The Case for Noncash Assets
March 19, 2019 - Two of our legal experts recently presented the “Case for Noncash Assets” during a Navigate Giving webinar, which aims to educate nonprofit organizations about gift planning. During the webinar, Joe Hancock, General Counsel at HighGround, and Marion Armstrong, Associate General Counsel at HighGround, discussed the impact that noncash assets could have for both donors and charitable causes.
A 2017 survey from USA Giving reported that 90% of the $90 billion donated to charitable causes were made in cash. However, cash represents only a small portion of the total assets that could be given to charity. The value of noncash assets, which are items such as retirement plans, tangible property and life insurance policies, is estimated to be nearly $150 trillion.
“Cash isn’t the only way for donors to give a lasting charitable gift,” Joe said.
Let’s dive deeper into four types of noncash assets that can be utilized by donors to ultimately benefit charitable causes.
1. Retirement Assets
For a long time, there was a question as to what Congress would do concerning charitable gifts from Individual Retirement Accounts, or IRAs. In 2015, however, Congress passed the PATH Act, which made the IRA charitable rollover a permanent feature. The PATH Act allows individuals 70 ½ years or older, the age people must start taking required minimum distributions from their IRA, to make a distribution directly to a charitable organization from their account. A distribution from an IRA would normally be taxable to the beneficiary, but these distributions, known as qualified charitable distributions or “QCDs”, are eligible to be excluded from the donor’s taxable income.
“For a gift from an IRA to qualify as a qualified charitable distribution, it cannot pass through the donor’s bank account,” Marion said. “It must go directly from the IRA to the charity.”
It is important to note that not all distributions from an IRA to a charitable organization will qualify as a QCD. “For a distribution to be a QCD, it must be made to a public charity or private operating foundation,” Marion said. “A distribution to a donor advised fund, supporting organization or a private grant-making foundation does not qualify for treatment as a QCD.”
“Additionally, a QCD must be deductible at 100% of the gift value. In other words, an individual cannot transfer assets from an IRA as a qualified charitable distribution to establish a charitable remainder trust or gift annuity,” Marion explained.
What happens if a distribution from an IRA doesn’t qualify for treatment as a QCD? For example, if a donor takes her required minimum distribution (RMD) from an IRA, decides over the course of the year that she does not need those funds, and then makes a gift of her RMD to charity later in the year – that transfer to charity is not an RMD since the funds went first to the donor herself. Those assets would first be included in the donor’s gross income, and she would be entitled to a charitable income tax deduction for the amount she transferred to charity.
2. Tangible Personal Property
A gift of tangible personal property allows a donor to utilize something he or she values to benefit a charitable cause. Personal property is defined as anything that you can touch or move and includes jewelry, gems, coins, collectibles, vehicles and artwork.
“Gift acceptance policies are always important,” Joe said.
A charitable organization should always have a gift acceptance policy to make sure they address a variety of asset types. The policy should also discuss the inspection and potential liabilities of some assets so that the organization can be aware of any associated downfalls related to a gift.
“Having a gift acceptance policy can help guide the conversation for each new gift, but each gift is going to be on a case by case basis to determine if it’s a beneficial gift for your organization,” Marion said.
Gift acceptance considerations should address specific questions including if the organization can make use of the property, the goals of the donor, especially from a tax standpoint, and the holding costs. The organization will also want to consider the marketability of any tangible personal property gift. Marketability speaks to whether an organization can put the item to a related use to further the organization’s exempt purpose or easily sell the item in order to support their mission financially.
“The related use can be constructed broadly,” Marion said. “For example, a donor’s gift of porcelain was put to charitable use at a retirement home because it made residents feel comfortable.”
“We are certainly also going to be mindful of and looking forward to liquidation,” Marion said. “Whenever we have these assets, ultimately, we know we want to convert them into proceeds that will benefit our charitable mission. So, we would want to size up the market of the gift and determine the prospects for liquidating the asset.”
Additional considerations to be made concerning gifts of tangible personal property include holding periods and liquidation. A holding period should be determined because it could result in the organization incurring unrelated business taxable income for any income-generated property that is unrelated to its exempt purposes.
Tangible personal property can also be used for gifts of future interest.
“This may be an example of artwork, where the donor wishes to continue to appreciate that artwork during his or her lifetime then, at the end of life, the artwork will go to charity,” Marion said. That is a gift of a future interest in a piece of tangible personal property and the donor is not entitled to take a deduction on until the intervening interest ends. In this case, it would not be considered a tax-deductible gift until the end of their life. The gift will not be considered made until it is under the control of the charity.
3. Life Insurance
“There are three typical scenarios we are going to usually look at for a life insurance gift to a charity,” Joe said.
The first scenario, the most straightforward by far, is where a donor simply designates the charity as the beneficiary on their beneficiary designation form. It is a very easy way for a donor to make a planned gift.
“I tell people, for a donor who is inclined and has the means, there is a planned gift for everyone,” said Joe. “This option really represents the reality of that for many individuals that have a life policy in place.”
This scenario is simple because all a donor must do is instruct their life insurance agent or provider that they want to include an organization as a beneficiary for the death proceeds at the end of their lifetime by filling out a form. An organization can be included in a fraction of the policy or as a whole.
“It is a revocable gift scenario – the donor is able to make a change to the policy at any time moving forward,” Joe said. “For that reason, they are not going to receive a charitable deduction, but it is a very quick and easy means of an impactful gift.”
The second scenario occurs when the donor donates an existing policy to charity. In this case, the policy will have been established in prior days. Perhaps an insurance policy was obtained for the sake of family needs and those needs have since passed.
“When donors make this kind of gift, they are going to sign all of their rights in an existing policy, which they created at an earlier time, to the charity,” Joe said.
In this scenario, the charity needs to know whether the policy is fully paid up, which would mean the donor would be entitled to an income tax deduction equal to the replacement value of that policy.
“It gets trickier, or more interesting if there are premiums ongoing for the policy,” Joe said.
If the latter is the case, once it is transferred to charity, the deduction is equal to the interpolated terminal reserve value, basically a prorated amount.
“The terminal reserve of a policy represents its value in certain points in time,” Joe said. “You might call them anniversary dates.”
Either the donor or the charity is eligible to pay premiums going forward. A good thing to note, which many donors want to know, is that if the donor contributes cash for premiums moving forward, they are certainly allowed to a contribution deduction, Joe explained.
The third and final scenario is where a charity purchases a policy on the donor’s lifetime using funds contributed by the donor themselves.
“Again, the donor is going to receive a deduction for those contributed amounts,” Joe said. “If they are acquiring a fully paid up policy or if premiums are going to be ongoing, those contribution deductions are fine.”
In this scenario, the charity must get an insurable interest in the donor’s lifetime – in other words, the charity must obtain the donor’s consent for it to have an insurable interest.
“Simpler approaches are probably the best when it comes to donating through life insurance,” Joe said. “We make donors aware of this option because it is straight-forward and does not require revamping an estate.”
4. Virtual Currency
Virtual currency is a currency that utilizes blockchain technology and is monitored by individuals who voluntarily opt-in to check on transactions of this currency, which is kept on a single, shared ledger. The most common virtual currency is Bitcoin, but others include Litecoin, Ethereum and Ripple. To receive virtual currency, an individual or organization must have a wallet and a payment processor.
“The regulation on this currency is the crowd of people that are doing it,” Marion said. “It is not regulated by a financial institution or a federal regulated agency.”
The total market capitalization for virtual currency is approximately $221 billion, which is down from its peak of $795 billion in early 2018. This is a significant increase from its 2016 value of $12 billion.
“You can tell based on these numbers that it is incredibly volatile,” Marion said.
While intended to operate like legal tender, there are no traditional financial institutions involved. New York has recently started to impose some state-wide regulations on individuals or entities that hold and perform transactions using virtual currency.
“This is just the beginning of what some of the reporting regulation may look like,” Marion said.
The supply and demand for these transactions are what determine virtual currency values. As of right now, all of these virtual currencies can be exchanged anonymously and, when combined with the fact that it is not regulated, transaction costs are very low.
The IRS rules treat virtual currency like property, which means donors who give virtual currency would be required to get a qualified appraisal in order to deduct gifts valued at more than $5,000.
“The legal and regulatory landscape is unsettled, but we expect to see it going toward more regulation in the future, although no current federal agency has taken a stance on it,” Marion said. “In the future, more regulation and less anonymity may take away much of the current appeal of this assets, making it less desirable in the market place, but this shift could also make it more widely accepted by individuals and organizations.”
If you are a donor or an organization that would like to learn more about noncash assets and how our trust and legal experts can help you, reach out to one of them today.