The holiday season typically sparks a desire to give. And one great way to donate to your favorite charity is with stocks you already own.
Making a gift of appreciated assets reaps several benefits:
- You help a cause you believe in
- You receive a tax deduction
- You avoid realizing capital gains
- You potentially reduce a concentrated holding in your portfolio
Charitable giving is pretty straightforward when it comes to appreciated marketable securities. For publicly traded stock, you make your donation and take a deduction for the easily ascertainable full market value at the time of donation, subject to adjusted gross income limitations.
However, some clients we serve often have illiquid stock in non-public, closely held companies. Often, the stock has significant value that is locked up until a liquidity event occurs, which may be years away. The holder has great uncertainty as to the future value of the stock price, as well as to the timing of the liquidity event. In specific circumstances, a donation of the stock in the current year may be more useful to the donor from a tax and investment planning perspective.
Assemble a knowledgeable team
Donating illiquid assets to a charity, foundation or donor advised fund is more complicated. However, it can be accomplished in most cases. From our experience, assembling a team of professionals is the best way to design the charitable giving plan, detail the tax strategy, and ensure the transaction goes as smoothly as possible.
Here’s what your team should include:
- Your financial advisor
Your advisor should be able to help you determine if this strategy is the right course of action for your specific situation and explore other planning options that may also deserve consideration. Your advisor can help design the charitable plan within your overall long-term financial plan and explain the high-level tax strategy. Once you decide to move forward, she or he may have experience and relationships that can be leveraged to make this process come together faster and take the coordination burden off of you.
- Your CPA/tax preparer
To help get the maximum tax benefit from your donation, you need to involve your tax preparer. She or he can estimate how much you’ll be able to deduct based on projected income and applicable tax rules. Remember, you can carry forward charitable deductions for up to five years beyond the first year of contribution.
- The general counsel of the company where you hold stock
The donation of stock to a charity is subject to the shareholder rights agreement in place. You should consult with the general counsel or another responsible attorney at the company to ensure that this charitable donation will be permitted before going too far down the process with a charity.
- A donation manager for the charity
We recommend first checking with your preferred charity to see if it can accept your gift. Many larger charities and foundations are equipped to accept complex illiquid assets. If your favorite charity is not able to accept such assets, there’s fortunately still a way to achieve your tax planning and charitable objectives: specialized charitable organizations. These organizations specifically focus on accepting complex assets as gifts, finding a pathway to liquidity, selling the asset, and making a grant to the final charity you want to support. Two of the larger such firms are Dechomai and National Philanthropic Trust. Please do your own careful due diligence or work with your financial advisor when selecting a specialized charity.
- A reputable appraiser
Another key resource for your team is a third-party appraiser to value the illiquid asset. Care must be given to selecting a competent appraiser with experience valuing the asset type you wish to contribute for charitable donation purposes. The IRS can challenge the valuation used for the deduction in certain circumstances. So, obviously, the valuation must be well-grounded and backed by a defensible process to save you tax-related headaches. The appraiser should factor in all available information, apply valuation discounts as needed for lack of marketability or control, and support their valuation with strong documentation.
With the team assembled and coordinated by your advisor, you can feel confident that the donation is appropriate for your situation and implemented appropriately. You’ll find the process will be much easier with this help than if you were to try to accomplish it on your own.
This works for many types of illiquid assets
Having a specialized team like this is good for more than closely held private stock. This approach can apply to many other types of illiquid assets including land, artwork and other types of private equity.
If you have an illiquid stock, have charitable goals, and can benefit from a tax deduction and portfolio diversification, you and your advisor should consider the benefits and tradeoffs of unlocking the stock’s value today though donation rather than holding the asset until a potential liquidity event.
Important disclosure: References to specific third-party appraisers are not endorsements.