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How To Integrate Complex Assets Into Your Giving Strategy

April 3, 2023

High-net-worth individuals often have a variety of deeply complex financial decisions to make, and much of their wealth is often tied up in various illiquid assets. This wealth-building strategy has many personal banking and tax advantages but can complicate certain financial decisions. One such example is when it comes to donating illiquid assets. People with these assets want to make sure that they contribute in a way that will benefit the organization and ensure the highest possible reduction in their tax bill.

High-net-worth individuals must ensure they are maximizing the tax efficiency of any charitable giving. Fortunately, expert organizations — like First Western Trust — can help guide people to make the best financial decisions for their situation.

Considerations for Donating Charitable Gifts Using Illiquid Assets

Donating illiquid assets can unquestionably benefit the donor, particularly if the illiquid asset has appreciated over time. When making charitable giving gifts, an individual would do well to get a receipt of the fair market value of the donation. This valuation method ensures that a donor will reap the benefit of any increase in the asset’s value. However, determining the fair market value is complicated when donating certain illiquid assets, like art or other collectibles. An individual interested in donating should get the most beneficial valuation but ensure that the valuation is legally defensible.

When donating real estate, certain factors can limit the tax benefit, including the impact of a long-term capital gain. As such, some complex assets can earn an individual a more favorable tax treatment than others.

Things get more complex when it comes to donating stocks, as only a “qualified appreciation stock” qualifies for a full tax deduction from charitable giving. A qualified appreciation stock is a stock someone has held for over a year. When the holder of this type of stock donates it, they avoid paying a capital gains tax. Furthermore, making this type of donation enables an individual to take the full deduction associated with the donation and appreciation of the stock, not just the cost of the stock.

How To Use Illiquid Assets When Giving

Wealthy individuals and business owners may find that there are some uses for illiquid assets that are better than others. Certain gifts are also easier to donate to a charity than others.

Using any illiquid gift requires a complete understanding of all tax implications. As such, it is highly advisable that someone interested in donating research the tax implications of each type of illiquid gift they are considering giving. Sometimes, selling an asset may be better than donating the cash to a charity. This determination ultimately depends on the type of asset, how long someone has held the asset, and the taxes an individual would pay to state and local governments.

When considering how to use illiquid assets for charitable giving, a potential donor must consider:

  • Tax implications
  • More efficient ways of making a donation
  • Varying methods of determining the appreciation or fair market value of an asset
  • Timing of the donation and whether it would be more valuable if an individual holds the asset for a longer period

These factors — and others — can make donating illiquid assets a highly complex issue.

Different Options To Donate Complex Assets

Making charitable gifts using illiquid funds can significantly benefit the donor, provided that the donor structures their gift appropriately and uses the right type of asset. These options include:

  • Donating an illiquid asset directly to a charity
  • Using the proceeds from the sale of an asset, then donating that to a charity
  • Holding an asset to allow for additional appreciation, then donating the sale to a charity

Recent technological advances have seen the rise of other illiquid assets previously unavailable on the market. For example, NFTs — or non-fungible tokens — are digital assets individuals can purchase or sell online. Some NFTs have shown major appreciations in value and have thus become possible assets that a person could donate to charity.

The rise of NFTs demonstrates that there are constantly new emerging illiquid options that may be suitable for donation purposes. If new types of illiquid assets are part of an individual’s long-term financial plan, they should ensure that the charity in question can receive and manage this type of asset. Many nonprofits need to be equipped to handle this type of donation.

The First Western Trust Advantage

At First Western Trust, we are committed to helping high-net-worth individuals, including business owners, understand how to maximize their wealth. The First Western Advantages offers a portfolio of banking and wealth planning services that can help individuals donate complex assets to maximize their donation’s tax value and financial impact and ensure the greatest financial benefit is to the organization receiving the gift.

If you are ready to get the most out of your complex assets and charitable giving, contact First Western Trust today.

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