Newsletter/Blog Posts
AUG: Cryptocurrency Donations--Don't Be Left Behind
Cryptocurrency has been in the news recently for a couple of reasons, and we thought it might be helpful to share our perspective on this interesting asset for charitable giving purposes.
Cryptocurrency Donations: Do You Have FOMO (Fear of Missing Out)?
Cryptocurrency has been in the news recently for a couple of reasons, and we thought it might be helpful to share our perspective on this interesting asset for charitable giving purposes.
The volatility of Bitcoin, the most well-known of the public cryptocurrencies, has led the press coverage over the past few years. Since Jan 2017, the Bitcoin has increased tenfold. The markets for crypto had their ultra-peaks in Dec 17 and Jan 18, were generally depressed through the latter half of 2018, further lost ground in the first quarter of 2019, and have recently been on the rise at a rate outpacing the markets in general, and Bitcoin has increased in value by 20% in the just the past five days. Notwithstanding the highly publicized highs,
Bitcoin remains an appreciated asset for long term holders.
Through this period, we’ve seen the negative press on the risk of a large charity’s portfolio overinvested in cryptocurrency, interest (curiosity?) in Facebook’s announcement of Libra, and the watchdog impact of IRS headlines with an outreach to taxpayers who have not complied with reporting requirements.
It’s no surprise that most charities have cryptocurrency on a list of avoided assets in their gift acceptance policy. The risks are not minimal to an organization: unwelcome publicity and brand impact, uncertainty of the valuation from one day to the next, privacy concerns and difficulty opening a commercial wallet and ultimately the anxiety of not being able to monetize the currency on your timetable.
There is however, considerable value inherent in these assets for certain donors. There are two discrete elements to gifting cryptocurrency assets:
- The donor must get a qualified appraisal for their tax reporting purposes. The key here
is engaging a “qualified appraiser”. - The other is finding a broker/agent who can manage the liquidation for you.
In the case of the occasional crypto donation, finding a partner who can assist in managing this charitable donation may be a better option than trying to manage the gift and liquidation internally.
Charitable Solutions and the Dechomai Foundation offer appraisal and donation services for charitable contributions of Bitcoin and other cryptocurrencies (legally however, we cannot offer both activities on the same gift). Like many illiquid assets, a gift of cryptocurrency can also be used to fund life income needs through gift annuity or remainder trust structures.
Our recent activity in this space include:
- Accepting over $50 million in crypto-related assets in 2018 through Dechomai Foundation
- Completing over 130 qualified appraisals through Charitable Solutions, LLC in the last 18 months
- Speaking (including at NCPP) and writing on the subject in Charitable Gifts of Noncash Assets, 2nd Edition (downloadable here)
We're happy to discuss cryptocurrency with you and your donors at any time, so feel free to give us a call. You can also review our offerings and services at charitablesolutionsllc.com.
JUNE: An S-Corporation Gift
There are more S-corps than C-corps and LLCs combined – but very few donations are occurring. With S-corps, there are subtle nuances that must be considered, not the least of which include the issue of unrelated taxable income (UBTI) on profits earned (pre and post contribution gain) as well as any income during the holding period.
There are more S-corps than C-corps and LLCs combined – but very few donations are occurring. With S-corps, there are subtle nuances that must be considered, not the least of which include the issue of unrelated taxable income (UBTI) on profits earned (pre and post contribution gain) as well as any income during the holding period.
S corporations pass the tax responsibilities to their shareholders, so like members of an LLC, the shareholders are individually responsible for the tax burdens of the business.
In the Spring of this year Charitable Solutions (CS) was approached by a senior planned giving officer at a large community foundation about a potential S corporation gift. The S corporation had two shareholders, a husband and wife, and a potential buyer to whom they expected the business to sell within a few months.
Charitable Solutions connected with the donors and their advisors and talked through the various aspects of the S corporation transaction. The donors had a specific net dollar amount they wanted to donate and understood that the donation of S corporation stock to the charities they wished to support would burden them with material tax liabilities in the form of unrelated business taxable income (UBTI). This meant that CS would have to work with the donors’ and their advisors to estimate the tax liability, so they could decide how much to donate.
Charitable Solutions manages a trust-form Donor Advised Fund, Dechomai Asset Trust (“DAT or the Charity”), which is located in an income tax-free state. However, under IRS regulations, the Charity is still liable for tax on income for each day it owns Subchapter S stock and on the gain from the sale of that stock. In this case the gain on the sale of the shares constituted a larger liability than the tax on the income during the holding period.
Because the Charity is taxed as a trust under the IRC it is allowed a 60% federal charitable deduction for every dollar it grants to another charity. This reduces the effective rate on federal capital gains to 8% from 20% and on ordinary income to 14.8% from 37%. As a result of these tax savings the donors were able to claim a $1.25 million charitable income tax deduction – they actually increased their donation by 10% - while the Charity’s federal tax liability was limited to $100,000.
From first conversation to completed donation, the process took less than two weeks, the community foundation remained involved throughout the process and received the proceeds of the sale within four weeks of the initial conversation.
Charitable Solutions has successfully completed over $500 million of S-corporation donations and LLC interests for many charities using its experience of our uniquely structured Dechomai Asset Trust to reduce or eliminate the tax liabilities. Our fees range between 3 and 1% since inception in 2003 (the average is 1.8%). We can also receive S-corp stock for charitable gift annuities as a life-income alternative to a CRT.
Our 15-person firm exists to make gifts happen that otherwise wouldn’t. If we can help you or your clients/donors with S-corp donations (or any other illiquid asset for that matter) please give us a call. A link to the current line-up of Charitable Solutions' services and offerings is also provided for your files.
MAY: Donor Queries
Are you anxious about having a discussion with one of your donors about an illiquid asset gift? It doesn’t have to be difficult or complicated, and you do not need to know everything about a particular asset type.
Are you anxious about having a discussion with one of your donors about an illiquid asset gift? It doesn’t have to be difficult or complicated, and you do not need to know everything about a particular asset type. Even those new to the development role can be as effective at these conversations as the veterans in your organization.
In every business, there is a point where specific knowledge of a product or issue is beyond the training and experience of an individual. We all have a list of “go-to” people and organizations to check with when we’re uncertain of something.
It may not be obvious, and we can’t stress this enough, but don’t immediately decline the gift opportunity.
Ruben Orduna, VP of Development and Donor Services at the San Francisco Foundation, has a terrific tactic when he gets a donation question he’s unsure of how to answer. Rather than shutting down the conversation with “No, but thank you for thinking of us”, his response is flipped to “That’s very generous of you to think of us. I’m not sure I have all of the information at hand to answer your question, so let me bring in a partner who is pretty knowledgeable on this kind of gift.”
That’s a very positive and engaging response and there’s a big difference for a donor to hear the first words of “no…” vs “thank you…”. It works whether the question is about real estate, hedge fund gifts, business interests, collections of art, complex annuity or trust situations, deferred gifts, and more.
Adhering to a smart gift acceptance policy is important for every organization and responding to some inquiries may involve the consideration of creative work-arounds. Alternate solutions can still achieve the charitable intent of a donor while satisfying those charged with the important duty of managing and mitigating risk and liability for your business.
There are several tactics and nuances to engage your donor by developing the conversation beyond the first impression, and good blogs are on the web that provide insight on how to be effective in these interactions. But you don’t have to have all the answers or build out a full dossier on the donor before you say, “thank you – let me bring in someone with more knowledge on this question than I”.
Our recommendation is to be honest, admit you need some assistance on this gift inquiry, and reach out to someone who can help.
APR: Two Gifts, One Transaction
Combining two split interest gift types into a single transaction isn’t easy. We had a situation presented to us earlier this year, and through some creative thinking and careful risk management, we crafted a great gift solution for the donor.
Combining two split interest gift types into a single transaction isn’t easy. We had a situation presented to us earlier this year, and through some creative thinking and careful risk management, we crafted a great gift solution for the donor. It took our team of Bryan, Gary, and Ryan to figure this out and wrap it up nicely, and frankly we’re a bit proud of the outcome.
The attorney for a donor called and asked about the possibility of using the donor’s residence to provide an income stream for the rest of her life and allow her to continue to live on the property. Like you, we heard “annuity” and “retained life estate” in this query.
The donor is 87 years old and the property is valued at close to $1 million in an affluent area of California.
A retained life estate request alone is straight-forward – a charity receives the deed to the property and agrees to allow the donor to live in it until their passing. On death, the property is sold to a new buyer, and the charity is the beneficiary of the proceeds. A gift of real estate to fund a gift annuity is theoretically straight-forward too. The real estate is donated to a charity, the proceeds of sale are used to fund the annuity, and the residuum benefits the charity at the donor’s end of life.
Putting the two together - an RLE and annuity against the same piece of real estate however is complicated because there’s no cash flow in this arrangement to fund the annuity. No investment proceeds can be converted to cash to make the annuity payments or fund the annual expenses for managing the annuity.
Our team got it to work. We’ll not get into the math and logic in detail, other than to provide a few data points:
- The $1 million property was logically split into a $750,000 remainder interest in the gift and $250,000 as the value of the donor’s life interest.
- The $750,000 remainder interest was used to “fund” the annuity.
- The alignment of the donor’s age and the value of the annuity came together to suggest a favorable combination for the annuity calculation.
- The donor will receive an annual payment of $65,000 and will be responsible for the expenses of the property until her passing, such as taxes, insurance, upkeep etc. (common in RLE arrangements).
- The donor’s tax benefits on the RLE gift separate from the tax benefits from the annuity were a challenge but with the help of our tax experts and Crescendo’s tax calculator our team was able to give the donor’s professionals the proper guidance.
We should probably think about writing a white paper on this gift, but we are opting to share this case with you now at a high level. It worked out nicely for the donor and for Charitable Solutions. We’ve been careful about the risk to be comfortable with the likely 8-10 yr. lifespan of the arrangement. The donor has named 5 charities to be the beneficiaries of the final proceeds of the sale of the property.
Our reference work Charitable Gifts of Noncash Assets (2nd ed, October 2018) is a good companion for those curious about illiquid asset gifts. This situation of a charitable annuity on a real estate gift is one of twelve assets discussed and called out for planning purposes in a new appendix. Other sections have been updated, especially recent insights into virtual currency issues and opportunities. The book also offers a broad introduction to illiquid assets, terms and conditions to be part of one’s gift acceptance thinking, insights into donor conversations, as well as estate settlement issues.
April 2019
MAR: Business Interest Success Story
This successful donation was one of the 72 illiquid asset gifts amounting to more than $350 million managed by Charitable Solutions in 2018. Among these, we noted an uptick in gifts of business interests, similar to the experience of other charities. But
This successful donation was one of the 72 illiquid asset gifts amounting to more than $350 million managed by Charitable Solutions in 2018. Among these, we noted an uptick in gifts of business interests, similar to the experience of other charities. But either because non-profits don’t have the internal expertise and capacity, or they simply walk away from these opportunities, less than 80 organizations among the top 250 in the country handled a business interest gift in the last reported year – a total of 750 gifts averaging $2 million each.
The growth pop isn’t surprising, as the expansion of businesses and the appreciation of investments in them – publicly and privately held positions – has been strong for the past 20 yrs, establishing some serious value. And as the generational shift of wealth evolves, these businesses will be transitioned to new buyers, and finding a way to take some or all of one’s business holdings to leverage an interest in philanthropy can be a smart business move AND a savvy tax play.
Let us share a good example of this, and how a donation of a position in a privately held business played out.
Charitable Solutions was approached last summer by a financial advisor to an extended family who had started an on-line quoting product/service as a partnership LLC. It was a classic “tech startup”, established in 2006 and principally owned by the four related families who had arrived at the decision to find a buyer for the business. Their desire was to donate about $10 million each of the expected proceeds from the transaction to support favorite charities. With the appraisal of the business in hand – valued at close to $300 million - they donated to Charitable Solutions shares worth $40 million.
The multiple business owners had their “village of support” in the form of their own attorneys, accountants, and other advisors, requiring our team to navigate numerous discussions that also included the new buyer (who was in the wings as the deal was brought to us) and the charities. We were able to execute the purchase agreement with the buyer by the middle of the fall.
Was this good for the donors? Yes - first, they were able to monetize a portion of their ownership in this privately held business in a tax advantageous manner and support favorite causes. The appreciation on their shares in the business over their 12 years was significant, being a very successful startup, and they were looking at an exposure to a large capital gains tax. By donating this business interest in-kind, the families were able to avoid the capital gains tax on the $40 million position they gifted to charity.
They also leveraged the tax deduction from the $40 million donation to offset some of the capital gains tax for which they were liable on the sale of the remaining shares. In addition, the minority owners, many of whom were valued employees in the business, were able to participate in the sale of the business and enjoy the profits of their years of work.
Was this a good arrangement for the other stakeholders? Yes – the financial advisor was wise in using a charitable vehicle on a transaction that could have lost a considerable percent of the profit on the sale to taxes. He knew the interests of his clients and worked to ensure the donors achieved the best results possible, recognizing their charitable desires and the need to balance their tax liability with a tax deduction. Four charities each experienced a windfall with minimal involvement in the legal details and negotiations of the sale of a business.
And what was our take on the gift? In fact, it was a straight-forward transaction. There were altruistic donors and a willing buyer involved to be sure, but this still required multiple calls and communications with all the parties, the negotiation of the purchase agreement with the new buyer, and demanded close attention to the reps and warranties of the sale necessitating carve outs and approvals for CS given certain industry-specific regulations. In all, this transaction took about four months to complete and for which Charitable Solutions received a fixed fee for our activities and responsibilities.
To arrive at these 72 gifts for 2018, we handled over 500 inquiries through the year – yes, that’s right: 1 in 7 inquiries converted to a valid gift. There were many reasons these inquiries didn't all resolve into valid donations and it took many conversations to find appropriate gift situations. As noted though, these opportunities are common and business owners should be aware of the benefits of gifting part or all of their ownership to further their philanthropic goals.
March 2019
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FEB: Gifts of Real Estate
We’ve been asked from time to time to share success stories for gift situations that come across our desks at Charitable Solutions. As a first case, this gift from last fall is a good example of certain nuances of the gift acceptance process for a principal residence.
We’ve been asked from time to time to share success stories for gift situations that come across our desks at Charitable Solutions. As a first case, this gift from last fall is a good example of certain nuances of the gift acceptance process for a principal residence.
CS was contacted by a charity asking for assistance with a donor inquiry. The first contact was in July for a property valued at about $6,000,000, located in a generally warm real estate market. There were several back and forth calls with the donor, including the charity rep, to make sure we understand expectations and perspectives of what a successful gift of this property would be to the donors, a husband and wife.
It was also determined that some additional work would increase the resale value of the property, so we negotiated with the donor on those added costs, along with an allowance for potential property taxes during the time of our ownership. Upon taking ownership of the property at the Dechomai Foundation in September, we contracted out for the interior and exterior work, and engaged a local realtor to market the property. We went to contract for the sale in late November (the week of Thanksgiving actually!) and the closing was right after the 12/25 holiday, netting proceeds of about $5.8 million. The grant of funds went out to the charity in mid-January.
Was this good for the donor? Yes - first, the donor liked the result and was appreciative of the effort put forth to complete this gift. The appraised value of the property was right in the vicinity of the sale price. The family was able to avoid about $1.3 million in capital gains taxes after working through the calculations of the appraised value, their cost basis, and the benefit of the exclusion on the sale of their principal residence. The donor effectively converted his illiquid residence into a fund from which he and his family can support their charitable desires for years to come.
Was this a good arrangement for the charity? Yes - they have a satisfied loyal donor who achieved his donative intent and were also pleased with the experience and the result. The charity wasn’t able to a handle a real estate gift of this type, especially given that they were a few thousand miles distant from the residence, property improvements were required, interim property management was necessary for the 3+ months between receiving the property and selling it, and regular interactions with the local real estate brokers were part of making the sale happen. Having Charitable Solutions to turn to in this case proved to be a perfect partnership for them.
And what was our take on the gift? In fact, it was pretty typical for the donation of a principal residence. In all, there were over 100 calls and emails throughout the process between Charitable Solution’s staff with the donors, contractors, the real estate brokers, and keeping the charity informed. In some situations, a potential buyer might be part of the early conversations with the donor, but in this case, we had to hire a realtor to advertise and manage the sale locally. Charitable Solutions collected a fixed fee for our work on this gift.
This is just one example of the of the $350+ million in illiquid assets received and managed by Charitable Solutions in 2018 (72 different gifts averaging about $5 million.) As mentioned, it’s a common gift opportunity in certain geographies, and we are available to discuss this kind of inquiry with you and your donors at any time.
February 2019