Just about any asset can be a good candidate for a donor-advised fund (DAF). Cash and publicly traded securities are by far the most common, but there are many other under-utilized “specialty” assets that work well for a contribution to a DAF. Such specialty assets include closely-held business interests, real estate, equipment, collectibles, and other similar property.
Why aren’t these specialty assets contributed more often? The reasons vary but range from an unwillingness of sponsoring charities to accept specialty assets to donors and their financial advisor or attorney simply assuming such a gift is not a viable option to fund a DAF.
This time of year we field lots of calls about donating closely-held business interests to a DAF. When it comes to contributing a closely-held business, there are several issues that need to be considered before proceeding. A common issue among all business structures is whether or not unrelated business taxable income (UBTI) will be created. UBTI within a DAF will trigger a tax at the sponsoring charity's tax rate. UBTI could also be triggered from income flowing through to the sponsoring charity, debt from the corporation, or sometimes even gain recognition on the sale of the business interest.
A C-corporation is by far the most straightforward business interest to contribute to a DAF. There is no concern of UBTI since any debt or income is sheltered inside the corporation. Once the shares are gifted, they can be sold to a third party, back to the company or even to the donor or a member of the donor’s family as long as the sale is an arms-length transaction for full market value. Note that a stock sale scenario with a C-corporation will avoid all taxation while an asset sale will only avoid the tax at the shareholder level (in this case the DAF), while the corporation will still be responsible for tax on realized gain at the corporate level.
With S-corporations the issues become a little trickier. A transfer of S-corporation stock to the sponsoring charity will allow the donor to avoid the gain recognition; however the sponsoring charity will not avoid the gain recognition. Any gain realized when the charity sells the S-corporation stock will be considered UBTI, which means the sponsoring charity will pay a tax at its tax rate. Also, any income generated by the S-corporation prior to the sale will also be considered UBTI to the sponsoring charity. For these two reasons, it is unusual that a gift of S-Corporation stock to a sponsoring charity will reduce the overall tax result as compared to selling outright. Note that any taxes paid by the sponsoring charity as a result of UBTI will reduce the net amount available for grants in the donor-advised fund account.
If partnership units are transferred directly to the sponsoring charity and the charity sells the units to the buyer, the capital gains tax will be avoided. However, any unrealized receivables or appreciated inventory are considered ordinary income assets which must reduce the value of the partnership units in determining the charitable deduction.
If the partnership assets are sold instead of the units, then the results will be a little different. Any gain from assets that are sold will flow through to the sponsoring charity and the capital gains tax will be avoided since it is not considered UBTI. However, any operating income from the partnership will trigger UBTI unless the income is rental income from leased real estate. Mortgaged property will also trigger UBTI concerns with a partnership contribution.
With LLCs it is important to see how the LLC has elected to be taxed, i.e., whether it has elected to be taxed as a C-corporation, S-corporation, or partnership. Then the rules will apply to the LLC as they would for the business structures we already discussed.
Just a reminder for all closely-held business contributions in excess of $10,000 or any other unmarketable asset contribution in excess of $5,000, a qualified appraisal is required to substantiate the charitable deduction on the donor’s personal tax return.
Renaissance has covered gifts of real estate, life insurance, tangible personal property, vehicles and collectibles in its webinars. You can view the webinar below in its entirety to learn the ins and outs of donating other specialty assets.
Remember though, time is of the essence if you want to donate specialty assets before year-end. Sponsoring charity approvals and transferring title can be as short as a couple of weeks or as long as 45 days.
As always, the Renaissance consulting team is available to answer any of your questions about charitable giving.