Complicated Gifts
If your client wanted to donate a painting, a horse, or a beach house to charity, would you know how to assist? Simple giving can often be quite complex
By Karen Hansen Weese
From the November 2004 Issue of Investment Advisor Magazine
First there was the guy who wanted to donate his banana tree to charity—he insisted that it was worth $35,000, but demanded that the charity’s staff dig the “gift” up out of his yard. (They didn’t.) Then there was the lady who wanted to donate $5,600 worth of amethysts, which, upon appraisal, turned out to be worth about $50. (Oops.) Another gentleman wanted to donate a seat on a mercantile exchange—fortunately, the charity accepted this one, because the seat turned out to be worth a whopping $1.4 million. Yet these unusual gifts aren’t the half of it: Although you may hear more about charitable contributions of cash and securities, there are plenty of people eager to donate all kinds of things: antiques, stamp collections, beach houses, gun collections, wine cellars, horses, cars, timberland. “We even had people who tried to donate cemetery plots,” laughs Penny Marlin, a Miami-based planner who once worked as the endowment director for the Greater Miami Jewish Federation.
Giving non-cash, non-securities gifts can have immense benefits to your clients and their favorite charities; donations of real estate, although complicated, can be particularly effective. But these contributions can require some extra legwork on your part. Do you know how to help your clients make such gifts properly, and do you know what resources are available to help you do so?
Getting Started
Robert Reed admits he doesn’t know a thing about horses. So when one of his clients, an avid equestrienne, came to him asking for help in donating one of her older jumping horses to a local college, Reed’s first response was to panic. Then he started to do some research. “I’m a comprehensive planner, so all sorts of strange things cross my desk,” he says cheerfully.
Issue number one—whether or not the donation was a good idea at all—was fairly easy to answer. The client wanted to buy a new horse to replace the aging one, “and we’re talking forty grand here [to buy a new horse], so we were going to have to cash out some of her investments,” says Reed, an advisor with Reed Financial Planning in Columbus, Ohio. “It seemed smart to try to write off some of those gains with a charitable donation.” Besides, the client liked the idea that her horse would be looked after and ridden regularly at the college, rather than trucked off to a glue factory at the earliest possible opportunity.
The next step was to address whether the donation would be “for the use of” or “for the benefit of” the receiving organization. “A donation ‘for the use of’ has to have something to do with the charity’s purpose, whereas a donation ‘for the benefit of’ does not,” says Reed. “For instance, if I gave an oil painting to the Boy Scouts, they’re going to sell it and keep the money, so that’s ‘for the benefit of.’ If I gave them some land in the country where they could hold campouts—or if I gave my oil painting to the Metropolitan Museum of Art—then those gifts would be ‘for the use of.’” Why is this important? Clients making donations “for the use of” a charity can deduct the fair market value of their gifts, while clients donating gifts “for the benefit of” a charity can only deduct their original cost basis.
“This is a very big deal,” says Penny Marlin, currently of Lubitz Financial Group in Miami, “because if someone has a highly appreciated asset, they want to get a maximum deduction for their donation.” (This rule, she adds, only applies to gifts of “tangible property”—artwork, collectibles, horses, cars, etc—and not to gifts of cash, securities, or real estate.) In the eyes of the IRS, the “for the use of/for the benefit of” distinction is usually determined by how long the charity keeps the gift before selling it: If they keep it for more than two years, it’s “for the use of,” and if it’s sold within two years, it’s “for the benefit of.” The real lesson is that “if you’re going to donate something weird, donate to an organization that has a use for weird stuff,” says Reed with a laugh. “If you’re cleaning out Granny’s house after she’s died and you’re going ‘What the hell is this?’ don’t just give it to Goodwill: Google it, and find out if there is a museum of that item somewhere that would accept it. For one thing, they’ll be able to value it properly, and you’ll be doing something good, and you’ll get a full deduction for it, too.”
In the case of the horse donation, the charitable recipient, Otterbein College, planned to use the horse in its horseback riding classes for students. Since the primary purpose of the university is to educate students, the gift was deemed “for the use of” the institution, and the client got a tax deduction for the full fair market value of the horse. Still, just to be safe, Reed asked the college to confirm this in their thank-you letter. “My rule with the IRS is to back up everything with a piece of paper, so their thank-you note said, ‘Dear Mrs. Jones, thank for your donation of your horse to our horseback riding educational program,’” he says.
And who determines the fair market value of the horse? For any donation of tangible property worth more than $5,000, donors must get written appraisals from qualified, objective, non-interested parties, according to IRS Publication 526, “Charitable Contributions” (available for download at www.irs.gov). “The onus is on the donor, not the charity, to substantiate the value,” says Marlin. “The charity is obligated to issue a receipt that says they received the gift, but they don’t ascertain the value. If you donate a 1998 Lexus, the receipt will say, ‘Thank you for the 1998 Lexus, model number 123ABC,’ period—without any reference to its value.”
