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Barbara Benware

Contributing Appreciated Illiquid Assets to Charity: Private Equity Fund Interests

by Barbara Benware
Vice President—Investment Oversight and Risk


Private equity funds often incur significant value over time, and may face taxable distribution. For philanthropically minded investors, illiquid assets such as this that have appreciated in value can be among the most tax-advantaged items to contribute to charity, because donors may enjoy a current year tax deduction and potentially eliminate capital gains tax liability on the distribution, transfer or sale of the shares 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 take a full, fair market value income tax deduction—as determined by a qualified appraisal—for the donation while also potentially eliminating tax liability on fund distributions. Contributions of illiquid assets to a private foundation would generally be deductible 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, 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 liquid 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 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

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

$983,256**

$1,782,000

The advisor recommends that he open a donor-advised fund with a provider that is willing and able to accept this type of asset and hold it until fully liquidated. The entrepreneur follows this advice, and his advisor coordinates the transfer of ownership to the donor-advised fund account. The following month, two of the funds make substantial distributions and the entrepreneur begins to recommend grants to charitable environmental programs. He is eligible for a fair market value deduction (as determined by a qualified appraisal).


About the Author:

Barbara oversees Schwab Charitable's investment and complex gift acceptance programs and is responsible for its enterprise risk management. Barbara joined Schwab Charitable™ in 2009, following an 18-year tenure as a wealth management executive. Most recently, she served as Vice President of Planning & Investments and Chief Compliance Officer for Union Square Investment Company, an SEC-registered investment advisory firm. Earlier in her career, Barbara held numerous management roles in finance and product management capacities in the telecommunications industry. Barbara holds a degree in economics from American University.