1. Complex Assets—
The Most Overlooked Charitable Donations
Karla D’Alleva Valas
Managing Director, Complex Asset Group
2. Current Trends
• Bulk of wealth in this country is held in private companies
• M&A activity is reaching pre-recession levels and business exit planning continues
to increase
• Global mergers and acquisitions (M&A) activity is expected to rocket upward 36% to
$3.04 trillion in 2011*
• Money is in motion—majority of boomer wealth is held in 12 million privately owned
businesses, of which more than 70% are expected to change hands in the next 10–
15 years**
• Capital gains taxes are expected to rise
* DailyFinance, “M&A Activity Expected to Jump 36% in 2011,” November 15, 2010.
** Robert Avery, Cornell University, February 2006.
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3. The Opportunity: A Tax-Efficient Way to Give
Advisors have a key opportunity to:
• Bring a new idea to a client and increase awareness
• Show clients how to utilize seemingly illiquid assets to fund charitable giving
• Help clients give more by minimizing taxes
80% of advisors say the biggest
benefit to offering charitable
planning advice is that it is an
effective relationship builder*
* 2010 Fidelity Charitable “Advice & Giving” survey, conducted by Harris Interactive for Fidelity
SM
Investments on behalf of Fidelity Charitable between May 21 and 26, 2010.
SM
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4. Why Donate Complex Assets?
Often the most powerful assets to give in a client’s portfolio
Lowest cost basis—costs less to give more
There is a perceived complexity around the process of donating
complex assets—it’s not when done correctly
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5. Examples of Complex Assets
• Private Company Stock
• S-Corp
• C-Corp
• Restricted Stock
• LLC and Limited Partnership Interests
• Real Estate
• Pre-IPO Shares
• Personal Property (Artwork, Collectibles)*
• Other Miscellaneous Capital Assets
• Certain Alternative Investments
* Related use needed to claim a fair market value tax deduction.
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7. Giving While Still Operating: Corporate Redemption
STEP 1
Donor contributes
private company
stock
DONOR STEP 2
Tax-exempt charity
tenders stock to
donor’s company for
DONOR’S repurchase
Charitable deduction COMPANY
(FMV based on appraisal)
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8. Giving in Advance of a Business Exit/Transition
The Good Outcome: FMV deduction for donor, charity receives cash
STEP 1* STEP 2
Donor contributes Tax-exempt charity sells
shares of company stock to third-party buyer,
stock to charity pays no capital gains
DONOR BUYER
STEP 3
Third-party buyer
Charitable deduction
(FMV based on appraisal) wires cash to charity
* During negotiations, material terms of sale cannot be final before involving charity in sale of company.
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9. The Power of Donating Complex Assets to a DAF at a Public Charity
Donor-Advised Fund Directly to Public Charity Private Foundation (PF)
(DAF)*
Tax deduction Fair market value Fair market value Cost basis
Expertise handling Internal expertise May need to outsource— Generally outsource
complex assets (some may outsource) could reduce net amount
Deduction limitation 30% 30% 20%
(federal)
Minimize tax on Minimize tax on Complicated rules
Other tax considerations gain from sale of asset gain from sale of asset and regulations
Ability to diversify giving Multiple grants to many Multiple grants to many
100% of asset to one charity
with one asset charities with one asset charities with one asset
May generate additional May generate additional
Confidentiality Anonymity fundraising fundraising
One point of contact Multiple charities requires One point of contact
Efficiency for transaction multiple contacts for transaction
*At a 501(c)(3) public charity.
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10. Who Benefits When Donating Complex Assets to a DAF?
Donor Advisor Charity
• Minimizes capital gains tax • Demonstrates high impact • May potentially receive bigger
giving strategy to client; a key gift from donor
• Generally entitled to fair market differentiator
value tax deduction* • Avoids cost and work involved
• Leverages experts in charitable with diligence and oversight
• Provides immediate and ongoing sector to facilitate transaction requirements
support to multiple charities on
his or her own timetable with one • Expands network of charitable • Stays focused on core charitable
transaction clients through word-of-mouth mission
referrals
* Donors are generally entitled to a tax deduction of the full fair market value of the
complex asset, not just the original cost basis like a private foundation.
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11. Contact Us
Call early, call often. We can help.
Donating
complex assets Jacqueline Valouch
is not 212.335.6432
complicated Jaqueline.valouch@fmr.com
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12. Disclosures
Information provided is general and educational in nature and should not be construed as legal or tax advice. Fidelity Charitable
does not provide legal or tax advice. Content provided relates to taxation at the federal level only, and availability of certain federal
income tax deductions may depend on whether you itemize deductions. Rules and regulations regarding tax deductions for
charitable giving vary at the state level, and laws of a specific state or laws relevant to a particular situation may affect the
applicability, accuracy, or completeness of the information provided. Charitable contributions of capital gain property held for more
than one year are usually deductible at fair market value. Deductions for capital gain property held for one year or less are usually
limited to cost basis. Consult an attorney or tax advisor regarding your specific legal or tax situation.
Fidelity makes no warranties with regard to the information provided or results obtained by its use. Fidelity disclaims any liability
arising out of your use of, or any tax position taken in reliance on, the information furnished herein.
To ensure compliance with Treasury Department Circular 230, you are hereby notified that: (a) any discussion of federal income tax
issues in this presentation is not intended or written to be relied upon, and cannot be relied upon, by you for the purpose of avoiding
penalties that may be imposed under the Internal Revenue Code; (b) such discussion is being used in connection with the promotion
or marketing (within the meaning of Circular 230) by Fidelity Charitable of the matter addressed herein; and (c) you should seek
advice based on your particular circumstances from an independent tax advisor.
Fidelity Charitable is the brand name for Fidelity® Charitable Gift Fund, an independent public charity with a donor-advised fund
program. Various Fidelity companies provide services to Fidelity Charitable. The Fidelity Charitable name and logo are service
marks, and Fidelity is a registered service mark, of FMR LLC, used by Fidelity Charitable under license.
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Editor's Notes
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Bring a new idea to a client and increase awareness\nBe the first to tell them about donating complex assets to charity\nThere is a broad lack of understanding of the benefits and option of donating these assets \n\nShow clients how to utilize seemingly illiquid assets to fund charitable giving\nThink beyond cash for a more strategic approach to giving\nYour clients possess these assets: privately-held C- and S-corp stock, limited partnership interests and certain publicly traded stock\n\nHelp clients give more by minimizing taxes \nPotentially eliminate long-term capital gains tax exposure\nFair market value tax deduction \nPass the savings directly to the charities they care about\n
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\nThere are a variety of complex assets. Here are some examples…\n
Diligence:\nRequire adequate time to review all aspects of the contribution\nCarry costs: can’t be unreasonable; will be deducted from proceeds; does not reduce tax-deductible value of contribution\n\nLiquidity/marketability: \nMust be able to find buyer unrelated to donor \nSell within reasonable time period\n\nRisk management: \nGenerally manage risk and liabilities\nEscrow required if financial liability after sale of asset (e.g., UBIT deducted from proceeds)\nDoes not reduce tax-deductible value of contribution\n\nCharitable recipient:\nWho is best positioned to accept donation (charity, private foundation [PF], DAF)?\n
Situation:\nIndividual was interested in making donations valued at $10K each to various charities \nPublicly traded portfolio was not appreciated\nAdvisor recognized client had very low cost basis in privately held company stock\n\nConsiderations\nDid the company’s governing documents permit the transfer to the DAF?\nWhat were the DAF’s transfer rights under the agreement?\nWhat was the company’s method of valuation?\nWhat was the company’s time frame and financial ability to redeem within a reasonable period of time?\n\nSolution\nWorked with CFO and board to amend the shareholder’s agreement/governing documents\nDAF took good and valid title to the stock\nDonor took tax deduction for FMV of gift (determined by qualified appraisal)\nDonor contacted DAF to make another donation \nAs a result, company has standing charitable program\n
Situation:\nAdvisor of client with S-corp contacted DAF about a corporate transaction in the early stages \nClient wanted to donate majority of company’s interest to charity prior to the sale in an attempt to eliminate tax on the gain (cost basis is $0)\nClient’s chosen charities were inexperienced and risk averse \n\nConsiderations\nDonor could transfer stock, but DAF would be severely restricted in its transferability\n“Plan A” exit strategy—sale of the company to a third-party buyer\nWas the deal already done (anticipatory assignment of income)?\nWhat was DAF’s “Plan B” if “Plan A” failed?\nCompany was averse to letting “strangers into the company”\n\nSolution:\nDAF designed “Plan B” by suggesting amendment to agreement—provided flexibility and protected company \nDonor took tax deduction for FMV of gift (determined by qualified appraisal)\nPlan A succeeded and DAF funds donor giving vehicle with 80% of the proceeds\nRemaining 20% is put into an escrow account for DAF UBIT and tax consultancy fees\n
DAF vs. PF\nTax deduction of fair market value versus original cost basis\nPF—complicated rules and regulations related to self-dealing, jeopardizing investments, and excess business holdings. Must meet minimum required distributions each year—problem if foundation’s assets are largely illiquid.\n\nBy making a contribution to Fidelity Charitable, the nation’s largest donor-advised fund program, donors are eligible for a tax deduction on that contribution, in a specific year, while spacing out their grants over a period of years. \n\nDAF—has responsibility for liquidating complex assets, including handling all legal review of documents and IRS reporting. Allows nonprofit organization (NPO) to focus on what it does best—fulfilling the organization’s charitable mission—rather than overseeing complicated financial and legal process. Might require that a donor first sell the assets and contribute the proceeds.\n\nDonors are also able to diversify their giving with one asset by recommending multiple grants to many charities—as opposed to donating the asset (or assets) to one NPO.\n
