It is important for fundraisers to understand the value of asset-based gifts. Not only are they good for your organization, but they are good for your donors, too, often creating a win-win situation.
We live in a time of uncertainty. Perhaps no more or less uncertain than other times or seasons, but it is genuine and present, especially for the Baby Boomer Generation, which makes up a large portion of our current donor class. Politicians on both sides of the aisle are printing money with no end in sight. Meanwhile, 10,000 Boomers approach retirement every day: for many, the security they had in mind erodes as dollar value cheapens.
Real estate, experts say, is one asset that can face that devaluation because it is a “hard asset” and will ride the economic tide upward quite nicely. But real estate also has other issues that will often cause an aging property owner to want to sell, at least real estate that requires their management or oversight.
Moreover, as this generation ages, questions of legacy and remembrance set in. When they had young children or were in focused “career mode,” life seemed as though it would last forever. Giving to their favorite charity was viewed as a civic or religious duty. Today, this is still true. But a new motivation, a new awareness, has surfaced in their thinking and conversation. They now see that life will not last forever. And they ask themselves, “What has my life counted for? What is my legacy?”
These two topics converge remarkably. The taxes property owners may face when divesting of real estate are often referred to as “involuntary philanthropy.” The state and federal government receive those tax dollars with a quiet “thank you very much,” and then go about spending them on everything from highways to stoplights and countless other expenditures that the “donor” of those taxes would likely never choose. “Involuntary philanthropy” has become such a part of our lives that individuals typically comply blindly without even wondering if there is another way.
There is good news: Yes, there is another way.
It is important for fundraisers to understand the value of asset-based gifts. Not only are they good for your organization, but they are good for your donors, too, often creating a win-win situation. What follows is a primer on how you as a fundraiser might be able to help your donors avoid “involuntary philanthropy” while supporting causes—like yours—that they care about.
Avoiding Involuntary Philanthropy
The aging process motivates property owners to do something with their real estate, particularly their investment real estate, and several issues will come into play. Older properties require infusions of capital, the required physical labor becomes unfeasible, the responsibilities of being a landlord are too much, liability issues remain . . . the list could go on.
Perhaps the most significant hurdle to addressing these issues for the senior real estate investor is a tax liability. If they simply sell the real estate to eliminate the above issues, the Long-Term Capital Gains taxes become a new issue they may not want to face
What if a property owner could reduce, defer, or even eliminate those taxes on the sale of a property? What if they could sell their property, pay no taxes, enhance their retirement income, create predictable, secure, and passive income while at the same time creating a legacy? What if they could “disinherit” the government in favor of your organization? They can!
Every situation is different, but let’s take Marjorie Lundquist as an example. Marjorie Lundquist lives in the suburbs of a larger metropolitan city. At 71 years of age, she feels as though life is changing. A pressing issue is a small apartment building that she has owned for more than 20 years. The suburb she lives in has enjoyed real estate appreciation that exceeds national averages by quite a bit. She has a manager for the apartment, but it remains one of those 3 AM distractions and worries that she wants to get rid of. Also, the national economy seems uncertain in many ways, including possible changes in taxes on real estate. Marjorie is secure financially. She could sell the building, pay the taxes and still “be ok,” but the idea of more than $1,000,000 in taxes just doesn’t sit well with her.
She would like to sell her building but let’s look more closely. She would like to:
- Sell the property and retain the high appreciation;
- Remove the management burdens so that she could spend more time with her daughter and grandchildren;
- Reduce the long-term capital gains tax; and
- Enjoy some retirement income that did not involve dealing with tenants.
She also cares deeply about two charities in her community and does not want her support to diminish during her retirement years. So, let’s help Marjorie achieve some of these goals.
I call this the “3 Bucket Strategy.” This can provide a framework for fundraisers to offer to potential asset-based donors.
Bucket 1. Transfer an undivided interest (say 40% of the property) into a Delaware Statutory Trust (DST)
The 1031 Like-Kind Exchange strategy is an effective way to address all the above concerns. Her benefits include:
- 100% tax deferral to include:
- state capital gains
- federal capital gains
- depreciation recapture
- 8% Medicare tax
- Predictable net income based on the strength of the lease/leases.
- 100% passive investment. No landlord responsibilities for any aspect of the real estate. Professional management.
- Nonrecourse financing. The investor gets the benefit of leverage but on a non-recourse basis.
- Real estate ownership without the complexities of traditional ownership
- Ability to diversify, reducing the risk to real estate ownership
- Access to institutional-quality real estate, which also reduces risk
The DST allows her to have easy “mailbox” income while deferring the anticipated taxes completely. And it enables her to pass the DST on to her daughter in her estate. Under current law, the daughter would receive a stepped-up cost basis, and if she later wanted to sell the DST, she would have paid zero capital gains taxes, and for this lady, she would also pay zero estate taxes. We have moved $1,200,000 to the daughter completely tax-free.
Bucket 2. Transfer 50% undivided interest in the property into a Charitable Remainder Trust.
This tax-exempt trust has been a popular tool for selling appreciated assets since 1969. The CRT is an irrevocable trust through which the trustee distributes an annual income stream, typically to individual beneficiaries for the balance of their life. Upon the trust’s term expiration, the trust terminates, and the remaining trust assets are distributed to identified tax-exempt charities chosen by the donor.
The CRT allows the property owner to sell an undivided interest in her building, pay no taxes, and receive income from the trust for life. Also, the CRT creates a charitable income tax deduction that will reduce her taxes in the year of the gift and up to five additional years.
The CRT is an irrevocable trust, but there are some things you can change. You can change the trustee who serves as fiduciary of the trust. You can change the professional who manages the assets in the trust, and you can even change the charity you want to receive the funds at your death.
Bucket 3. Transfer a 10% undivided interest into a Donor-Advised Fund.
This tax-exempt tool is the fastest-growing solution in the charity world for the past 30 years. Although it does not provide any income back to the property owner, it does allow her to sell that portion of the property tax-free, receive a Fair Market Deduction today, and then give out of that DAF over time.
My wife and I call our DAF our “Charitable Checking Account.” There are three additional benefits to the DAF that we particularly enjoy.
- All our giving to charity goes out of our DAF. We give to 14 different charities each month, but I have not written a check to a charity for years. The gifts go out automatically. No Fuss.
- Like you, we often get invited to some charity event by some friends. It’s a nice evening out, and we enjoy hearing about other charities. But we don’t want to add a new monthly commitment for our giving. We would rather give MORE to the charities we support than be a Mile Wide and an Inch Deep. So, we simply call up our DAF and ask them to cut a check to XYZ Charity and make us anonymous. This allows us to be generous that evening but not be added to another charity’s list of donors.
- Finally, in our estate plan, we are giving 25% of our estate to each of our three daughters and another 25% to charity. We call that final 25% A Child Named Charity. If we list those charities in our will or trust and then change our mind on a charity two years from now, we would have to call our attorney and spend $750 to do an amendment or codicil. But if we give in our estate through our DAF, we simply call the DAF and ask them to change Charity A for Charity B. Easy.
So, let’s review what we have accomplished for Marjorie. . .
Had she sold her property outright, she would have paid $1,024,000 in state and federal Long-Term Capital Gains taxes. Invested at 5%, her retirement income would have been $98,800. Her daughter would have received $1,976,000. And, last but not least, the charities she loves would have received $0.
But by using the 3 Bucket Strategy:
- She pays ZERO in Long Term Capital Gains Taxes.
- Her retirement income is $120,000.
- Her daughter receives $1,400,000 (still a very nice inheritance).
- And she can make two gifts to charity $600,000 TODAY and $1,000,000 in her estate.
- She has indeed blended the problem-solving of her real estate concerns with her desire for a meaningful legacy. There are no more worries about the building or repairs; just steady, diversified retirement income.
- She can leave a legacy by blessing her daughter and her favorite charities.
- It is voluntary philanthropy, not involuntary philanthropy.
Understanding this option is key to understanding how you as fundraiser can work with your donors. Asset-based gifts can make a huge impact for your organization, and they can relieve a huge burden for your donors. So, make sure you know about these options, know your donors, and bring them up the next time they are thinking about selling a property!
If you have any questions about the “3 Bucket Strategy” or asset-based gifts, you can reach me directly at firstname.lastname@example.org.