When you think about charitable giving, you may first think about donating cash. Then, perhaps gifts of publicly traded securities.
Community foundations, however, can accept additional assets that benefit both donors and nonprofits.
This includes complex assets that many smaller nonprofits cannot accept directly, such as gifts of real estate, privately-held stock and business shares, providing significant benefits to you and the causes you care about.
In this article, let’s examine how gifts of privately-held stock to community foundations can open new avenues to maximize your giving.
What is Privately-Held Stock?
Privately-held stock represents ownership in a company that is not publicly traded on the stock market. These companies are typically smaller, family-owned businesses, or large corporations that have chosen to remain private.
While these stocks aren’t as liquid as their publicly traded counterparts, they can be a valuable and strategic asset for charitable donations.
Importance of Preparing Early
Timing is essential when planning to donate privately-held business interests.
Business exit opportunities can arise quickly, and the window to make charitable donations in a tax-efficient manner can be narrow. Early preparation and planning conversations with all relevant parties—such as your advisors and potential charitable recipients—are crucial.
By engaging in these discussions early, you can ensure that the legal transfer of business interests occurs smoothly, without delaying the sale process. This not only maximizes the tax benefits of your donation but also enhances your philanthropic impact.
The Appraisal Requirement
One of the most critical steps in donating privately-held stock is obtaining a qualified appraisal to determine the stock’s fair market value. This appraisal is essential for substantiating the charitable tax deduction.
It’s important to start this process early, well before the donation is made, to avoid scrambling at tax time.
The appraisal can be obtained no earlier than 60 days before the donation date, and it must be completed before the donor’s annual tax return is due for the year of the donation.
Engaging with a qualified appraiser early on allows you to establish the stock’s value and ensures that your charitable contribution is accurately documented.
Choosing a Charitable Giving Strategy
When donating privately-held stock, choosing the right charitable giving strategy is paramount. Donors have several options, including donating directly to an operating charity (if they are setup to accept the asset directly), setting up a private foundation, or contributing to a donor-advised fund (DAF) at a public charity, such as a community foundation.
Among these, a DAF often offers the most flexibility, expertise and tax benefits.
Contributions to a DAF allow for a fair market value deduction of up to 30% of your adjusted gross income (AGI), similar to direct donations to operating charities. Additionally, DAF sponsors like San Diego Foundation (SDF) often have in-house expertise to handle the complexities of donating non-publicly traded assets, making the process smoother and more efficient for donors and their advisors.
Three Benefits of Donating Privately-Held Stock
Donating privately-held stock is not just a generous act – it’s a smart financial move that can significantly enhance your philanthropic efforts in San Diego and beyond.
- Tax-Smart: One of the primary benefits of donating privately-held stock is the potential for significant tax savings. You can often deduct the fair market value of the stock and avoid capital gains taxes that would have been incurred if the stock were sold.
- Maximize Impact: By donating an appreciated asset, you can contribute more than if you would have sold the stock first and had to pay capital gains taxes on the sale.
- Strategic Philanthropy: By contributing privately-held stock directly to a community foundation, such as SDF, you maximize your giving potential and choose nonprofits and initiatives to support over time – allowing you to be more strategic about your giving.
By understanding these benefits, you can make informed decisions that align your charitable goals with tax-smart financial strategies.
Considerations for Donors
Before donating privately-held stock, it’s essential to be aware of several important considerations.
- Liquidity: Unlike publicly traded securities, privately-held stock is less liquid. You should work with your advisors and your community foundation or charitable experts to understand how the donation will be managed.
- Restrictions: Some privately-held stocks come with transfer restrictions or buy-sell agreements. It’s crucial to review these details before making a donation.
- Tax Implications: Donors should consult with tax advisors to navigate the complex tax landscape associated with privately-held stock donations.
By carefully evaluating these factors, you can make well-informed decisions that maximize your giving while minimizing potential challenges.
Utilizing Experts
Navigating the complexities of donating privately-held stock requires expert guidance. Collaborating with trusted advisors, such as attorneys, accountants, and financial advisors, ensures that your charitable donation aligns with your broader financial and legacy planning goals.
Additionally, working closely with your local community foundation or recipient charity’s experts – who specialize in converting non-publicly traded assets into charitable dollars – can streamline the process, making it easier for you to achieve your philanthropic objectives without disrupting larger business transactions.
How to Donate Privately-Held Stock to a Community Foundation
The process of donating privately-held stock involves several key steps to ensure a smooth and beneficial transaction for both you and your community foundation.
Remember: Timing is essential when planning to donate privately-held business interests. You must first engage in the charitable giving process before the business sale begins.
The next step is obtaining a qualified appraisal to determine the stock’s fair market value. This appraisal is essential for tax deduction purposes. This process is called the valuation.
The next step is transferring of ownership of the stock to your community foundation. Work with the foundation and your financial advisors to transfer the stock. This process may involve transferring shares or establishing a charitable trust.
At SDF, our giving experts work directly with you and your advisors to ensure this process is smooth and streamlined.
Lastly, the community foundation will liquidate the stock or hold it as part of their investment portfolio, depending on their policies and your wishes.
Once your giving account – most often a donor-advised fund (DAF) – at the community foundation is funded, you can support charities and initiatives from your fund that matter most to you.
Following these steps can help you navigate the complexities of donating privately-held stock and maximize the impact of your gift.
FAQs about Donating Privately-Held Stock
- What is privately-held stock?
Privately-held stock refers to shares in a company that are not publicly traded on the stock market. These stocks are often from family-owned businesses or private corporations. - What are the tax benefits of donating privately-held stock to a community foundation?
You can deduct the fair market value of the donated stock from your taxes and avoid paying capital gains taxes that would apply if the stock were sold. Relatedly, this maximizes your gifts for charity. - How is the value of privately-held stock determined for donation purposes?
The value is determined through a qualified appraisal, which is necessary for tax deduction purposes and to establish the stock’s fair market value. - What steps should I follow to donate privately-held stock to a community foundation?
The process includes obtaining a valuation, transferring ownership, and working with your community foundation to manage the donation, either by liquidating the stock or holding it in their investment portfolio. - Are there any restrictions or special considerations when donating privately-held stock?
You should be aware of liquidity issues, potential transfer restrictions and any buy-sell agreements associated with the stock. Consulting with your legal and tax advisors is crucial. - How can donating privately-held stock benefit my community?
Donations of privately-held stock to a community foundation can provide significant financial support for local initiatives. Through your fund at the foundation, you can support nonprofits, programs and initiatives that matter most to you.
Maximizing the Impact of Your Donation
By donating privately-held stock to a community foundation, you can maximize the impact of your gift while benefiting from significant tax savings. This strategic approach not only supports the causes you care about but also aligns with tax-smart financial strategies that enhance your overall philanthropic efforts.
Early preparation, obtaining a qualified appraisal, choosing the right charitable vehicle, and leveraging expert advice are key to successfully donating privately-held stock. By taking these steps, you can successfully transition into the next charitable phase of your life.
For more information on how to donate privately-held stock and explore charitable giving options through SDF, contact us today.
