So You’ve Missed an Opportunity to Give an Asset. Now What?
Fear Not. Never Underestimate the Power of Plain Ol' Vanilla Ice Cream
Fancy isn’t always best. Consider the experience of joining sophisticated friends for dinner at a highly-rated French restaurant. Your friends’ orders includes caviar, pâté de foie gras and truffles, which in translation means “fish eggs,” “liver from an overfed goose,” and “mushrooms dug up by pigs.” Thankfully the wine is excellent.
Nonetheless, you approach the end of the meal exhausted from trying to look appreciative, hungry from diminutive portions, and appalled at the anticipated size of the check. Then you look at the dessert menu and discover with joy that even the French like ice cream!
And who doesn’t? A scoop of vanilla with a cup of really good coffee can redeem even an over-priced dinner.
Cash is the vanilla ice cream of charitable giving. It can fix almost anything!
Challenging Techniques and Challenging Assets
In the world of charitable giving there are useful but challenging giving techniques, such as the pre-sale gift of closely held stock, and there are very difficult and tax compromised assets, such as stock options or restricted share units. With challenging techniques and assets, cash gifts can sometimes fix a mistake or be the only charitable giving option that actually makes sense – in both cases by adding the vanilla ice cream of cash to your charitable giving dinner party.
Fixing a Mistake – Using Cash When It’s Too Late for an Asset Gift
The most frequent problem we encounter with charitable asset gifts is that it’s too late to make the gift. It is not uncommon for an owner who is selling a closely held company to decide at the last minute that he wants to gift some of the shares being sold to charity. While that can be a great giving strategy, there are practical and purely legal reasons why it can be too late to make a charitable asset gift.
The practical reason is that giving shares to a charity, pre-sale, means that the charity needs to join in the sale. While we, NCF, do this all the time, adding a new party to a complicated transaction at the last minute can be a daunting task and a burden to the attorneys who are trying to get the deal done.
If faced with that situation, it’s wonderful to know that you can still give cash from the proceeds. As an aside, the pre-sale gift of shares can be a great strategy – and if you tell the buyers and the attorneys what you are doing up front, it usually works just fine.
The legal reason is a tax concept called “assignment of income.” The IRS takes the position that if you give away an asset which you have already committed to sell, then you are actually giving away the proceeds and you are still taxed on the sale. In other words, you get your charitable tax deduction but you are still subject to capital gains taxes on the gifted shares.
In other words, you get your charitable tax deduction but you are still subject to capital gains taxes on the gifted shares.
This is always a question of fact so there is no safe harbor. All you know for sure is that the closer you are to closing, the more likely you are to be challenged by the IRS. That result can leave a bitter taste in your mouth… a bit like foie gras.
Bring on the Ice Cream!
You can still give cash from your sale proceeds. Charitable donations of cash are now deductible up to 60% of your Adjusted Gross Income (“AGI”), which is your income from all sources. In a year in which you have sold a company or other asset, your AGI includes the full amount of capital gains from the sale. Consequently, you can donate and take a charitable tax deduction for 60% of your regular income plus capital gains.
Gifting assets pre-sale will usually produce greater tax savings than a post-sale donation of cash because you avoid tax on the embedded capital gains. But because the deduction for asset gifts is limited to 30% of AGI, the difference in tax benefits between your after-sale cash gift and your pre-sale share gift might not be all that great – particularly in the year of the gift. And as a side benefit, gifting cash proceeds from a sale doesn’t change your deal and doesn’t require documentation, appraisals, attorney’s fees or anyone else’s agreement. You can just do it. Sweet!
…because the deduction for asset gifts is limited to 30% of AGI, the difference in tax benefits between your after-sale cash gift and your pre-sale share gift might not be all that great – particularly in the year of the gift.
Charitable Tax Savings with Stock Options or Restricted Stock Units
Some of the most common and valuable forms of employee compensation, especially in technology and other modern industries, are Incentive Stock Options (“ISO”), Non-Qualified Stock Options, and Restricted Stock Units (“RSU”). All allow employees to participate in the appreciation of their company’s shares on generally favorable terms.
But unless you chose to pay taxes when you first received those interests (a so-called 83(b) election), none of them can be easily or effectively gifted. Any transfer of an ISO causes the employee to recognize compensation income. Similarly, an employee can gift a non-qualified stock option but whenever the recipient charity exercises that option, the employee is still taxed on the embedded gain.
With Restricted Stock Units the “interest” the employee “owns” is merely a contract right and not a capital asset so there is nothing to “gift” so far as the IRS is concerned. Whenever Restricted Stock Units vest, the value of the shares becomes ordinary salary income and is taxed as such. We highly sophisticated connoisseurs of charitable giving call all of these, de mauvais résultats, which in translation means, “poor results”!
But – in the same way you can enjoy a delicious scoop of ice cream after your expensive meal – you can gift cash after exercising options or receiving vested shares from RSU’s and potentially eliminate all of the incremental taxes. The reason is actually pretty simple. Whatever extra income you receive from exercising options or receiving vested shares is in addition to your other regular income. With cash, you can donate up to 60% of that larger total income.
To keep it very simple, if your income doubles as a result of the share-based incentives, you can contribute all of the extra income to your NCF Giving Fund and receive an income tax charitable deduction for the full amount. The transaction just described takes your taxable income back to where it would have been without the share benefits.
It’s a tiny, tiny bit more complicated with Restricted Stock Units, as you need to sell the shares you receive on the day they vest. But there is typically no capital gain if you make a same-day sale so you then have the cash you need for your charitable contribution. In the right circumstances, you can actually achieve a completely tax-free receipt of the proceeds from the vesting of the units and the subsequent sale of the shares.
Check Out Our Dessert Menu
We have many different flavors of ice cream when it comes to cash, from the vanilla of post-sale giving to your favorite flavor with sause chocolat or raspberry Chambord for stock options and restricted share units. In the world of employee compensation, you may discover the incredible joy of having dessert every year as you match contributions to your Giving Fund to each year’s additional income and build up your own endowment for post-employment giving.
With that strategy, you can take as little or as much of your additional income as you like and set it aside for ministry or charitable purposes… completely tax-free.
To receive a customized menu of your charitable giving dessert choices, just call us at 949.263.0820 or send me an email at Rfryjr@NCFGiving.com with whatever questions you may have. Good tables are always available!
Copyright Robert Fry Jr. 2019, All Rights Reserved.