CGNA: Noncash Opportunities, Aggregate Markets and Property Types, Part 3

CGNA: Noncash Opportunities, Aggregate Markets and Property Types, Part 3

Article posted in Assets on 9 May 2017| comments
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Summary

As we dive into the noncash asset analysis, we first must define the various categories and requirements for assessing them. These charts provide the fundamental guidance.

This article is an excerpt from Charitable Gifts of Noncash Assets, a comprehensive guide to illiquid giving by Bryan Clontz, ed. Ryan Raffin. Published by the American College of Financial Services for the Chartered Advisor in Philanthropy Program (CAP), with generous funding from Leon L. Levy. For a free digital copy, click here, and to order a bound copy from Amazon, click here.

Noncash Asset Types

Here are the most common noncash donations (excluding personal household and clothing items).

Real Estate

Residential, commercial or investment

Encumbered or unencumbered

Foreign or domestic

Privately-Held Interests

C corporation stock

S corporation stock

Limited partnerships

LLC interests

Restricted Stock

Section 144 and 145 stock

Tangible Personal Property

Art

Collectibles

Vehicles (i.e., cars, boats, planes)

Weird Stuff
Other assets that have been donated include:

Horses/livestock/crops

Gold bullion and other precious metals

Foreign currencies or denominated bond

Intellectual property (e.g., patents, royalties and copyrights)

Mineral and resource interests (e.g., oil, gas, water, timber, clay rights)

Professional sports teams

Historical artifacts

Important Noncash Substantiation Requirements

IRS substantiation requirements are addressed in depth in Appendix A. However, given the importance of these considerations, a few points are worth emphasizing. Put simply, failure to comply with substantiation rules will mean no tax deduction for the donor.

The donee charity must provide a contemporaneous written acknowledgment for all gifts valued over $250. The charity need not put a value on the gift itself in the acknowledgment. Further, the IRS requires a qualified appraisal for deductions over $5,000 on assets other than cash or publicly traded stock.

The donor must file Form 8283 to properly substantiate this deduction and show that an appraisal occurred. The appraiser and a representative of the charity must sign the form—the charity need not agree to the appraised (and therefore deducted) value.  All of this is to say that the burden of properly substantiating the deduction is on the donor, and that the appraisal is therefore also the donor’s responsibility. However, the charity is responsible for reporting sale or disposition of the donated property if it occurs within three years. It must send Form 8282 detailing the sale to both the IRS and the donor.

Noncash Asset Considerations

Financial / Estate / Tax Planning Considerations for Top Ten Noncash Asset Contributions

Asset Type

Various Forms

Unique Issues and Potential Traps

Planned Gift Issues

Additional Comments

Real Estate Deduction: FMV

Residential, commercial, domestic or foreign, leasehold / life or remainder interest

Environmental liability, holding period management, accelerated depreciation, negative basis, debt (note “5-and-5 UBTI exception”), pre-arranged sale

Ideal for FLIP-CRUT, difficult for CRAT and CGAs because of marketability / liquidity

Real estate represents nearly 50% of privately held wealth, estimated at twice the entire stock market. Yet only 2% of all charitable gifts are real estate.

Closely Held Stock Deduction: FMV

C corp or S corp

Thin to nonexistent market, difficult valuation, self-dealing/ inurement without independent appraisal, pre-arranged sale, S Corp UBTI issues

Ideal for FLIP-CRUT, except S corp, with no known liquidation event—other vehicles work for corporate redemption or market sale. S corp to a CGA can be optimal for a life income gift.

Private company contributions are very popular prior to a market sale. S corp gifts to a trust charity are  tax-effective prior to sale or to a corporation if held.

LLC Interests Deduction: FMV

Tax status may be corporate or partnership

Same as closely held & characteristics of underlying assets & potential capital calls, multiple shareholders/ assets difficult

Same as closely held. LLC may donate illiquid asset directly for a charitable deduction flow-through.

Charities usually want the LLC interest for liability protection. Multiple owners may make asset donations difficult.

Partnerships Deduction: FMV

General, Limited or Operating

May be difficult or expensive to appraise, characteristics of underlying assets, general partnership liability, partnerships with negative basis

Limited partnerships are particularly good funding assets for Lead Trusts.

For LLCs and Partnerships, appraisal discounting may apply unless income approach is used.

Life Insurance / Annuities Deduction: Lesser of Adjusted Cost Basis or FMV

Paid-up and Non-Paid-Up Life Insurance—Variable or Fixed Deferred Annuities

Non-paid-up policies, “Stranger-Owned” or premium financed, or gifts with policy loans are more difficult. Paid-up whole life policies work well. Annuities trigger gain upon transfer.

Life insurance is an excellent life-time or testamentary gift (through beneficiary designation). Annuities are only attractive as testamentary gifts because of IRD.

Life insurance can be an excellent wealth replacement tool for any planned or out-right gift. Premiums for charity-owned policies can be paid with appreciated property.

Asset Type

Various Forms

Unique Issues and Potential Traps

Planned Gift Issues

Additional Comments

Mineral Interests Deduction: Varies

Oil / Gas Working or Nonworking Interests, Timber, Other Minerals

Valuation difficult, tax law very complex and state rules may govern (e.g., timber).

Difficult based on specific asset type and marketability but possible.

These assets are typically held in partner- ships or LLCs so those rules apply as well.

Restricted Stock Deduction: FMV

Section 144 or 145

Appraisal requirement, lock-up period

Restricted stock can easily be used for just about every planned gift – but liquidity needs should be addressed with long lock-ups

Restricted stock should be coordinated with an experienced broker and company’s SEC counsel.

Stock Options and ESOP Qualified Replace- ment Property Deduction: Varies

Qualified (ISOs) or nonqualified

“In-the-money” option transfers trigger gain to the donor at ordinary income rates at the time the charity sells the option (important for same tax year)

ISOs can be exercised, the underlying stock is held for over a year and then can be donated to charity

Qualified replacement stock from an employer retirement plan / ESOP can work well for both outright and planned gifts.

Collectibles/Art Deduction: Basis for nonrelated use / FMV for related use

Art, coins, antiques

Valuation, insurance, storage, transaction costs, complex structures like private operating foundations are sometimes used

Tangible property works fairly well for nearly all forms of planned gifts, but cost basis deduction is triggered upon sale. Testamentary gifts are ideal, but many donors want to liquidate and do not mind a lower income tax deduction for lifetime gifts if non-use-related.

PPA 2007 rules severely tighten partial interest art gifts.  Federal capital gains taxes remain at 28% federal so there is an extra tax benefit in tangible property donations for the gains exclusions plus the potential 3.8% net investment income tax.

Intellectual Property Deduction: Varies

Patents, royalties, copyrights, regardless of revenue produced

Valuation cost, disposition process

Work best as testamentary gifts to receive step-up in basis.

2004 Act reduced attractiveness of patent/royalty gifts with a deduction schedule.

 
G ift Acceptance / Management / Disposition Considerations for Top Ten Noncash Asset Contributions

Asset Type

Liability / Cost Exposure

Risk Management / Due Diligence

Acceptance Issues

Staff Role

Disposition Alternatives

Real Estate

Environmental, UBTI, liens, IRS penalties, accident claims, up-front due diligence expense, on-going holding costs, remediation or improvement cost, time-to- reward ratio, fiduciary risk

Indemnification letter, environmental audit, survey, BPO or appraisal, insurance, site inspection with pictures, determine property’s history, develop sales plan— review all deeds, lease agreements, rental agreements, inspection reports, donor should complete disclosure checklist citing any known issues, outsource to another charity which specializes in real estate donations.

Conflicts of interest, valuation, self-dealing, implied, assignment of income issues or expressed restrictions

Tax substanti- ation—8283 /8282, due diligence, change insurance / utilities, execute transfer documents, donor communication, audit preparation, manage disposition

Note: Ideally, one person should project manage all illiquid assets.

1. Hold (not usually recommended) 2. Sell to private buyer (unrelated party)
3. Sell to related party (additional compliance)
4. List with broker

Privately-Held Stock / LLC / Partnerships

Capital calls, indemnification clauses, lack of contril with minority gifts, UBTI and specific issues related to underlying property as well as reputational or community risk

Indemnification letter, independent appraisal, review financials if appropriate, develop sales plan, review all entity documents

Thin to nonexistene market, difficult valuation, self-dealing without independent appraisal, S corp UBTI issues

Tax substantiation -- 8283 / 8282, due diligence, execute transfer documents, donor communication, audit preparation, put stock certificate or assignment document in safe. Check in with company annually to see if there has been any material change.

1. Sold back to entity
2. Sold in open market transaction
3. Sold to private unrelated buyer
4. Sold to related buyer
5. Initial Public Offering

Asset Type

Liability / Cost Exposure

Risk Management / Due Diligence

Acceptance Issues

Staff Role

Disposition Alternatives

Life Insurance / Annuities

Virtually none except as it relates to complex foundation-owned and investor owned contracts, or policies with loans

IRS has listed a number of reportable transactions -- be cautious to comply with reporting requirements. Also review the illustration or policy being considered and have a memo outlining the donor's premium paying responsibilities and charity's options for noncompliance.

Work with agent to illustrate any non-paid-up (universal or variable life policies) at 2% under the current rate or guaranteed if greater.

Tax substantiation -- 8283 / 8282, due diligence, execture transfer documents, donor communication, audit preparation, manage policy annually to determine health. Put donor in contact with a qualified insurance appraiser.

1.  Usually held to death
2. Csh surrender to company
3. Reduce paid-up
4. Sold to life settlement companies

Mineral Interests / Intellectual Property

None other than potential capital calls and environmental and reputational issues assuming working mineral interests rather than royalty interests

More than any other asset, having a well-designed sales plan prior to accep- tance is critical

Marketability, appraisals

Tax substantiation—8283 / 8282, due diligence, execute transfer documents, donor communication, audit preparation

1. Hold (not recommended unless strong income payments)
2. Sold via broker
3. Sold privately

Restricted Stock / Stock Options

Post-contribution loss possibilities during restricted or holding period, process of removing the legend

Review all restrictions and option agreements, also consider including a put option to mitigate risk

None

Tax substantiation—8283 / 8282, due diligence, execute transfer documents, donor communication, audit preparation

Sold with broker as soon as restriction is lifted

Asset Type

Liability / Cost Exposure

Risk Management

/ Due Diligence

Acceptance Issues

Staff Role

Disposition Alternatives

Collectibles / Art

Post-contribution holding expenses, project management -- reputational and potential provenance issues

Review history of collection, document with pictures and brief descriptions; discuss tax implications with donor prior to acceptance

Work with broker / appraiser / auctioneer to assess value and liquidation prior to acceptance

Tax substantiation -- 8283 / 8282, due diligence, execute transfer documents, donor communication, audit preparation, insurance, storage

1.  Auction sale
2. Private buyer
3. Broker

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