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Barbara Benware

Contributing Appreciated Non-Cash Assets to Charity: Private Equity Fund Interests

by Barbara Benware
Vice President—Investment Oversight and Risk


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Private equity funds often incur significant value over time, and may face taxable distribution. For philanthropically minded investors, non-cash assets such as this that have appreciated in value can be among the most tax-advantaged items to contribute to charity, because donors potentially eliminate capital gains tax liability on the distribution, transfer or sale of the shares and may enjoy a current year tax deduction, if they itemize, while allowing supported charities to receive the most money possible.

It is typically most tax-effective for investors to choose their most highly appreciated, long-held assets to contribute to public charity (including a donor-advised fund account). By donating highly appreciated private equity fund interests, investors can potentially eliminate tax liability on fund distributions and may take a full, fair market value income tax deduction—as determined by a qualified appraisal. Contributions of non-cash assets to a private foundation would generally be deductible, for those who itemize, at the lower of cost basis or market value.

Depending on the size and complexity of the private equity fund, it may be possible to donate a limited partnership interest in the fund directly to a donor-advised fund, yielding maximum benefits to charity. These donations must be approved by the private equity fund’s general partner and accepted by the donor-advised fund provider. Upon completion of the gift, donors are eligible for a fair market value income tax deduction, if they itemize, as determined by a qualified appraisal.

Considerations include:

  • Private equity fund general partners typically oversee transferability of fund shares, and limited partners who wish to donate a portion of their investment to charity can work with the general partner to achieve this goal. In some cases, general partners have established charitable giving programs to enable their investors to achieve their philanthropic goals by permitting charitable transfers of partnership interests or distribution of portfolio company stock prior to a sale. Such programs require the active involvement of the fund’s general partner, may be complex, and take time to establish, so initiating discussions well in advance of a liquidity event is critical.
  • The charity or donor-advised fund provider will generally not assume liabilities associated with these investments. Individuals should plan to contribute sufficient non-cash assets to cover granting as well as private equity fund open commitments, unrelated business income tax (UBIT) or other liabilities.
  • The donor's fair market value tax deduction, if the donor itemizes, will be determined by a qualified appraisal of the contributed interest.
  • In order to realize the full value of the investment, the charity or donor-advised fund provider must normally be able to hold the private equity interests until the scheduled termination date or liquidity event. Sales of these interests in the secondary marketplace prior to this may be subject to steep discounts.
  • If the fund carries debt, the donor may be liable for taxes if the contribution is treated as a bargain sale.

Case Study—Contribution of Seasoned Private Equity Fund Interests

A successful entrepreneur retires from his firm to dedicate himself full time to preserving wild spaces in America. He meets with his advisor to identify portfolio holdings he can tap to fund his philanthropic effort. His advisor suggests donating limited partnership interests in several private equity funds which have completed their investment stage and will soon begin realizing and distributing gains on long-held portfolio companies. By donating these fund interests directly to charity, the entrepreneur can potentially eliminate capital gains tax liability on the distributions, thereby preserving a larger amount for his philanthropy.

  Hold fund and donate after-tax proceeds to charity Donate limited partnership interest directly to charity
Asset Value

$5,000,000

$5,000,000

Capital Gains (100% Long-Term)

$3,000,000

$3,000,000

Taxes Paid*

$714,000

$-

Gift to Charity

$4,286,000

$5,000,000

Charitable Deduction

$4,286,000

$4,500,000

Donor Tax Savings

$1,585,820**

$1,665,000


For more information about the advantages of contributing private equity interests to charity and for a detailed consultation about your specific situation, please contact us.