Worth Knowing: Making Gifts of Specialty Assets Work for Your Organization

Without the proper planning, accepting gifts of real assets today can lead to unexpected and potentially costly consequences.

A rancher wishes to donate several hundred acres of pasture to your organization. A senior executive desires to contribute company stock. A family wishes to bequeath oil, gas and mineral rights.

As a generation of aging donors finalizes plans for transferring their wealth, philanthropy often assumes a role of greater importance in their overall legacy planning strategy. A desire to minimize capital gains and estate taxes and avoid probate compels many individuals and families to propose gifts of securities, business partnerships, timber holdings, farms and ranches, and energy interests to charitable entities.

Yet many organizations restrict gifts to cash and marketable securities to avoid some of the complexities involved in gifts of specialty assets. Organizations that have policies in place for accepting and managing these assets may be better positioned to potentially benefit as the "greatest generation" bequeaths its wealth in the coming years.

When presented with a gift of specialty assets, it's important to weigh your organization's desire to build long-lasting relationships with key benefactors and derive financial benefits from these assets against your ability to:

  • Perform the due diligence required to properly evaluate the rules, risks and expenses involved in accepting, managing and selling a particular asset
  • Provide ongoing operational management of specialty assets donated to your organization
  • Integrate the investment characteristics of specialty assets into your overall portfolio management strategy
  • Identify and avoid potential conflicts of interest

Understanding the unique characteristics of specialty assets can provide the foundation for establishing a standardized process for evaluating gift proposals.

ESTABLISHING A GIFT ACCEPTANCE POLICY

Many organizations implement standardized processes for evaluating, accepting, managing and disposing of gis and communicate these guidelines to staff, board members and donors in the form of a formal gi acceptance policy. Such a policy should clearly state:

  • The categories of gifts, including cash, securities or specialty assets, your organization may accept
  • The processes that will be used to evaluate gift proposals and transfer, manage and sell approved assets
  • Policies governing restricted gifts
  • Which roles within the organization assume fiduciary responsibility for evaluating, managing and selling donated assets
  • Guidelines for helping to avoid potential conflicts of interest
  • The legal responsibility of the donor versus the institution in terms of appraising and transferring the gift
  • Conditions under which the organization may seek the advice of legal counsel

If your organization serves as trustee for a planned giving program, your policy may also want to address:

  • What kinds of assets can be contributed (and which cannot be contributed) to split interest trusts, charitable gift annuities and other charitable giving vehicles
  • The processes your organization will use to sell the asset and diversify assets in a manner that meets the specific objectives of a particular trust

A standardized gift acceptance policy can provide guidance for donors and their financial and legal advisors; create an objective, accountable evaluation process for gi committees; and help reduce risk.

SPECIALTY ASSETS

For many individuals and families, specialty assets, such as highly appreciated real estate holdings and closely held businesses, represent a significant portion of their total net worth. Contributing these assets to charity on an irrevocable basis may entitle them to an immediate income tax deduction and further enable donors to remove them from their estate and avoid paying potential capital gains taxes on their sale. It can also relieve them of the costs associated with owning these assets

Contrary to the old adage, "Don't look a gift horse in the mouth," due diligence should serve as your guiding principle to help ensure that a specialty asset doesn't become a Trojan horse that could put your organization at legal or financial risk. This level of research, however, may be beyond your organization's capability to complete.

Many charitable organizations don't have the expertise needed to thoroughly evaluate proposed gifts of specialty assets. Having access to consultants with in-depth knowledge of such things is invaluable as they can provide fiduciary services for evaluating, managing and selling real estate, farms and ranches, timberland, closely held businesses, and oil and gas interests.

For example, if a donor proposes contributing several hundred acres of undeveloped farmland, the organization may need to perform a thorough title search and conduct environmental studies to make sure the property isn't contaminated or subject to federal and state wetlands protection that could subject the institution to expensive remediation.

Developed properties can also carry unknown or undesirable expenses, especially if they must be managed over an extended period of time before they can be sold.

Families often want to contribute improved property, such as an apartment or retail building. Before accepting it, an organization needs to evaluate its location, condition and surrounding neighborhood to determine its marketability. And until it can be sold, the organization is financially responsible for insuring the improvements and, if applicable, supervising the property manager responsible for maintenance and collection of lease payments

While institutions can use outside companies to assist them in dealing with specialty assets, working with a bank or trust organization that offers these specialized services can provide an added layer of fiduciary protection should problems arise.

TAX ISSUES

While the deductibility of cash donations is generally easy to calculate, gifts of non-cash assets invoke rules of greater complexity in determining valuations and deductibility limits. Furthermore, contributing non-cash assets to split interest trusts adds additional complexities, since different kinds of trusts offer varied benefits.

Generally, the donor works with his/her financial planner and tax attorney to determine which charitable vehicle makes sense. However, you should not assume that this decision-making process has taken place before a donor approaches you. It's important to ascertain whether the donor has sought legal counsel before proposing any kind of gift and what kinds of responsibilities the donor will cede to your organization once the gift has been made.

Nonprofits are not in the business of providing tax advice. That is best left to the donor's own tax advisor.

However, charitable gifts generally result in advantageous tax implications for the donor; therefore, nonprofit organizations often discuss the tax-deductible nature of charitable gifts.

If organizations are having these discussions, they need to make sure that what they're telling the donor is correct. These rules are complex, especially those governing specialty assets. In particular, abuses in valuations over the years have resulted in a whole host of new rules. For example, certain types of gifts require substantiation from the charity. Others may require formal appraisals. Gifts of certain kinds of property, such as copyrights, life insurance and vehicles, have their own sets of rules. That's why it's important for an organization to work with donors and their tax advisors in a manner that clearly defines the lines of fiduciary responsibility.

AVOIDING CONFLICTS OF INTEREST

A higher degree of scrutiny should be applied to directors, board members and major contributors who propose gifts of specialty assets to avoid conflict-of-interest situations where the individual might receive special consideration or benefit materially from the donation. Examples of potential conflicts of interest might include:

  • A major contributor pressures the organization to accept a gift of unmarketable property as a "personal favor"
  • The CEO of a healthcare company, who also serves as a board member of a medical school, proposes a gift of stock to fund a research study whose findings could commercially benefit his company
  • A donor wishes to contribute a minority interest in his business, but still wants to maintain control over its operations

Working with your legal counsel to implement and communicate a conflict of interest policy can help protect your organization against reputational and legal risk.

BE PREPARED TO POTENTIALLY BENEFIT

Organizations that are able to accept specialty assets may be better positioned to help meet their future financial and philanthropic commitments. Establishing procedures for evaluating and managing these gifts will ensure that your organization employs prudence in fulfilling this complex responsibility

The Specialty Asset Management group and Institutional Investments and Philanthropic Solutions can offer you the breadth of skills and depth of resources required to develop a gift acceptance policy and help you achieve the potential benefits of specialty assets.

To learn more about how gifts of specialty assets can work for your organization, contact your advisor.

Institutional Investments & Philanthropic Solutions ("II&PS") is part of U.S. Trust, Bank of America Corporation ("U.S. Trust"). U.S. Trust operates through Bank of America, N.A. and other subsidiaries of Bank of America Corporation ("BofA Corp.") Bank of America, N.A., Member FDIC. Trust and fiduciary services and other banking products are provided by wholly owned banking affiliates of BofA Corp., including Bank of America, N.A.

The information and views contained in this publication are for informational purposes only and do not provide investment advice or take into account your particular investment objectives, financial situations or needs and are not intended as a recommendation, offer or solicitation for the purchase or sale of any security, financial instrument, or strategy. Any opinions expressed herein are given in good faith, are subject to change without notice, and are only correct as of the stated date of their issue.

This publication is designed to provide general information about ideas and strategies. It is for discussion purposes only, since the availability and effectiveness of any strategy are dependent upon each individual's facts and circumstances. Always consult with your independent attorney, tax advisor, investment manager and insurance agent for final recommendations and before changing or implementing any financial strategy.

Neither U.S. Trust nor any of its affiliates or advisors provide legal, tax or accounting advice. You should consult your legal and/or tax advisors before making any financial decisions.

Nonfinancial assets, such as closely-held businesses, real estate, oil, gas and mineral properties, and timber, farm and ranch land, are complex in nature and involve risks including total loss of value. Special risk considerations include natural events (for example, earthquakes or fires), complex tax considerations, and lack of liquidity. Nonfinancial assets are not suitable for all investors.

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