When it comes to charitable giving, many people think of donating cash or publicly traded securities. However, more complex assets are sometimes overlooked in philanthropy. Understanding these assets and their potential can unlock powerful charitable giving opportunities, especially through vehicles like Donor-Advised Funds (DAFs). In this blog post, we will explore what complex assets are and how they can be donated to a DAF.
Defining Complex Assets
Complex assets encompass a broad range of holdings that require specialized handling due to their illiquidity, valuation intricacies, and transfer complexities. Here are some of the most common types of complex assets that can be donated to a DAF:
1. Real Estate
Types: This includes residential, commercial, industrial, and undeveloped land.
Benefits: Donating real estate to a DAF can help donors avoid capital gains taxes, receive a fair market value tax deduction, and eliminate the hassle of selling the property themselves.
2. Private Business Interests
Types: These include privately held C-corporation or S-corporation shares, interests in limited liability companies (LLCs), and sole proprietorships.
Benefits: Donating private business interests allows donors to receive a tax deduction based on the appraised value, while potentially avoiding capital gains taxes on the appreciation.
3. Cryptocurrency
Types: UI Charitable accepts various forms of cryptocurrency, including Bitcoin, Ethereum, and other major cryptocurrencies.
Benefits: Donating cryptocurrency can offer significant tax benefits. Donors can potentially avoid paying capital gains taxes on the increase in value of the cryptocurrency, and they can deduct the fair market value of the asset. Cryptocurrency donations to a DAF can be processed quickly and converted into cash, providing immediate funds for charitable grants.
4. Limited Partnership (LP) Shares
Types: These are ownership shares in private equity funds, venture capital funds, or real estate partnerships.
Benefits: Donating LP shares can help diversify a donor’s portfolio, provide a tax deduction, and fund philanthropic endeavors with illiquid assets.
5. Oil and Gas Investments
Types: This includes royalty interests, working interests, and mineral rights.
Benefits: Donating these interests can provide a tax deduction while potentially freeing the donor from the complexities of managing such investments.
6. Alternative Investments
Types: These include hedge funds, private equity, venture capital, and other non-traditional investment vehicles.
Benefits: Donors can leverage the appreciated value of these investments to receive a tax deduction and support charitable causes.
Donating Complex Assets to Donor-Advised Funds
DAFs are an effective vehicle for donating complex assets due to their flexibility and potential tax benefits. Here's how the process typically works:
Evaluation: The donor consults with the DAF provider to evaluate the asset and ensure it is suitable for donation.
Appraisal and Acceptance: An independent appraisal will be required to establish the asset’s fair market value. The DAF provider may conduct due diligence to determine if they can accept the asset.
Transfer and Liquidation: Once accepted, the donor transfers ownership of the asset to the DAF. The DAF provider may choose to liquidate the asset to add the proceeds to the donor’s charitable fund. The asset can continue to be held in the Donor-Advised Fund, particularly if it has cash flow and/or if it is not yet ready for sale.
Charitable Giving: The donor can recommend grants from their DAF to their favorite charities over time, leveraging the proceeds from their donated complex assets.
Conclusion
Complex assets offer unique opportunities for charitable giving through DAFs, providing significant tax benefits and funding potential. Whether it is real estate, private business interests, or alternative investments, donating these assets requires some planning, but can be immensely rewarding. By understanding the nature of complex assets and leveraging the expertise of DAF providers, donors can maximize their impact on the causes they care about most.
