Valuing Non-Cash Assets for Charity

Replenishing a Donor Advised Fund with appreciated stock or other non-cash assets can be a tax-advantaged move for donors, but the transaction requires planning and care that simple transfers of cash do not.

Gifts of 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 there things donors absolutely must be aware of in order to properly claim a charitable gift deduction, experts warn.

Chase Magnuson, president of Virginia-based Real Estate for Charities, says donors and their advisors need to know about “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.

The Internal Revenue Service requires that these assets be valued, a sometimes difficult task for things like illiquid company stock, land, privately held corporations or anything else not priced by a public market.

“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?” 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.  Cash, he says, is almost never the right asset.

Most wealth is in non-cash assets

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. 

“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.

“If donors are going to gift something that’s not publicly traded and for which there’s not a ready market, it’s their obligation to obtain the appraisal,” Mr. Rotstein says. 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. He is a managing director at Willamette Management Associates in Chicago who frequently testifies about valuations in court.

Because of the IRS’s specific rules about valuation, donors might consider asking a potential appraiser these questions:

• 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.