Seven Considerations for Gifting Real Estate and Closely Held Stock
October 27, 2021
By Sheila Zamanian
At the 26th Annual DJCF/SWCF Professional Advisors Seminar, keynote speaker Dana Holt discussed the secrets of non-cash gifts through various case studies.
Key recommendations from Dana included:
Engage in Detailed Goal Planning
Many professionals focus philanthropic conversations on the technical aspects of gift giving instead of the client’s goals. A study shows that advisors believe a client’s main reason for giving is to reduce taxes, while clients stated their motivation is to instill values in other generations and experience the joy of giving. Tax impacts do not determine the why of giving but, instead, the when of giving (e.g., during life, at the sale of a business, at death). Understanding this and the client’s specific goals for gifting assists the planning process.
Involve Selected Charities Early
Many charities are not prepared or able to accept a more complex asset like closely held stock or real estate. Therefore, it’s important to talk to the charity in the early planning stages. If the charity is not able to accept such a gift, consider a donor-advised fund (“DAF”). A DAF is equipped to handle more complex transactions. The DAF can liquidate the non-cash assets and then get the funds to the charity of your client’s choice.
Donate Highly Appreciated Assets
To maximize a deduction, donate the most appreciated assets. The fair market value of the asset will result in the highest possible deduction for the client without having to recognize the gain on the asset.
Pair Deductions with Extra Income
If a client expects a liquidity event, this may be the time when they will also want to make a big charitable deduction. This is an example of the timing (when) impacting the tax reasons far more than the goals (why) of the gift. Consider this early in the process, not when the liquidity event it complete.
Allow Gifting Goals to Guide the Techniques
It’s easy to become comfortable with a particular technique or tool and use it for every gift. Avoid this tendency. Instead, first engage in goal development and allow this to lead the choice of technique.
Don’t Conduct Pre-Arranged Sales
It’s important that the gift to the charity and the charity’s sale of the asset received are distinct, arms-length transactions. Charities are not in the business of keeping an asset like real estate, and so they will want an exit plan. An interested buyer is just fine, but it’s important to avoid any actual agreement to terms before the gift is made to a charity. If a pre-arranged sale is considered to have occurred, the donor will have to recognize the gain on the sale of the asset.
Don’t Donate Mortgaged Property
Donating mortgaged property can result in income to the donor in the amount of the outstanding loan. If the mortgaged property is donated to a charitable remainder trust, that can disqualify the trust.
Of course, this list is not exhaustive, and each client’s situation is unique. That is why consultation with an experienced advisor us recommended.