Donating Non-Cash Assets to Charity Can Help Maximize Tax Benefits
Clients looking to take advantage this year should act soon.
January 17, 2008
Sponsored by Fidelity Charitable Services®
As the year-end tax planning season gets under way, many of your clients may be looking for ways to maximize the tax benefits of their charitable giving. One of the most effective ways for them to do so is to establish a donor-advised fund at a public charity.
This provides donors with the opportunity to take an immediate tax deduction for their irrevocable contribution and the privilege to recommend grants to qualified public charities on their own timetable. The Fidelity® Charitable Gift FundSM is one of the nation’s largest public charities and has the largest donor-advised fund program in the country.1
Most clients donate cash or publicly traded securities when they establish a Giving Account® at the Gift Fund. However, many people (as well as their advisors) are unaware that it’s also possible to donate special kinds of assets, including certain real estate, private C-Corp shares, S-Corp shares, the cash value of a life insurance policy and certain LLC and limited partnership interests. By contributing these special assets directly to the Gift Fund, clients potentially avoid income taxes that would be due if the assets were sold first and then donated.
Do Assets Meet Contribution Criteria?
Before accepting a contribution of a special asset, the trustees of the Gift Fund must determine whether the asset meets the following criteria:
Marketability. The Gift Fund must be able to find a buyer who is unrelated to the donor and sell the contributed asset within a reasonable period of time.
Diligence. Before the Gift Fund can accept a donation of a special asset, it must review the impact of the Gift Fund carrying title as well as the potential exit strategies. This can be a time-consuming process, so donors considering a contribution of special assets this year should start the process as soon as possible.
Liabilities. The Gift Fund generally does not accept special assets that come with actual or contingent liabilities.
Steps to a Successful Donation
Contributing special assets is more complicated than writing a check or donating publicly traded securities. Depending on the asset, the process typically takes four to seven weeks from the date of inquiry to the date of acceptance. In some cases, the process may take longer.
Donors must first review and sign a Letter of Understanding that certifies they have read and understand the Gift Fund’s special asset contribution policy and due diligence procedures. The Gift Fund then begins the due diligence process to determine whether the assets can be accepted.
Assuming the special asset meets the Gift Fund’s criteria and is accepted, the Gift Fund will determine the timing, the manner of the sale, the buyer, the terms and the sale price. Once the sale is complete and gross sales proceeds have been received, the Gift Fund will deduct any carrying costs it incurred and will fund the donor’s Giving Account with the remaining net sales proceeds.
Special Considerations for Special Assets
For tax purposes, donors may be required to obtain a qualified appraisal of the contributed property. Without a qualified appraisal, the IRS may disallow the claimed tax deduction. The donor will likely need to report the donation to the IRS via IRS Form 8283, with supporting appraisal information.
If the donor would have incurred long-term capital gains by selling the special asset, the tax deduction is usually equal to the fair market value of the asset at the time the contribution is considered completed. If the sale of the appreciated asset would have resulted in ordinary income or short-term capital gains for the donor, the deduction is usually limited to the cost basis. Other deduction limitations may apply, depending on the donor’s individual tax situation and the type of property donated.
Although the Gift Fund strives to minimize potential problems, donors should also consider a number of other issues the IRS may raise in connection with certain contributions. For example, in certain circumstances the IRS may assert that a donor maintained excessive control over contributed assets and therefore never made a completed gift. Or the IRS may assert that a donor made an anticipatory assignment of income to the Gift Fund in an effort to avoid paying tax on the gain from the sale. Donors should discuss the tax, legal and other implications of specific donations with their own tax and financial advisors.
Donating S-Corp Shares
A client who is considering selling his or her interest in an S-Corporation may face a large capital gains tax. One potential solution is to help your client donate his interest in the S-Corp to charity before selling the corporation.
Your client can do this by establishing a Giving Account® with the Fidelity® Charitable Gift FundSM. Over time, charities supported by the donor will potentially receive more grants due to the tax savings, and the proceeds will have the potential to grow over time.
Before accepting S-Corp shares, the Gift Fund will conduct due diligence on the proposed contribution and the Gift Fund’s exit strategy. Assuming the shares are accepted, the client is eligible for a tax deduction, based on a qualified appraisal and adjusted according to IRS regulations, for the shares up to 30 percent of adjusted gross income. If the tax-deductible value of the donation is greater than 30 percent of AGI, the donor can carry forward the deduction for five years. Clients must determine whether making the contribution prior to the sale would result in an anticipatory assignment of income. If the IRS determines that the sale was prearranged, the client may lose the tax deduction and be required to pay tax on any gains from the sale.
As a shareholder of the S-Corp, the charity will generally be subject to unrelated business income tax (UBIT) on any income it derives during its period of ownership and on its gain from the sale. The charity may pay these taxes with the proceeds of the sale. After the sale is complete, the client’s Giving Account will be funded with the gross proceeds of the sale, less the UBIT and other costs incurred by the Gift Fund in accepting and liquidating the contributed shares. Keep in mind that the proceeds received by the Gift Fund as a result of the sale may be higher or lower than the appraised value and/or the tax-deductible value of the contributed shares.
The IRS has a three-year look-back window during which it can challenge the cost basis of an S-Corp and, therefore, the tax paid by the charity. Therefore, the charity may escrow a portion of the proceeds (usually 20 percent) in a separate account for three years, and your client will not be able to make grant recommendations from these funds until they are released. If the sale is not completed, the charity controls the contributed shares and their disposal, not the client.
For more information about how to make charitable planning part of your client offering, call a Planned Giving Specialist at 1-800-280-6357 or visit www.FidelityCharitableServices.com today.
Information provided is general and educational in nature. It is not intended to be, and should not be construed as, legal or tax advice. Fidelity does not provide legal or tax advice. Content provided relates to taxation at the federal level only. Availability of certain federal income tax deductions may depend on whether you itemize deductions. Rules and regulations regarding tax deductions for charitable giving vary at the state level, and laws of a specific state or laws relevant to a particular situation may affect the applicability, accuracy, or completeness of the information provided. Charitable contributions of capital gain property held for more than one year are usually deductible at fair market value. Deductions for capital gain property held for one year or less are usually limited to cost basis. Consult an attorney or tax advisor regarding your specific legal or tax situation.
The Fidelity® Charitable Gift FundSM is an independent public charity with a donor-advised fund program. Various Fidelity companies provide nondiscretionary investment management and administrative services to the Gift Fund.
Charitable Gift Fund is a service mark of the Trustees of the Fidelity Investments Charitable Gift Fund. Fidelity and Fidelity Investments are registered service marks of FMR Corp., used by the Gift Fund under license.
1 Chronicle of Philanthropy Rankings, 2007.