Give Strategically: Consider Gifts of Appreciated Assets Now Rather Than at Year EndSubmitted by American Endowment Foundation on August 19th, 2019
By Sarah Tomeo Hertzog & Martin Hall, Guest Columnists, Ropes & Gray LLP
Despite best intentions, we often find ourselves up against personal and professional demands that cause us to delay other plans. For many, these other plans frequently include charitable giving. According to Nonprofits Source, a digital marketing agency, approximately 30 percent of annual giving occurs in December.
If 2018 taught us anything, it is that waiting until the last minute to make charitable gifts can disadvantage donors and charitable organizations alike. During much of 2018, investors saw strong growth in global equity markets. In the last quarter of the year, however, equity markets dropped sharply both domestically and internationally.
How did this environment impact charitable giving? Charitable gifts of appreciated assets that a donor has held for more than one year offer two meaningful tax advantages:
- The donor avoids the recognition of capital gains tax on the property’s appreciation; and
- The donor is generally eligible for a charitable income tax deduction equal to the fair market value (FMV) of the assets at the time of the gift.
Aside from tax advantages, a gift of property (rather than cash) also benefits donors by enabling them to accomplish their charitable objectives, while retaining cash necessary to satisfy everyday living expenses.
During the fourth quarter of 2018, investors saw the value of their investments drop dramatically and the appreciation they earned earlier in the year evaporate. As a result, a gift of securities was significantly less valuable to a donor in the fourth quarter of 2018 than earlier in the year.
In turn, charitable organizations were hurt because many donors chose not to make gifts they otherwise would have made, and the investment assets they did receive had less value.
What can we learn from 2018? U.S. and global markets have recovered for the most part from the losses of 2018, with U.S. equity indices reaching all-time highs in July. As is typically the case, the economic outlook remains uncertain, though, with trade war tensions and geopolitical risks creating questions about the economy’s sustainability.
If you are a financial advisor to an individual who has expressed interest in gifting long-term investment assets to charity, consider taking advantage of the recent run in market values by advising that the client make the gift now, rather than waiting until year-end when economic conditions might be different. Alternatively, if your client is worried that the gift could be even more valuable later in the year – because the economy continues on an upward trajectory – consider transferring a portion of the intended gift assets now and further portions over the course of the year, based on economic conditions.
By making gifts now, donors will lock in the current, higher FMV of their assets, avoiding capital gains tax on a greater amount of appreciation and becoming eligible for a higher income tax deduction. These benefits are available even to donors who are not yet sure of which charitable organizations they would like to support. If a donor makes a gift to a donor advised fund (DAF), the donor is eligible to receive an immediate FMV tax deduction, but has the flexibility to recommend the charitable beneficiaries of his or her contribution later. If a donor selects a DAF program that permits donors to choose the DAF account’s investment advisor, the donor’s financial advisor may also continue to manage the assets in the account and include the assets in the advisor’s AUM.
Most importantly, by timing gifts strategically, rather than simply waiting until year-end, donors may give more value to the charitable causes that are important to them.
This article should not be construed as legal, tax or investment advice, nor should it be construed as a legal opinion on any specific facts or circumstances. This article is not intended to create, and receipt of it does not constitute, a lawyer-client relationship. The contents are intended for general informational purposes only, and you are urged to consult your attorney, tax and investment advisors concerning any particular situation and any specific legal, tax or investment questions you may have.
Sarah Tomeo Hertzog is a Senior Career Associate at Ropes & Gray LLP. Martin Hall is a Partner and Chair of the Private Client Group at Ropes & Gray LLP. Mr. Hall is a member of the AEF Council of Advisors.
We at American Endowment Foundation look forward to discussing your needs and interests in greater detail. Contact or call us at 1-888-660-4508 and let us discuss how donor advised funds can play a role in charitable planning.