We often share that 91 percent of an average American’s estate is made up of non-cash assets like real estate, retirement funds, stocks, securities, or business- or farm-related goods. It’s a great idea to consider supporting charity through these assets—both for the tax benefits and to keep your liquid capital intact.
Stephanie Hoff is a former CPA-turned-gift strategist at WaterStone in Colorado. She helps donors envision creative, tax-efficient ways to make a difference for their favorite causes—both now and through their estates—and helps nonprofits educate supporters on this topic. “I guess you could say I used to spend taxpayer dollars…now I save taxpayer dollars!” she jokes. “‘More money to charity and less money to the IRS!’ could be my motto.”
We recently sat down with Stephanie, who shared a few of her favorite non-cash or asset-based charitable giving strategies:
1. Maintain flexibility and privacy through a Donor Advised Fund (DAF)
A main focus at WaterStone is donor advised funds—also known as DAFs or “Giving Funds.” DAF funds are set aside for charitable giving—and grow tax-free—until you decide how and when to grant those dollars to your favorite causes.
“The only requirement for a DAF disbursement is that it must be made to a public 501(C)3,” Hoff explains. “We do some due diligence to make sure the organization is legitimate, and also to make sure they’re not antithetical to our statement of faith. But other than that, there are no requirements on the percentage of funds that need to go out annually, minimum balance, etc. There are also lots of anonymity options. It’s a great option for donors who want their giving to stay private.”
Here are some ways to utilize a Donor Advised Fund:
- Fund a DAF with long-term appreciated assets and you’ll bypass capital gains tax on the appreciation—and get to take a fair-market-value charitable income tax deduction for the gift.
- Grant the DAF money to charity right away, set up automatic disbursements over a period of time, or let it grow and send annual earnings to charity, kind of like a mini endowment fund.
- Facilitate leaving a meaningful legacy by setting up your kids/heirs as successor advisors on the account.
2. Plan non-cash gifts ahead of upcoming income–and tax legislation changes
“There’s lots of talk of potential tax legislation changes coming, and interest rates are high,” Hoff explains. “People are liquidating companies before tax rates change, and it’s wise to get a foundation like WaterStone—or another charity—involved before those high-income events.”
If you can make a gift of an asset—even a partial gift of real estate or business interest—it can give you a huge tax advantage!
3. Gift appreciated stock instead of cash
“Alright, let’s say you have Apple stock that’s gone way up in value. You could sell it, pay capital gains tax on the appreciation in value, and give any cash left over. You’d get a normal charitable deduction for that cash gift,” Hoff explains. “Or, you could give the appreciated stock outright to a charity, donor-advised fund, or foundation—or all three—and completely avoid paying capital gains tax on the appreciation. You get a charitable deduction for the full value of the Apple stock on the day it was donated, instead of the after-tax sale amount. The amount that would have gone to capital gains tax is now going to charity!”
4. Gift real estate
Do you have a lot of real estate? Consider making a full or partial donation to charity instead of doing a 1031 Exchange. Or if you’re selling three properties, donate one and use the charitable deduction to reduce the taxes paid on the other property sales, Hoff suggests.
She mentions one donor who wanted to donate 10% of their real estate—basically a tithe, like in the Bible—by recording a deed that allocated a portion of the property ownership to WaterStone, which is a public 501(c)3. They avoided tax on the gifted percentage of the property at the time of sale, while also receiving a charitable deduction for 10% of the value.
“For all complex assets, the process is a little different, but the concept is the same. Donors are usually completely avoiding capital gains tax while also getting a fair-market-value charitable deduction.” -Stephanie Hoff
5. Consider giving crops or other agricultural products/equipment
All you have to do is put a charity’s name on an account at the grainery/bin, and you can gift crops. You won’t get a charitable deduction for this, but you do get to decrease your taxable income for the year, while still claiming the expenses on Schedule F—which can be significant.
Hoff had one donor—another farmer—who used his John Deere rep to find another farmer in the area to buy the machine after it was gifted to WaterStone. He got a charitable tax deduction for the gift, and WaterStone could liquidate it quickly and easily.
Real estate can also be used to fund a Charitable Remainder Trust. This could give you more income than you’d get renting out that same property—consider farmland, a rental property, a mobile home park, or even a McDonald’s lease!
6. Most importantly, make charitable gifts before selling assets
Similarly to Apex, Hoff’s first step is helping donors determine their goals. Are they wanting to save on taxes? Is there a building campaign they want to support right now? Are they creating a legacy that’ll play out over decades? Do they want to invest or meet a goal—like 10% of their estate or $1M—for their charitable giving? Someone’s big-picture situation, age, needs, and goals should drive their giving strategy.
But it’s important to ask these questions before selling assets. If you’ve already sold a property or other asset, it’s too late to fund a charitable trust or DAF. There may still be ways to get deductions and reduce their tax liability, but it just might not be quite as tax-efficient as the reverse would have been.