Maximizing the Impact of Charitable Giving Through Complex Assets

How not-for-profit organizations and donors can work together to optimize the impact of non-traditional gifts.

Not-for-profit organizations, including endowments, rely on gifts to accomplish their missions and help shape a better future. Accepting complex assets, such as privately held business interests or alternative investments, allows these organizations to work with donors who are looking to make substantial contributions beyond traditional cash donations. Donors benefit thanks to potentially significant tax savings, while not-for-profits benefit by opening up new income sources.

Complex assets often represent a significant portion of donors’ wealth, and when handled correctly, they can create transformative opportunities for not-for-profits. However, the process requires expertise to ensure compliance, mitigate risks, and uphold donor trust.
“At State Street, we prioritize a seamless experience by guiding donors and organizations through the gift acceptance process,” says Dan Parker, a leader in charitable gift management at State Street Global Advisors. This process involves collaborating with valuation experts to establish accurate and defensible valuations, ensuring the assets are properly transferred, and managing the assets after they are transferred.

The Importance of Accurate Valuations

For non-cash charitable gifts, accurate valuation is essential. The IRS requires a qualified appraisal for donations exceeding $5,000, ensuring that donors receive appropriate tax benefits while protecting the integrity of the charitable organization. If the IRS determines the valuation is unsubstantiated, it can impose penalties or even deny the deduction entirely for the donor. “A thorough valuation not only ensures compliance but also allows charities to better plan how to allocate the assets’ value toward their initiatives,” says Dave DeFronzo, a valuation specialist at San Francisco-based valuation and advisory firm Teknos Associates.

To secure an accurate valuation, collaboration between the not-for-profit organization, the donor, and a valuation expert is key. Working together helps to:

1. Educate stakeholders. Donors, advisors, and not-for-profits benefit from understanding the unique considerations of complex asset gifting, from tax implications to the long-term impact.
2. Streamline the acceptance process. Clear communication and pre-acceptance reviews ensure that both donor intent and organizational capacity align.
3. Maintain trust. Transparency throughout the process strengthens the relationship between donor and charitable organization while enhancing the organization’s reputation.

How the Valuation Process Works

Here’s an example of how the valuation process works for a case of complex gifting:

Say the co-founder of a tech startup decides to donate privately held shares of her startup to a donor-advised fund as part of her philanthropic and financial planning. The company has recently closed a Series C funding round at a $150 million post-money valuation, issuing preferred shares at $5 a share. However, because these common shares lack the same liquidation preferences and are subject to restrictions, their fair market value is lower, and they require an independent appraisal to determine the appropriate deduction amount.

The co-founder collaborates with a valuation expert to get a qualified appraisal. The expert analyzes the startup’s financials, applying market and income approaches, and adjusting for illiquidity. The appraisal determines a fair market value of $2.50 per share, allowing the co-founder to claim a $1.5 million charitable deduction for her 600,000 donated shares.

Managing Complex Assets After They Are Transferred

Once the complex assets are valued and sold, the proceeds should be invested with the help of a trusted advisor. The particular asset allocation depends on the type of gift vehicle, says Dennis Dwyer, senior portfolio manager at State Street Global Advisors. “We start with the belief that asset allocation is the key decision that will drive long-term returns and ultimately what is left for the not-for-profit,” Dwyer says.

For charitable trusts, the allocation should be based on a number of factors, including payout rate, the life expectancies of the donor and beneficiary, and the risk tolerance of both parties. In general, it’s wise to seek more equity exposure for trusts with lower payout rates and longer life expectancies, and more fixed income exposure for trusts with higher payout rates and shorter life expectancies.

Charitable gift annuities offer an additional layer of complexity because of the contractual obligation of the annuity payments. “When determining the allocation for a gift annuity, we consider the risk appetite of the issuing organization, state regulatory requirements, excess reserve, effective payout, and diversification of the donor pool,” Dwyer says.

Meanwhile, for pooled income funds, it’s best practice to set the asset allocation to achieve and maintain a target yield. A healthy selection of equities in the portfolio can help grow the principal and protect against inflation.

The Growing Role of Complex Assets

Charitable organizations and their partners have a shared responsibility to maximize the impact of every gift. Complex assets have an important role to play in this ecosystem. As new asset classes emerge, such as cryptocurrency and other digital assets, and donors become more sophisticated in their giving strategies, this role will only grow. Charities that adapt by building robust processes and partnering with experts will be better positioned to attract and manage these transformative gifts.

To learn more about State Street Global Advisors investment solutions for not-for-profit plans, contact your relationship manager.