Private Stock Finding Its Way Into Donor Advised Funds, Says Fidelity’s Valas

‘Complex’ assets, especially C- and S-Corp shares, can be particularly valuable when gifted to DAFs

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The time is right for charitable giving of ‘complex assets,’ especially to donor advised funds, thanks to the rise in mergers and acquisitions and IPOs over the past year, and the growing ranks of boomer business owners who are looking to exit their businesses and are thus anticipating a liquidity event.

That was the takeaway from a conversation on Thursday with Karla Valas (left), who heads the Complex Assets Group that focuses on donations of such assets—noncash, illiquid assets, often nonpublic shares of S-Corp or C-Corp  stock—for Fidelity Charitable Gift Fund.

The insight was supported by the most recent report from the Gift Fund, which found that donations of these assets quadrupled in the first quarter of 2011, to $24 million, or 9% of all contributions to the Fund, compared to $6 million, or 2% of all donations, in the first quarter of 2010. “The real wealth in this country is in private businesses and real estate,” Valas said, neither of which is particularly liquid.

Valas says the spike can also be attributed to “growing awareness” among investors and their advisors of the value of gifting private assets as well as public assets for both tax-reduction purposes and legacy reasons.

She cautions, however, that gifting private stock can be a complex, lengthy process to both accommodate the sale of that private stock and to comply with Internal Revenue Service regulations, particularly when it comes to not running afoul of the IRS’s ‘anticipatory assignment of income’ rules (See IRS Bulletin addressing in part this section of the IRC).

There is also growing awareness, Valas said, of the double tax advantage enjoyed by taxpayers who donate to a donor-advised fund: Not only are the contributions fully deductible at their current fair market value, subject to an appraisal, but the taxpayer does not have to pay capital gains tax on the appreciation of the asset.

That second advantage can be particularly attractive to those who own a business and those employed by a private business who have been given or who have bought stock at a very low basis and which at the time of gifting has appreciated greatly. One other value of a DAF, emanating from its status as a public charity, is that the donor gets the tax benefit immediately, but can then direct the fund to make grants to multiple charities over time. 

Overall, donations increased 25% to the Gift Fund over the prior year to $269 million in 2011’s first quarter, which Valas pointed out is usually a slow quarter for charitable giving. Fund donors recommended $293 million in outgoing grants in the quarter, an 8% rise over Q1 2010’s grants.

Valas spoke in New York immediately before running the latest in a series of educational seminars that the Gift Fund is holding across the country that is attracting advisors looking to learn more about donor advised funds and charitable giving strategies. Upcoming seminars will be held Philadelphia on Sept. 27; Chicago on Oct. 12; and Boston on Oct. 20.

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