Trapped Wealth: Turning NonCash Assets into Smart Giving
Submitted by American Endowment Foundation on January 13th, 2016
By Eric Kinaitis
According to a Boston College study, US household assets are valued at nearly $70 trillion, with only 5% of that value held in cash. Yet nearly 75% of all charitable donations are made either using cash or publicly traded stock. With the majority of wealth held in other assets, why are most charitable gifts made from cash or public stock? Liquidity and lack of awareness are the likely answers.
The inherent liquidity of cash (or the ability of publicly-traded shares to be easily sold for cash) allows non-profit organizations to cover the expenses of fulfilling their charitable mission. Because of its flexibility, cash is likely the preferred asset for non-profits to receive.
But for a donor, is cash the best thing to give? It can be a common practice for a donor to liquidate stock holdings for the purpose of making a cash gift. For many donors, lack of awareness that other assets can be given or how they can be gifted is a likely culprit in making their choice.
Let’s look at a few different scenarios:
If we look at an example of determining how noncash assets can be given, let’s look at how an appreciated stock can be gifted directly instead of being liquidated. If we look at the table, each gift is the same dollar amount and each gift creates a charitable deduction of $7,920 for the donor. However, by donating a stock that may have had significant growth in the last decade, the donor can also avoid the capital gains tax and net investment income tax they may pay if they were to normally sell the stock. This can trigger an additional tax savings to the donor of about $3,570 and means that the donor really only “paid” $8,510 for that particular $20,000 gift.
Utilize our noncash assets calculator to see the differences that can occur when comparing the after tax cost of cash donations vs. stock. The same concepts and calculation can additionally be utilized with other noncash or illiquid assets such as mutual funds, real estate or grain.
Another scenario is looking at the wealth trapped within closely-held shares. Collectively, businesses structured as S-corps number nearly 4.5 million individual businesses and those structured as C-corps represent another 1.7 million. It is estimated that the wealth in S-corps may represent assets of over $3 trillion. Not only may potential donors not realize how those shares could be gifted, but many charitable organizations simply may be unwilling to accept such an asset due to their lack of understanding of how to convert it into usable cash. Even some donor advised fund administrators may also be unwilling to engage in such illiquid gifts due to a lack of understanding of how to manage the complexity involved.
The paths to untrapping the wealth of S-corp shares and C-corp shares vary, but both are innovative means that allow a donor to make a charitable gift in ways that are tax-smart. At American Endowment Foundation, we have the experience and ability to map out the process for donors and their financial advisors to achieve the best tax savings available using illiquid assets.
All of these efforts can help a donor in pre-funding multiple years of future giving through the use of a donor advised fund.
Download our Ebook on Trapped Wealth to learn more.
(Portions of this article were excerpted from “Getting Bigger ' Bank' for the Buck” by Laura Malone, CRAIN'S Cleveland Business, Estate Planning Supplement, November 9, 2015.)