Updated 11/15/19

What do you think of when you hear “charitable gift”? Perhaps a postage-paid donation envelope, a change jar at a humane society, or a  country club raffle fundraiser. What do these all have in common? They are all gifts in cash. While donating cash is a great way to support charity, most people don’t realize that there are more efficient ways to give. You may be able to support your favorite causes while saving yourself on taxes – everyone wins! One of these tax-efficient strategies is donating complex assets.

Why donate complex assets?

Complex assets are more common than you might imagine. This category includes any holdings which are illiquid, or difficult to sell for the full market price. Examples include Texan oil rights, fresh soybean crops, a vacation home in the Colorado mountains, or ownership in a private company.

Why donate complex assets?

  • Up your tax efficiency. Cash is not the most efficient way to give to charity. When you donate cash, you are giving assets that have already been taxed (either through income or capital gains taxes). On the other hand, when you donate appreciated securities, such as publicly traded stock or more complex assets, you are giving untaxed dollars in the capital gain.
  • Save on capital gains. Many individuals who own complex assets, such as shares in a family business, have low or even zero cost basis. This means that selling would result in a huge capital gain hit. By donating the assets, you bypass this gain and still enjoy up to the full market value as a tax deduction.
  • Diversify. A significant portion of your wealth may be tied up in a single complex asset, such as a closely-held partnership or a rental property. As a result, the performance of this single asset determines the performance of your entire portfolio. By donating part or all of this complex asset, you may achieve more diversification while still pursuing your charitable ambitions – a win-win!
  • Deduct more. After the 2018 Tax Cuts and Jobs Act raised the standard deduction to $12,000 for single and $24,000 for married filers, many have found themselves unable to deduct their usual charitable donations. By giving a significant gift of an appreciated asset, you may qualify for itemized deductions.

What kinds of complex assets can I donate?

The largest issue with complex assets is that they are illiquid. There may be few buyers or large transaction costs in making a sale. Even still, many of these complex securities can be donated to a charity or donor-advised fund.

Closely-held business interests

Many family businesses hold private shares. This includes a wide variety of corporate types, such as C and S Corps, limited liability companies, and partnerships. Before donating, you must often obtain a qualified appraisal. The appraisal considers such factors as net worth, dividend history, and future earnings potential. You can deduct the full market value up to 30% of your AGI (adjusted gross income). Any remaining deduction can be rolled forward for up to 5 years. [1]

Real estate

Real estate is another common complex asset. Before selling, you must obtain a qualified appraisal, completed no more than 60 days before the gift or up to your tax filing deadline. [1]

Life insurance policies

Have an old life insurance policy you no longer need? You may be able to convert this policy into a generous charitable gift. There are two options. First, you can irrevocably name your desired charitable organization or donor-advised fund as the owner and beneficiary. While this gives you a charitable deduction the year you transfer ownership, you forfeit all control of the policy.

On the other hand, if you’d like to stay in charge, you can also name your charity as beneficiary. While you will not receive a tax deduction right away, you maintain the right to change the beneficiary later on down the road. Also, the death benefit will pass estate-tax free to the charity, and your estate will receive a charitable tax deduction. [1]

Tangible personal property

Have an unwanted RV rusting in your garage or a dreary painting that no longer fits the style of your home? You may be able to donate physical property. The tax treatment depends on whether or not the charity has a direct use for your property. If the charity can use your gift (such as a painting donated to an art museum), you can deduct the full market value. On the other hand, if the gift is unrelated to the charity’s activity (such as a jet ski gifted to a humane society), your deduction is limited. You are limited to either your cost basis or the full market value, whichever is less. [2]

Other complex assets

The list above is certainly not exclusive. You may have other types of assets that you’d like to donate, such as patents, mineral rights, private equity, and hedge fund holdings. Some or all of these assets may be eligible for donation, depending on your charity or your donor-advised fund.

What else should I know?

Before donating complex assets, here are some important things to keep in mind:

  • Snag that tax break. Give only appreciated securities, where the market value is greater than your cost basis. Otherwise, you lose the benefits of donating directly to charity. If you have an unrealized loss, you can gain a tax advantage by selling the position yourself, realizing a loss for tax purposes, and then donating the proceeds.
  • Careful on the timing. Don’t wait to donate until after a sale of your business. Your charitable gift must be completed before terms to sell have been finalized. [3]
  • Get that second opinion. Don’t forget about your appraisal. Qualified appraisals are generally required for assets valued above $5,000. Your appraisal must be completed 60 days before your gift or up to tax filing date when claiming a deduction. [2]
  • Find the right expertise. You may wish to consider a donor-advised fund. Many individual charities lack the expertise and staffing to process gifts of complex assets. Donor-advised funds, on the other hand, may offer the skills necessary to handle your gift in a way that works best for you and your charity. [4]

Need more information or ready to give?

We are ready and excited to support you in your charitable adventures! Contact our office today for any questions regarding your situation.

[1] https://advisor.morganstanley.com/dan.sears/documents/field/s/se/sears-daniel-h/Donor_Advised_Funds_-_Gifts_of_Complicated_Assets.pdf

[2] https://www.kiplinger.com/article/retirement/T055-C000-S004-how-to-donate-complex-assets.html

[3] http://www.santabarbaraepc.org/assets/Councils/SantaBarbara-CA/library/03-24-15%20Handout%20Complex%20asset%20article%20Practical%20Tax%20Strategies%20Boland%202014.pdf

[4] https://www.fidelity.com/viewpoints/donating-nonpublic-traded-assets

Stratos Wealth Partners and its affiliates do not provide tax, legal or accounting advice. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. You should consult your own tax, legal and accounting advisors before engaging in any transaction.