Advisors – charitable strategies to help your clients

photo of Sarah Weaverby Sarah Weaver, JD, 
senior gift planning advisor at CICF

Earlier this year, our newsletter featured the charitable giving strategy of bunching with donor-advised funds in response to the passage of the Tax Cuts and Jobs Act in December of 2017 and the increased standard deduction. As we enter the fourth quarter of 2018, we thought it would be a good opportunity to remind our advisors of how bunching through the use of a donor-advised fund can be advantageous to your clients. Bunching permits a donor to (1) contribute several years’ worth of donations to a donor-advised fund, (2) itemize his or her tax deductions for that year and receive the full amount contributed, and then (3) grant money from the fund out to the donor’s favorite charities over the desired number of years. In the subsequent years after the initial contribution is made, the donor then takes the standard deduction.

As clients may be interested in this concept, they may raise concerns about having enough available income to contribute multiple years’ worth of charitable donations in one year to a donor-advised fund. That’s where encouraging gifts of appreciated assets as opposed to gifts of cash can come into play. As you all well know, clients hold much more wealth in non-cash assets than cash, so discussing gifts of appreciated assets with your clients can result in a win-win for your clients and their charitable goals. In most cases, gifts of appreciated assets provide two key tax benefits:

(1) A charitable income tax deduction for the full fair market value of donated assets; and

(2) Avoidance of the capital gains tax that would have been paid had the assets been sold, and the cash donated instead.

Publicly Traded Securities

Gifts of publicly traded stocks, bonds, and mutual funds can be used to establish or add to a charitable fund. Clients donating appreciated stock are permitted to take a charitable income tax deduction, up to 30% of the client’s adjusted gross income with any surplus carried forward over the next five years, on the full fair market value of the gift, provided the client has held the stock for more than twelve months. Additionally, the client avoids capital gains tax on the appreciation.

Real Estate

Gifts of appreciated real estate can also be used to establish or contribute to a charitable fund. The value of the real estate must be established by a qualified appraisal prepared by a qualified appraiser. Gifts of real estate, held for more than twelve months, again permit avoidance of capital gains tax on the appreciation and provide a charitable income tax deduction for the property’s full fair market value. Like publicly traded securities, the deduction limit for gifts of real estate is 30% of the client’s adjusted gross income with any surplus carried forward over the next five years. Because each gift of real estate is unique, CICF will undertake an evaluation and due diligence process to ensure that the real estate is suitable for contribution to a charitable fund.

Closely Held Business Interests

Like gifts of real estate, shares of closely held business interests, such as shares of closely held corporations, limited liability companies, and limited partnerships, must be appraised by a qualified appraiser, pursuant to IRS regulations, to determine its fair market value. As long as the client has held the interest for more than twelve months, the client will avoid capital gains tax on the appreciation and receive a charitable income tax deduction for the full fair market value, subject once again to the 30% of adjusted gross income deduction limit with the five year carry forward.

Virtual Currency

Virtual currency, including Bitcoin, Ethereum, Ripple, Bitcoin cash and other altcoins, generally constitutes property for tax purposes pursuant to a 2014 IRS notice. So long as the donor has held the virtual currency for more than 12 months for investment purposes, he or she will be entitled to an income tax charitable deduction for fair market value up to 30% of AGI, and can avoid capital gains tax on its appreciation.  Charitable contributions of virtual currency is on the upswing following the TCJA provision prohibiting 1031 exchanges whereby owners of virtual currency previously could avoid capital gains simply by exchanging their altcoin for other forms of virtual currencies to avoid gain recognition. Like other gifts of appreciated assets, a donation over $5,000 will require a qualified appraisal.

Personal Property

Gifts of personal property, such as artwork and other collectibles, must also be appraised by a qualified appraiser to determine the property’s value at the time of donation, assuming that the claimed deduction is $5,000 or more or if the item is worth $500 or more and is in poor condition (for gifts of personal property between $500 and $5,000 and in good condition, the donor must complete form 8283 with his or her tax return but is not required to have a qualified appraisal done). Although the value of the gift for tax purposes normally is the lesser of the client’s basis in the property or its fair market value, the client’s charitable income tax deduction is limited to 50% of adjusted gross income. And of course, a gift of personal property, when used to create a charitable fund, can transform a valuable object that may not be of much value to your client into grants to your client’s favorite charities.

As a community foundation, CICF is equipped to accept charitable gifts of appreciated assets, like publicly traded securities, real estate, closely held business assets, and personal property, which are more complex and less liquid than gifts of cash. CICF’s gift acceptance policies, available here, sets forth the procedures by which CICF may accept various types of assets.

There are complex requirements at play for non-cash gifts, like real estate and non-publicly traded business interests, and timing can be a critical factor.  In the event of a sale, it is crucial that the client make his or her donation before there is a signed agreement with a prospective buyer.  As noted above,  clients also must follow IRS rules regarding appraisal requirements in order to substantiate the tax deduction.  In short, your client will need a charitable partner that has the know-how to handle complicated charitable gifts.

If you or your clients have questions about charitable gifts of appreciated assets or any other aspect of charitable giving, please feel free to contact Mary Stanley, director of gift planning and legal affairs, at or 317.634.2423 x 319.

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