When a donor wants to make a significant gift to an institution or to an organization, the default thinking is to use available cash or other relatively liquid investments such as listed equities whether from a private foundation, a Donor Advised Fund or a checkbook. In some cases, however, when there is not enough cash available, but the donor still wants to make one or more significant gifts it may be time to look at alternative options such as using non-cash assets to fund the gift and achieve the kind of impact around the issue or issues he or she cares most deeply about.
Using assets such as art, securities, land or intellectual property as an alternative to, or in addition to, traditional financial support is becoming increasingly popular, particularly for individuals who would prefer to preserve their capital. There are tax benefits as well. A donor can potentially avoid capital gains taxes that may arise if the asset is sold, while simultaneously getting a charitable deduction.
Along with the positives associated with contributing non-cash assets, there are also pitfalls and challenges to take into consideration. There is the issue, for the recipient organization, of what to do with the gift. Securities are easy; they are liquid. Hold on to them and reap the reward when they increase in value or sell them for the current value. Interest or dividend bearing securities can provide much needed revenue or can be reinvested. Non-cash assets can be more of a burden to an organization than a benefit.
A gift of land carries with it ongoing costs for maintenance and taxes. Unless the land gift includes the financial resources to cover these costs, the recipient organization may have inherited an additional financial burden that it simply cannot absorb.
While every gift is appreciated, what does an organization do with a piece of art? Clearly what they really need, and want, is the cash value. While the gift may be well meaning, converting it to cash will cost an organization both time and money…not always readily available. There are costs associated with the valuation and sale of the art and what happens if there is not a ready market to sell it? For many organizations the greatest need is for general operating support. This helps the organization keep the lights on, fund initiatives, keep or hire staff and generally continue to do the work they are committed to doing. In making a gift, the donor should consider whether it is realistic for the organization to be the recipient.
Then there is the question of validating value and not just relative to a piece of art. With intellectual property, the holder of an asset may attach greater value to it then is realistic particularly if the holder created the property involved. Their emotional connection can skew perspective.
Intellectual property (IP) is a complicated non-cash asset. Whether a trademark, patent, copyright or trade secret, even when properly valued, the IP can pose some unique challenges for both the holder and the recipient. There can be overlaps – a copyright or patent might also be a trade secret. Alternatively, an individual could own the rights in the underlying work, but the application of the work may be covered by a separate intellectual property right. In these instances, ownership of both interests needs to be addressed to ensure that the appropriate actions have been taken to value, protect, and transfer the rights and interests.
So What Should a Donor Know About Using Non-cash Assets to Fund Charitable Gifts?
- Is the ownership of the asset clear and unencumbered or are there specific restrictions or expectations connected to the use or transfer of ownership? For example, if the gift is land and the donor wants the land to be used in a certain way, this may cause problems for the recipient organization;
- Does the donor have full ownership? A partial interest in any intellectual property is non-deductible. In order for a donor to receive credit for the gift, they must donate their entire interest in the intellectual property;
- If the asset is a piece of art, documentation of provenance must accompany the art piece along with valuation;
- If the gift is licensing rights, the recipients must adhere to the licensing terms. This can place a burden on an organization not equipped to enforce the rights;
- If the gift is a copyright of a book, the charity may get the royalties associated with the copyright. However, if the copyright is shared between the author and the publisher or other parties, there has to be documentation regarding the relinquishing of all rights. If the creator of the asset donates it directly, and has not sold the asset previously, then he or she can only get a deduction on the cost basis, not the market value of the asset unless the market value has been determined. Valuation is based on market value of the same or similar item or replacement value or present value of revenue generated (royalties x length of patent or trademark rights).
Even with the best intentions as motivation it is a good idea to discuss the viability and applicability of a non-cash gift with the intended organization. The relationship between donors and the organizations they support is a partnership. In any good partnership there has to be good communication, with both parties understanding and agreeing to the terms and conditions, and expectations, connected to any gift.
A final consideration: In many instances, gifting non-cash assets should be one of the discussion points in the estate planning process particularly if there is a desire to reduce potential tax to the corpus or if heirs are not interested in having the assets in question.
Susan Winer, Co-Founder of Strategic Philanthropy, Ltd., a global philanthropic advisory firm headquartered in Chicago and working solely with high net worth and ultra-high net worth donors. Since 2000 the firm has been at the forefront of helping individuals, families, closely held and family owned businesses plan, assess, and manage their charitable giving to ensure that they achieve measurable impact with their philanthropic investments. Strategic Philanthropy, Ltd. works in partnership with the clients’ legal and financial advisors, providing customized support to donors whether just starting out, revisiting or revising their charitable activities.
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