely are, Fred. 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 for us 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 that donors need to 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 more 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, again, 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 initial public offering (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 always to be in contact with your tax advisor to ensure that all tax implications are being reviewed.

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 the donor 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 you want 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 the donor 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, so definitely check with your tax advisor.

Thanks very much, Denise. Donor-advised funds help make it simple to maximize the impact and the potential tax benefits of charitable giving. At Schwab Charitable, we handle most of the administration around non-cash donations and we offer convenient mobile and online access. We are committed to helping our donors maximize the impact of their philanthropy by providing a solution that is efficient and tax-smart, and enables them to give a variety of different kinds of assets.

Learn more about donating non-cash assets

Diversification, automatic investing and rebalancing strategies do not ensure a profit and do not protect against losses in declining markets.

Schwab Charitable does not provide specific individualized legal or tax advice. Please consult a qualified legal or tax advisor where such advice is necessary or appropriate.

Contributions of certain real estate, private equity or other illiquid assets are accepted via a charitable intermediary, with proceeds transferred to a donor-advised account upon liquidation. This intermediary considers donations on a case-by-case basis, and assets typically must be valued at $250,000 or more. Call the Fund for more information at 800-746-6216.

A donor’s ability to claim itemized deductions is subject to a variety of limitations depending on the donor’s specific tax situation. Consult your tax advisor for more information.