For many potential donors, illiquid wealth like closely held shares can be a hurdle to donation. Whether they are C-corporation or S-corporation shares, selling or donating them is complicated, requiring strict adherence to . It is always crucial to consult legal and tax advisors to begin the process.* Additionally, some charitable organizations are unable or unwilling to accept illiquid gifts due to their complexity.
However, gifting closely held shares to a donor-advised fund (DAF) can help ease the capital gains tax burden and maximize your charitable impact. The key is finding a DAF sponsor that accepts these assets and knows how to manage them effectively.
What Are the Potential Benefits of Donating Closely Held Shares?
The most important benefit of donating closely held shares is that the donor can support worthy causes and establish a charitable legacy. Gifting C-corp or S-corp shares to a DAF opens up funds for charitable causes by easing the burden of capital gains taxes. That means the donor can get more dollars in the hands of charities they support.
Donating appreciated assets of any kind to a DAF can allow for immediate income tax deductions. Conversely, if someone sells their closely held shares themselves and then donates the proceeds to charity, they may be subject to capital gains taxes that impact how much they can donate.
Why Do Some Charitable Organizations Not Accept Closely Held Shares?
The simple answer is that it is often too much of an administrative burden or too technically complex for charitable organizations to accept closely held shares. There are complications that arise for both the donor and the charity.
On the other hand, DAFs are well suited to turning your shares into charitable gifts, assuming the DAF sponsor is equipped to do so.
How Does the Process Work for Gifting Closely Held Shares to DAFs?
Donors who have had successful business ventures often have illiquid assets like S-corp or C-corp shares as their most appreciated assets. These may have significant market value, meaning they’ll likely incur large capital gains taxes when sold. Gifting all or a portion of these shares to a DAF can allow for an income tax deduction on their fair market value for the date of contribution – potentially offsetting the capital gains taxes and allowing more money to go to charity.
It’s crucial to consult a tax advisor throughout the process. For instance, when donating S-corp shares specifically, the DAF sponsor may be subject to unrelated business income tax (UBIT). Additionally, the donor may be subject to qualified appraisal requirements and annual deduction limits.
The donor must find a DAF sponsor willing to accept gifts of closely held shares. Accepting illiquid assets is complex and risky for any sponsor – and liquidating them can be time consuming. Often, sponsors will partner with other organizations to help convert these assets to cash.
Reach Out to AEF for More Information on Donating Closely Held Shares
If you’re looking to donate closely held shares to a charitable cause and want to make the biggest impact, a DAF is a great option. Contact AEF to start making an impact and find the right solution for you or your client.
The information provided herein is for informational purposes only and should not be interpreted to constitute legal and/or tax advice. Donors should consult their legal and tax advisors regarding their specific situations.