Unlocking the Potential of Charitable Trusts

Diversifying charities’ funding and support networks is a priority for many trustees. CAF and ICAEW research shows that fostering greater diversity in trustee boards can benefit charities.

Donating appreciated non-cash assets to a donor-advised fund (DAF) lets you eliminate capital gains tax liability and increase the amount available for charity.

Donations of Privately Held Business Interests

Many philanthropically-minded executives and entrepreneurs invest significant portions of their wealth in illiquid investments, including interests in privately held businesses (C- or S-Corporations, LPs, or LLCs) and alternative investments such as hedge funds. The illiquidity of these assets presents unique challenges when considering a charitable gift, particularly where the donor wishes to use a non-cash donation to fund tax-efficient transactions.

For example, a business owner may wish to transfer their ownership interest before a planned acquisition, new investment/investor round, IPO, ESOP sale, or other partial or full exit. This can prevent a large capital gains tax liability while enabling the charity to benefit from a portion of the company’s increased value.

These gifts require careful planning and expert guidance, especially for interest in pass-through entities taxed as partnerships. A 501(c)(3) public charity such as the Community Foundation of Tampa Bay can be a great choice for these types of gifts since it is equipped to receive and hold illiquid business interests and will also have a team of experts who are familiar with the complex issues that often arise in these cases.

Another important consideration is the treatment of UBTI, which refers to unrelated business taxable income and is generally any net gain from the operation of a private foundation or other nonprofit entity, including capital gains from the sale of illiquid securities and other investments. Donors should consult with their attorneys and qualified appraisers when planning such transactions to ensure the charitable gift is structured correctly to minimize tax consequences.

Donations of Real Estate

Donations of real estate have the potential to generate significant tax benefits for donors and confer substantial financial and programmatic benefits on charities. The complex nature of these gifts requires the expertise of an experienced team.

Real property held for more than one year can qualify for a charitable deduction based on fair market value (as determined by a qualified appraisal). Suppose the donor receives income from the donated property in exchange for life rent. In that case, the donor and beneficiaries will receive income payments taxable at only long-term capital gains rates (i.e., the donor’s income tax rate minus long-term capital gains taxes).

Charitable trusts can be established to own and manage real estate. This can allow for avoiding gift and estate taxes by transferring ownership to a trust, a “grantor.” The trustee can then sell the property with no recognition of gain to the donor. The trustee can also use the property as collateral for debt financing, allowing it to escape mention of the gain and defer the capital gains tax on the portion of the sale attributed to the charity.

Donors with appreciated real estate may consider donating the property to a donor-advised fund. This enables the donor to claim a fair market value tax deduction in the year of transfer (assuming that the donation is made with unsold assets) and then liquidate the property in the future, using funds from the donor-advised fund that have been invested to maximize return and strengthening its grantmaking and social good power.

Donations of Personal Property

Suppose you own valuable property such as real estate, artwork, or a concentrated stock position. In that case, philanthropic trusts can help you maximize your donation to the charities you care about while providing income to you and your family.

The first step is to define what impact you want your charitable giving to have. This can include specific projects or broader areas of need, such as literacy, access to higher education, or public health. Once you have determined your impact goals, you can decide what assets to place in a charitable trust and whether to retain a life interest.

One type of trust that can make the most of a real estate donation is a Charitable Remainder Trust (CRT). This allows you to donate a property valued at a significant amount and then continue to use it for a set period, after which the charity will sell the asset tax-free. Your lifetime income will be based on the fair market value of the remainder interest, and you will receive an income tax deduction for the gift.

If you own long-term real estate that has appreciated significantly, this is an incredibly effective way to reduce your income tax bill. The original donation is tax deductible based on the property’s fair market value, and you can add to your contribution at any time.

Donations of Publicly Traded Stock

Many donors hold appreciated stock in their portfolios, and gifting these assets allows them to give more than they could if they sold the stores and donated the cash. In addition, giving supplies may help the donor avoid capital gains taxes, which can be much higher than income tax rates for individuals.

For nonprofits, accepting gifts of publicly traded stock provides a great source of revenue and allows donors to support your organization without selling their investments. To receive these gifts, the charity needs to determine the fair market value (FMV) of the shares being donated, which means that you must have a reliable appraiser.

Nonprofits also often establish policies that outline accepting, liquidating, and acknowledging stocks as donations. This may include establishing timeframes and periodic account audits to ensure the charity receives and records the correct values for these donations.

Donor-advised funds may be an option for donors who want to donate securities but need to know which charities can accept them. Some brokerage firms and community foundations offer these accounts, allowing donors to donate stock, mutual funds, and other appreciated assets with minimal transaction costs while maintaining a complete record of their giving history. In addition, these accounts typically allow donors to deduct the total fair market value of the assets they donate.