Transcript Slide 1

The Power of Donating Complex Assets—
Trends, opportunities and considerations
Mike Hoffman, CAP®
VP, Charitable Planning Consultant
Examples of complex assets
34% of wealthy
• Private Company Stock
• S-Corp
• C-Corp
clients report that
they own complex
assets*
• LLC and Limited Partnership Interests
• Restricted Stock
• Real Estate
• Oil and Gas Royalty Interests
• Certain Alternative Investments
2
*2012 Fidelity Charitable® “Advice & Giving” survey, conducted by Harris Interactive for Fidelity Investments on behalf of Fidelity
Charitable® between March 19 and March 23. 2012. Respondents who work with a paid financial advisor, have at least $100,000 in
household income and a minimum of $1million in investable assets excluding their primary residence
Current trends
Private companies
•Bulk of wealth in this country is held in private companies
–In 2012, total U.S. private equity exit volumes totaled 616 – valued at $142
billion*
–Private business owners are estimated to generate $10 trillion in liquidity
by 2020 as they exit their businesses**
Mergers and acquisitions (M&A)
•M&A activity is off to its fastest start since 2000◊
– In 2012, $982 billion in M&A deals were announced◊
*Private Equity Growth Council, 2012 Private Equity Index and Industry Update
**Exit Planning Institute. “Key Facts About Exit Planning.” 2005. https://www.exit-planning-institute.org/index.php?section=exit-planning&content=key-facts-about-exit-planning)
◊ CNN Money. “M&A Making a Comeback.” 2013. http://money.cnn.com/2013/02/12/investing/merger-acquisition/index.html?iid=HP_Highlight
3
The Opportunity: A tax-efficient way to give
Advisors have a key opportunity to:
• Bring a new idea to a client and increase awareness
– Complex assets are often the most powerful assets to give in a client’s portfolio
• Show clients how to utilize seemingly illiquid assets to fund charitable giving
– There is a perceived complexity around the process of donating complex assets—it’s
not when done correctly
• Help clients give more by minimizing taxes and capital gains
– Lowest cost basis—costs less to give more
72% of advisors say that offering
charitable planning advice is an
effective relationship builder*
* 2012 Fidelity Charitable® “Advice & Giving” survey, conducted by Harris Interactive for Fidelity Investments on
behalf of Fidelity Charitable® between March 15 and 29, 2012.
4
Why donate complex assets to a DAF at a public charity?
Donor-Advised Fund
(DAF)*
Directly to Public Charity
Private Foundation (PF)
Tax deduction
Fair market value
Fair market value
Cost basis
Expertise handling complex
assets
Internal expertise
(some may outsource)
May need to outsource—
could reduce net amount
Generally outsource
Deduction limitation
(federal)
30%
30%
20%
Ability to diversify giving
with one asset
Multiple grants to many
charities with one asset
100% of asset to one charity
Multiple grants to many
charities with one asset
Confidentiality
Anonymity
May generate additional
fundraising
Annual tax filings of IRS Form
990-PF is a public record of
assets, contributors, and grants
Efficiency
One point of contact
transaction
*At a 501(c)(3) public charity.
5
for
Multiple charities requires multiple One point of contact
contacts
transaction
for
Key concerns for donor and charity
Transferability
Liquidity and Timing
Valuation
Risk Management
6
Giving in advance of a business exit/transition*
Donor
STEP 1
STEP 2
STEP 3
Donor contributes shares of
company stock to charity
Tax-exempt charity sells
stock to third-party buyer,
eliminates capital gains tax
Proceeds flow into Donor’s
Giving Account®
The end result:
7
FMV tax deduction, eliminate capital gains , and give more to charity
*During negotiations, material terms of sale cannot be final before involving charity in sale of company.
Case study: Oil & Gas royalties
Situation: Donor is considering a sale of oil & gas interests and potentially using the after-tax proceeds
for charitable gifts.
STEP 1
STEP 2
STEP 3
Donor’s investment managers
contact a charitable planning
consultant
Tax-exempt charity evaluates
the situation and performs due
diligence; negotiates sale with
buyer
The proceeds, less carrying
costs, flow into Donor’s Giving
Account®
Considerations
•How marketable is the asset?
•Is the donor willing to make the irrevocable contribution?
•What are the carrying costs and risks to the charity?
•Valuation of the asset
The end result:
8
FMV tax deduction, eliminate capital gains , and give more to charity
Case study: Real estate contribution
Situation: Donor is selling a condo in Palm Beach and is interested in donating to 30 charities annually.
The donor’s advisor suggests donating the condo to a donor-advised fund*.
STEP 1
STEP 2
STEP 3
Donor’s advisor contacts a
charitable planning consultant
Tax-exempt charity performs
due diligence and manages the
sale
The proceeds, less carrying
costs, fund the Donor’s Giving
Account
Considerations
•How marketable is the property?
•Is the donor willing to make the irrevocable contribution?
•What are the carrying costs and risks to the charity?
•Valuation of the property
The end result:
9
*At
FMV tax deduction, eliminate capital gains , and support multiple charities over time
a public charity with a donor-advised fund program.
Recent complex asset contributions
Affordable Housing
Credits
Valuation
•Asset class created by
state statute
Indiana Farm Land
• More than 200 acres –
under agreement in 7
days, closed in 3 weeks
• Very much a commodity
Marketability
•Necessary for all
commercial construction
• Readily sold at auction if
necessary
•Builders must acquire
housing credits or
include set percentage in
each new project, or pay
a fee to the county
1
10
Stock Buyback
Programs
Donors are generally entitled to a tax deduction of the full fair market value of the long-term appreciated complex
asset, not just the original cost basis as would be the case if it was contributed to a private foundation.
•Charity can elect to sell
back to company; Great
private “market” for charity
to sell to
•Number of donors could
increase each year if
buyback program is offered
annually
Contact Us
Donating
Donating
complexassets
assets
complex
doesn’thave
havetoto
doesn’t
be complicated.
be complicated.
11
Call early, call often. We can help.
{Fidelity Charitable Contact Name}
Phone #
Email address
Appendix
12
Appendix
Charitable Investment Advisor Program Overview
Program Details
• Fidelity Charitable hires Investment Firm
as investment advisor; advisor agrees to
program investment guidelines
»Investment vehicle flexibility
»Asset allocation and diversification
• Assets held at Investment Firm custodian;
registered to Fidelity Charitable TIN
• Trading through Investment Firm portfolio
management system
• Quarterly fee billing
»Investment management fees
»Fidelity Charitable administrative fees
13
Operations
• Giving Account set up and maintenance
• Manage Giving Accounts and view
transaction activity online
• Brokerage account position and transaction
data transferred through Advent
• Investment statements and confirmations
from Investment Firm
• Wire for money movement between
Investment Firm and Fidelity Charitable
Charitable Investment Advisor Program Overview
14
Private equity contributions: Partners donate stock
PE Fund (LP)*
STEP 1
Shares in Portfolio Company
are allocated to partners
STEP 2
Partners donate shares in
Portfolio Company to Fidelity
Charitable
PE Fund holds shares
Portfolio Company
Taxpayers/Partners/LPs
STEP 3
Participating partner(s)
take a Fair Market Value
charitable tax deduction
Benefits
• Potentially eliminate capital gains on the appreciation and
receive a fair market value charitable tax deduction
• Multiple firm partners with differing charitable objectives
can utilize one streamlined process
• A single lot contribution can support multiple charities
over time
STEP 4
Fidelity Charitable awaits
liquidity event** and
chooses to participate
with other shareholders.
Proceeds flow into Donor’s
Giving Account
* Assume the Investment Entity is taxed as a partnership. Stock distribution to the partners BY the entity is NOT taxable
to the partners; they have carryover basis.
15
**As
a tax exempt charitable entity, for most transactions, Fidelity Charitable pays no capital gains tax on sale.
Private equity firm contributions: Partnership donates stock
STEP 2
STEP 1
PE Fund (LP)*
Partnership contributes
the appropriate collective
share amount to
Fidelity Charitable
PE Firm typically identifies
Partner/MDs who would
like to donate
PE Fund holds shares
STEP 3
Taxpayers/Partners/LPs
Fair Market Value Charitable
tax deduction goes to PE Fund,
which allocates to donating
partner(s)
Benefits
• Potentially eliminate capital gains on the appreciation and
take a fair market value charitable tax deduction
• Multiple firm partners with differing charitable objectives
can utilize one streamlined process
• A single lot contribution can support multiple charities
over time
STEP 4
Fidelity Charitable awaits
liquidity event** and chooses to
participate with
other shareholders.
Proceeds flow into Donor’s
Giving Account
* Assume the Investment Entity is taxed as a partnership. Stock distribution to the partners BY the entity is NOT taxable to
the partners; they have carryover basis.
16
**As
a tax exempt charitable entity, for most transactions, Fidelity Charitable pays no capital gains tax on sale.
Disclosures
Information provided is general and educational in nature and should not be construed as legal or tax advice. Fidelity Charitable does
not provide legal or tax advice. Content provided relates to taxation at the federal level only, and availability of certain federal income
tax deductions may depend on whether you itemize deductions. Rules and regulations regarding tax deductions for charitable giving
vary at the state level, and laws of a specific state or laws relevant to a particular situation may affect the applicability, accuracy, or
completeness of the information provided. Charitable contributions of capital gain property held for more than one year are usually
deductible at fair market value. Deductions for capital gain property held for one year or less are usually limited to cost basis. Consult
an attorney or tax advisor regarding your specific legal or tax situation.
To ensure compliance with Treasury Department Circular 230, you are hereby notified that: (a) any discussion of federal income tax
issues in this presentation is not intended or written to be relied upon, and cannot be relied upon, by you for the purpose of avoiding
penalties that may be imposed under the Internal Revenue Code; (b) such discussion is being used in connection with the promotion
or marketing (within the meaning of Circular 230) by Fidelity Charitable of the matter addressed herein; and (c) you should seek advice
based on your particular circumstances from an independent tax advisor.
Fidelity Charitable is the brand name for Fidelity® Charitable Gift Fund, an independent public charity with a donor-advised fund
program. Various Fidelity companies provide services to Fidelity Charitable. The Fidelity Charitable name and logo are registered
service marks, and Fidelity is a registered service mark, of FMR LLC, used by Fidelity Charitable under license. Giving Account is a
registered service mark of the Trustees of Fidelity Charitable.
17
1.931686.100
588296.4.0