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Charitable Gifts of Noncash Assets: Preface and Users' Guide, Part 1
We are pleased to begin our series that will ultimately publish the entire content of Charitable Gifts of Noncash Assets. Noncash assets represent a tremendous opportunity for both advisors and charities but they are, by their very nature, complex. This series will provide you with all of the rules, regulations, and nuances of these assets.
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.
Preface and Users' Guide1
By Phil Cubeta
This book is intended for several audiences:
- Front line advisors: financial, tax and legal advisors who have clients whose assets go well beyond cash and public securities.
- Nonprofit gift planners: fundraisers in major gifts, planned gifts, and principal gifts whose donors wish to give assets other than cash.
- Technical experts: Lawyers, accountants, and back office staff at charities and financial institutions charged with determining how an asset may be used for a philanthropic purpose, or determining whether that asset should be accepted as a gift.
The Scope of the Opportunity
Today in gift planning we have an historic opportunity, if we can seize it through canny collaboration among professional advisors, national gift funds, local community foundations, single issue charities, and nonprofit gift planners.
Boomer business owners (think of them as The Rotarians) are reaching an age at which they must exit the business that has been their baby and their identity. As they exit, they are very good prospects for a charitable tool or gift, both to reduce tax upon sale of their appreciated business interests, and also to transition to a new way of life, post-exit, as community leaders. These can-do people, when they exit, want to do more than take their name off the trucks and their building, and put it on a gravestone. They want to go from "success to significance," set a good example for their heirs, and as one said to me, "make my last stand.” They made their money in town, will die in town, and often want to give locally. They see giving generously, post-exit, as stepping up rather than stepping down, or stepping aside. They step up into leadership and set an example for their heirs.
As the case in point below shows, there are better and worse ways to exit a business and turn to philanthropy.
A Case in Point: Todd, A Day Late
Todd (not his real name) came to our wealth transfer firm the day after he sold his business, a C corporation with zero basis, for $100 million. His capital gain was $100 million. Tax due was $20 million. He said, “Help me wipe out my $20 million tax bill.” We helped him some, but the truth is he came to us at least one day too late.
Charitable planning for noncash assets, particularly for closely held business interests and commercial real estate, is one of the most complex areas of the tax code. Proper planning requires a team with at least a tax attorney, a CPA, a business exit specialist, a qualified appraiser, an investment advisor, and perhaps an insurance professional.
To see the value of proper planning, consider how Todd might have done better. Assume he gave half his firm to charity, say, in a donor-advised fund (DAF). What would be the effects?
- No capital gain on the half sold inside the DAF.
- A charitable deduction up to 30 percent of adjusted gross income, with five year carry forward, subject to whatever limitations may apply under the phaseout of itemized deductions. (Be thankful CPAs are happy to do these calculations.)
- Half sold outside the DAF, with the gain partly offset by the deduction for the part given to the DAF.
Note the effect on assets under management (AUM).
- $50 million new dollars under management in theDAF.
- $50 million (minus whatever residual tax is due) outside the DAF.
Note the effect on potential gifts from the DAF.
- $50 million new dollars that must and will go to a charity.
- A “charitable checkbook” from which the donor can recommend gifts to your organization.
- Alternatively, of course, Todd might have given half the stock in his business directly to a charity. But would they have accepted it? What about the land under the business? What if the firm had been an S corporation? A Limited Partnership? What if Todd had owned antique cars, an apartment complex, timber interests, an oil and gas lease, intellectual property, crops in the field, livestock, or some other arcane asset that he wanted to give? How could the charity have researched such a gift? Until now, there has been no comprehensive guide.
- 1. Phil Cubeta, MSFS, CLU®, ChFC®, CAP®, The Wallace Chair in Philanthropy at the American College of Financial Services.