CGNA: Noncash Opportunities, Aggregate Markets and Property Types, Part 3
Summary
This article is an excerpt from Charitable Gifts of Noncash Assets, a comprehensive guide to illiquid giving by Bryan Clontz, ed. Ryan Raffin. Published by the American College of Financial Services for the Chartered Advisor in Philanthropy Program (CAP), with generous funding from Leon L. Levy. For a free digital copy, click here, and to order a bound copy from Amazon, click here.
Noncash Asset Types
Here are the most common noncash donations (excluding personal household and clothing items).
Real Estate
Residential, commercial or investment
Encumbered or unencumbered
Foreign or domestic
Privately-Held Interests
C corporation stock
S corporation stock
Limited partnerships
LLC interests
Restricted Stock
Section 144 and 145 stock
Tangible Personal Property
Art
Collectibles
Vehicles (i.e., cars, boats, planes)
Weird Stuff
Other assets that have been donated include:
Horses/livestock/crops
Gold bullion and other precious metals
Foreign currencies or denominated bond
Intellectual property (e.g., patents, royalties and copyrights)
Mineral and resource interests (e.g., oil, gas, water, timber, clay rights)
Professional sports teams
Historical artifacts
Important Noncash Substantiation Requirements
IRS substantiation requirements are addressed in depth in Appendix A. However, given the importance of these considerations, a few points are worth emphasizing. Put simply, failure to comply with substantiation rules will mean no tax deduction for the donor.
The donee charity must provide a contemporaneous written acknowledgment for all gifts valued over $250. The charity need not put a value on the gift itself in the acknowledgment. Further, the IRS requires a qualified appraisal for deductions over $5,000 on assets other than cash or publicly traded stock.
The donor must file Form 8283 to properly substantiate this deduction and show that an appraisal occurred. The appraiser and a representative of the charity must sign the form—the charity need not agree to the appraised (and therefore deducted) value. All of this is to say that the burden of properly substantiating the deduction is on the donor, and that the appraisal is therefore also the donor’s responsibility. However, the charity is responsible for reporting sale or disposition of the donated property if it occurs within three years. It must send Form 8282 detailing the sale to both the IRS and the donor.
Noncash Asset Considerations
Financial / Estate / Tax Planning Considerations for Top Ten Noncash Asset Contributions
Asset Type |
Various Forms |
Unique Issues and Potential Traps |
Planned Gift Issues |
Additional Comments |
Real Estate Deduction: FMV |
Residential, commercial, domestic or foreign, leasehold / life or remainder interest |
Environmental liability, holding period management, accelerated depreciation, negative basis, debt (note “5-and-5 UBTI exception”), pre-arranged sale |
Ideal for FLIP-CRUT, difficult for CRAT and CGAs because of marketability / liquidity |
Real estate represents nearly 50% of privately held wealth, estimated at twice the entire stock market. Yet only 2% of all charitable gifts are real estate. |
Closely Held Stock Deduction: FMV |
C corp or S corp |
Thin to nonexistent market, difficult valuation, self-dealing/ inurement without independent appraisal, pre-arranged sale, S Corp UBTI issues |
Ideal for FLIP-CRUT, except S corp, with no known liquidation event—other vehicles work for corporate redemption or market sale. S corp to a CGA can be optimal for a life income gift. |
Private company contributions are very popular prior to a market sale. S corp gifts to a trust charity are tax-effective prior to sale or to a corporation if held. |
LLC Interests Deduction: FMV |
Tax status may be corporate or partnership |
Same as closely held & characteristics of underlying assets & potential capital calls, multiple shareholders/ assets difficult |
Same as closely held. LLC may donate illiquid asset directly for a charitable deduction flow-through. |
Charities usually want the LLC interest for liability protection. Multiple owners may make asset donations difficult. |
Partnerships Deduction: FMV |
General, Limited or Operating |
May be difficult or expensive to appraise, characteristics of underlying assets, general partnership liability, partnerships with negative basis |
Limited partnerships are particularly good funding assets for Lead Trusts. |
For LLCs and Partnerships, appraisal discounting may apply unless income approach is used. |
Life Insurance / Annuities Deduction: Lesser of Adjusted Cost Basis or FMV |
Paid-up and Non-Paid-Up Life Insurance—Variable or Fixed Deferred Annuities |
Non-paid-up policies, “Stranger-Owned” or premium financed, or gifts with policy loans are more difficult. Paid-up whole life policies work well. Annuities trigger gain upon transfer. |
Life insurance is an excellent life-time or testamentary gift (through beneficiary designation). Annuities are only attractive as testamentary gifts because of IRD. |
Life insurance can be an excellent wealth replacement tool for any planned or out-right gift. Premiums for charity-owned policies can be paid with appreciated property. |
Asset Type |
Various Forms |
Unique Issues and Potential Traps |
Planned Gift Issues |
Additional Comments |
Mineral Interests Deduction: Varies |
Oil / Gas Working or Nonworking Interests, Timber, Other Minerals |
Valuation difficult, tax law very complex and state rules may govern (e.g., timber). |
Difficult based on specific asset type and marketability but possible. |
These assets are typically held in partner- ships or LLCs so those rules apply as well. |
Restricted Stock Deduction: FMV |
Section 144 or 145 |
Appraisal requirement, lock-up period |
Restricted stock can easily be used for just about every planned gift – but liquidity needs should be addressed with long lock-ups |
Restricted stock should be coordinated with an experienced broker and company’s SEC counsel. |
Stock Options and ESOP Qualified Replace- ment Property Deduction: Varies |
Qualified (ISOs) or nonqualified |
“In-the-money” option transfers trigger gain to the donor at ordinary income rates at the time the charity sells the option (important for same tax year) |
ISOs can be exercised, the underlying stock is held for over a year and then can be donated to charity |
Qualified replacement stock from an employer retirement plan / ESOP can work well for both outright and planned gifts. |
Collectibles/Art Deduction: Basis for nonrelated use / FMV for related use |
Art, coins, antiques |
Valuation, insurance, storage, transaction costs, complex structures like private operating foundations are sometimes used |
Tangible property works fairly well for nearly all forms of planned gifts, but cost basis deduction is triggered upon sale. Testamentary gifts are ideal, but many donors want to liquidate and do not mind a lower income tax deduction for lifetime gifts if non-use-related. |
PPA 2007 rules severely tighten partial interest art gifts. Federal capital gains taxes remain at 28% federal so there is an extra tax benefit in tangible property donations for the gains exclusions plus the potential 3.8% net investment income tax. |
Intellectual Property Deduction: Varies |
Patents, royalties, copyrights, regardless of revenue produced |
Valuation cost, disposition process |
Work best as testamentary gifts to receive step-up in basis. |
2004 Act reduced attractiveness of patent/royalty gifts with a deduction schedule. |
G ift Acceptance / Management / Disposition Considerations for Top Ten Noncash Asset Contributions
Asset Type |
Liability / Cost Exposure |
Risk Management / Due Diligence |
Acceptance Issues |
Staff Role |
Disposition Alternatives |
Real Estate |
Environmental, UBTI, liens, IRS penalties, accident claims, up-front due diligence expense, on-going holding costs, remediation or improvement cost, time-to- reward ratio, fiduciary risk |
Indemnification letter, environmental audit, survey, BPO or appraisal, insurance, site inspection with pictures, determine property’s history, develop sales plan— review all deeds, lease agreements, rental agreements, inspection reports, donor should complete disclosure checklist citing any known issues, outsource to another charity which specializes in real estate donations. |
Conflicts of interest, valuation, self-dealing, implied, assignment of income issues or expressed restrictions |
Tax substanti- ation—8283 /8282, due diligence, change insurance / utilities, execute transfer documents, donor communication, audit preparation, manage disposition Note: Ideally, one person should project manage all illiquid assets. |
1. Hold (not usually recommended) 2. Sell to private buyer (unrelated party) |
Privately-Held Stock / LLC / Partnerships |
Capital calls, indemnification clauses, lack of contril with minority gifts, UBTI and specific issues related to underlying property as well as reputational or community risk |
Indemnification letter, independent appraisal, review financials if appropriate, develop sales plan, review all entity documents |
Thin to nonexistene market, difficult valuation, self-dealing without independent appraisal, S corp UBTI issues |
Tax substantiation -- 8283 / 8282, due diligence, execute transfer documents, donor communication, audit preparation, put stock certificate or assignment document in safe. Check in with company annually to see if there has been any material change. |
1. Sold back to entity |
Asset Type |
Liability / Cost Exposure |
Risk Management / Due Diligence |
Acceptance Issues |
Staff Role |
Disposition Alternatives |
Life Insurance / Annuities |
Virtually none except as it relates to complex foundation-owned and investor owned contracts, or policies with loans |
IRS has listed a number of reportable transactions -- be cautious to comply with reporting requirements. Also review the illustration or policy being considered and have a memo outlining the donor's premium paying responsibilities and charity's options for noncompliance. |
Work with agent to illustrate any non-paid-up (universal or variable life policies) at 2% under the current rate or guaranteed if greater. |
Tax substantiation -- 8283 / 8282, due diligence, execture transfer documents, donor communication, audit preparation, manage policy annually to determine health. Put donor in contact with a qualified insurance appraiser. |
1. Usually held to death |
Mineral Interests / Intellectual Property |
None other than potential capital calls and environmental and reputational issues assuming working mineral interests rather than royalty interests |
More than any other asset, having a well-designed sales plan prior to accep- tance is critical |
Marketability, appraisals |
Tax substantiation—8283 / 8282, due diligence, execute transfer documents, donor communication, audit preparation |
1. Hold (not recommended unless strong income payments) |
Restricted Stock / Stock Options |
Post-contribution loss possibilities during restricted or holding period, process of removing the legend |
Review all restrictions and option agreements, also consider including a put option to mitigate risk |
None |
Tax substantiation—8283 / 8282, due diligence, execute transfer documents, donor communication, audit preparation |
Sold with broker as soon as restriction is lifted |
Asset Type |
Liability / Cost Exposure |
Risk Management / Due Diligence |
Acceptance Issues |
Staff Role |
Disposition Alternatives |
Collectibles / Art |
Post-contribution holding expenses, project management -- reputational and potential provenance issues |
Review history of collection, document with pictures and brief descriptions; discuss tax implications with donor prior to acceptance |
Work with broker / appraiser / auctioneer to assess value and liquidation prior to acceptance |
Tax substantiation -- 8283 / 8282, due diligence, execute transfer documents, donor communication, audit preparation, insurance, storage |
1. Auction sale |
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