ELITE ADVISOR BEST PRACTICES

Why Charitable Gifts of Noncash Assets Should Matter to Elite Advisors - Part Two

Three video case studies explain

By Phil Cubeta

Key Takeaways:

  • Donor-advised funds (DAFs) are a popular tax-advantaged way to transfer appreciated assets to a favorite charity.
  • However, once a business is in the DAF, it must be sold within five years to avoid the private foundation penalties.
  • The advisor’s role is to recognize opportunity early, before the liquidity event, and get the right people in place to close the deal while minimizing the “gotchas.”

In Part One of this article, we explained why it is often best for you and your client to tap real estate and closely held business interests to fulfill charitable intentions, and walked you through some real-life examples involving private foundations and charitable remainder trusts. Here, we’ll discuss the pros and cons of donor-advised funds and show how you can help your clients with their charitable intentions—and still get paid.

Donor-advised funds? Yes, sometimes.

A donor-advised fund (DAF) is like a private foundation in many ways, but it is much more likely to work in transferring a business or land. For purposes of the income tax deduction, gifts to a DAF are considered gifts to a public charity. The deduction for appreciated assets is at fair market value, up to 30 percent of adjusted gross income, with a five-year carry-forward. However, once the business is in the DAF, it must generally be sold within five years to avoid the private foundation penalties. For a C corporation, there should be no capital gains tax on the sale. But with an S corp, the gain, and any flow-through income, will be taxed as unrelated business taxable income. (For nuances of how to reduce the tax bite on the gain, all the way down to as little as 10 percent, see the S corp video linked at the end of this essay.)

Doing right and getting paid

This is a huge market—noncash assets in aggregate are larger than the entire U.S. public stock market. Boomers today are exiting businesses. As they exit, many are perfect prospects for a charitable tool. They built their business locally and often want to give back locally. They want to move from “success to significance.” They do not want to pay capital gains tax. Regardless of business form, a good team can almost always find a way to get the deal done. Your job is to recognize the potential liquidity event before it happens, focus on goals, be alert for the gotchas and get the team in place to do the deal. Fidelity, Schwab, Vanguard, National Philanthropic Trust, American Endowment Foundation, Charitable Solutions, Renaissance Charitable Foundation, National Christian Foundation and your local community foundation are potential allies in working with a gift to a DAF. Renaissance or a bank trust department can be a resource for setting up charitable remainder trusts (CRTs). If you work with the right charitable tools and the right provider, subject to their rules and those of your broker-dealer, you can get paid on AUM. And, of course, you want a good tax attorney involved.

The pay-off to you? Had Todd in our example in Part 1 used a DAF for half of his business, a C corporation, the DAF could have sold its half of the business without capital gains tax. He could have sold the other half outright, and the deduction on the gift could have partially offset tax on the amount sold. With the DAF, Todd could then have done what he considers to be “God’s work,” funding his charitable goals over time. In the meantime, you could have managed the $50 million inside the DAF, and the net amount from the half he sold outside the DAF.

Final gotcha and moral

A CPA will point out that the deduction for capital gain property in the DAF in our example is at fair market value, limited to 30 percent of AGI, subject to the phase-out of itemized deductions for high-income earners. The moral is that our role is to recognize opportunity early, before the liquidity event, and get the right people in place to close the deal while minimizing the gotchas. The potential payoff to you, the client and the community is significant.

Three successful case studies

Below are links to three video case studies with Bryan Clontz, CLU, CFP, CAP, AEP, president of Charitable Solutions.

  1. Commercial Real Estate (5 minutes) https://www.youtube.com/watch_popup?v=6I8TwHJfu_A
  2. Closely Held C Corporation (8 minutes) https://www.youtube.com/watch_popup?v=GJ-oTXegT28
  3. S Corporation (7 minutes) https://www.youtube.com/watch_popup?v=ze4gqHw1UHo

About the Author

Phil Cubeta, CLU, ChFC, MSFS, CAP is the Wallace Chair in Philanthropy at The American College and is responsible for the Chartered Advisor in Philanthropy (CAP®) designation. Prior to joining the American College, Phil was Chief of Staff for The Nautilus Group, a service of New York Life, providing estate, business, and philanthropic strategies to affluent clients of its member agents.

To learn more, consider The American College’s Chartered Advisor in Philanthropy designation, CAP®. Click here or call Mary Anne Roselle at 610-526-1395.