Valuing Complex Assets: What Every Advisor Should Know

Bryan Clontz specializes in brokering gifts of non-cash assets to charity, so he has seen his share of unusual donations. But even he was nonplussed when a community foundation called and asked if he could help them accept and quickly liquidate a collection of 88 stuffed and mounted safari trophies, among them an elephant and a black rhinoceros.

“They wanted the money, but not the animals, which also included a three-legged Arctic fox,” the founder and president of Charitable Solutions, LLC, told professional advisors at the Boston Foundation on April 30. Fortunately, Mr. Clontz was able to arrange for an auction that yielded about $325,000 for charity.

While very few people have taxidermy collections to donate, non-cash (or complex) assets have enormous potential for good because charities, unlike regular people, don’t pay capital gains taxes when appreciated property (held longer than a year) is sold. Yet giving complex assets, such as illiquid company stock, land, privately held corporations or anything else not priced by a public market, requires planning and care that simple donations of cash don’t.

“Land mines”

Chase Magnuson, president of Virginia-based Real Estate for Charities, says advisors need to be aware of “the land mines they can step on that turn an otherwise wonderful gift into a nightmare for the donor and eventually for the charity.”

The two biggest land mines are timing – shares in a closely held business, for example, must be donated before there is a signed purchase and sale agreement if the donor wants a tax deduction – and valuation. Advisors whose clients have upcoming liquidity events should raise the subject of charitable giving sooner, rather than later, because of IRS rules.

“It’s almost the obligation of the advisor to bring this up early so that a solution like this isn’t missed,” says Elliot Rotstein, a Boston-based Vice President of Management Planning Inc., which specializes in valuing interests in closely held businesses and private-equity and hedge funds.  “The three things people need to consider are: what is the best asset to give, what is the right time to give it and what is the right vehicle to use?” Cash, he says, is almost never the right asset.

While only 5 percent of the $69.7 trillion in American household assets is cash, it and publicly traded securities account for 75 percent of all itemized charitable donations, according to John Havens of the Center on Wealth and Philanthropy at Boston College. 

That may partly be due to the inability of many small charities to handle gifts of complex assets.

“By giving complex assets through the Boston Foundation to establish or replenish a Donor Advised Fund, donors can make grants to smaller nonprofits that would otherwise be unable to accept the gift,” says Laura T. Godine, Senior Director of Professional Advisor Relations. So far, she says, the Foundation has been able to handle virtually every kind of asset.  “Someone once gave us a share in a cruise ship! That yielded close to $30 million for his Donor Advised Fund.”

Determining fair market value is key

Donors must obtain a “qualified appraisal” for the asset they are giving away, and that appraisal must be dated no earlier than 60 days before the gift and no later than the filing date of the tax return for the year of the gift. “The burden here rests with the charity and the professional advisors,” notes Mr. Rotstein, an incoming member of the Boston Foundation’s Professional Advisor Network. “The advisors need to let their clients know that if they are going to gift something that’s not publicly traded and for which there’s not a ready market, it’s the donor’s obligation to obtain the appraisal.” That’s because the donor will be submitting an IRS form 8283 with his or her tax return, a document declaring the gift’s fair market value. And the form has to be signed by the appraiser, the charity and the taxpayer.

“It happens all the time that donors don’t realize they have to complete the 8283,” explains Robert F. Reilly, a CPA and author of a recent textbook on valuing complex assets. Advisors should let their clients know what documentation and substantiation requirements must be met in order to successfully claim a charitable deduction on their taxes, according to Mr. Reilly, a managing director at Willamette Management Associates in Chicago who frequently testifies about valuations in court.

How to select an appraiser

Advisors should also help their clients find and vet appraisers. “Advisors need to ask the right questions to ensure that the Internal Revenue Service’s qualified appraisal test will be met,” says Reilly, who suggests asking:

• Does the appraiser have experience with charitable contribution appraisals for this type of property?
• Last year, how many 8283s did the appraiser sign for this kind of asset?
• Does the appraiser have experience defending his or her work before the IRS?

Nelson Clayton, an accredited senior appraiser who serves on the Board of Governors of the American Society of Appraisers, says appraisers generally charge $100 to $500 an hour and should never base their fee on the percentage of the value or offer to purchase the item.

Appraisers should also be willing to testify if the charitable deduction becomes the subject of an audit or a tax court case, according to Mr. Reilly. Courts are getting stricter, and “judges are expecting better substantiated appraisals than they would have accepted 10 years ago,” he says.