FAQ: Gifts of privately held securities
How to make gifts of privately held and restricted stock
September 01, 2015 | by Phillip Buchanan
Our office receives many questions about gifts of securities. From appreciated stocks, bonds or mutual funds — each option may provide special tax advantages.
The following are a few of the most common questions we hear regarding gifts of privately held and restricted stock.
- Does Duke accept gifts of securities or other business interests that are not publicly traded on the NYSE, NASDAQ or other public platform?
- YES! Duke University encourages donors to consider gifts of closely held C corporation and S corporation stock, limited partnership (LP) interests, and limited liability company (LLC) ownership interests. These may be in a family business or in a company in which you were an "angel investor" or in early-round financing.
- You may also hold restricted stock in a publicly traded company that you acquired before the public offering. As such, your shares may contain a "legend" and be subject to a shareholders' agreement that restricts its public sale. These shares are sometimes referred to as "Rule 144 stock."
- What are some of the primary issues to consider?
- The type of security or business interest being considered for a charitable gift will largely determine your gift options. For example, donating restricted C corporation stock may be relatively simple. In some cases, after consultation with the company's counsel, the legend can be removed and the certificate replaced with electronic shares that can be wired to Duke and thereafter sold without restriction.
- By contrast, other types of business interests, such as S corporation shares, partnership interests or LLC interests, require careful review and planning to protect both the donor and Duke. Some business interests are not transferable under the terms of a shareholders or partnership agreement. Others have capital call requirements, debt, or other liabilities that Duke cannot accept.
- How is the fair market value of the gift valued for tax purposes?
- To claim a tax deduction for a lifetime gift of non-publicly traded securities / assets valued at $5,000 or more (or over $10,000 for C corporation stock), the donor will need to secure a qualified appraisal and I.R.S. form 8283 appraisal summary for his or her personal income tax return.
- In some cases involving a start-up company, there is no ascertainable value, and the donor does not intend to claim a charitable deduction. In those cases, no appraisal may be necessary.
- Charitable gifts of non-publicly traded securities made through a donor's estate are also welcomed and may result in significant estate tax savings.
- I'm worried about control of voting shares or membership interests after my donation. What do I need to know?
- To claim an income tax deduction and avoid capital gains taxes, a donor cannot require Duke to sell the security to a specific person or entity nor to vote a specific way in corporate matters. However, Duke appreciates insights, reports, and suggestions as to interested buyers and other information related to these assets that may help us make prudent decisions. Moreover, privately held stock is often subject to restrictions on sale that protect the integrity of the closely held entity. A contribution of non-voting shares may also negate concerns about corporate control.
- How will the securities or business interest be liquidated?
- Duke's policy is to sell such assets in a prudent manner. The sale of donated securities and business interests may come at any number of points. If a specific party is interested in gaining or maintaining control of the business, the shares donated to Duke may be purchased by the donor, a family member, or a business partner. This gives the buyer the added benefit of establishing a higher cost basis in the asset based on current market value. In other instances, the stock or business interest may be sold to:
- Key employees or a company ESOP,
- A second closely held enterprise or a publicly traded company, or
- Through an initial public offering (IPO).
- After the stock or business interest is sold, what happens to the net proceeds?
- The donor may direct the cash proceeds to programs or purposes he or she cares about at Duke, such as need-based scholarships, faculty support, research, or one of Duke's special spaces (the Libraries, the Chapel, the Gardens, the Marine Lab, etc.). Please note that any costs incurred by the university in receiving the asset, such as the cost of due diligence review, will be subtracted first from the proceeds.
- Are there any other considerations I need to think about?
- Duke has received significant support from gifts of securities and business interests that were not publicly traded. While these gifts are not as simple as writing a check or donating publicly traded securities, they often make good sense for the donor and Duke. In some circumstances, after careful review, the cost-benefit analysis balances in favor of the donor holding the asset and waiting to make a substantial gift when the asset has matured and a significant value can be determined by appraisal or in conjunction with the eventual sale or buyout of the business. We can work with you and your personal tax and financial advisors to think through these issues.
- If the gift makes sense for both the donor and Duke, the assets may be contributed to a charity known as Duke University Philanthropies, Inc. "DUPI" will hold the assets until they are sold, and will then gift the net proceeds to Duke University to be used as the donor has directed.
- For gifts that involve S corporation shares or similar interests, we may suggest that you make the gift to a "pass-through" charity that is established as a trust (Duke is a charitable corporation) in order to reduce applicable taxes and net a larger gift to Duke in the end. In other cases, it may work best for an S corporation or LLC to donate marketable assets so the tax deduction can pass through to the owner(s).
- Most gifts of privately or closely held stock are outright (for immediate use by the charity), but some can also be used to fund a life income gift (charitable remainder unitrust), or as part of a charitable gift and family wealth transfer plan (charitable lead trust). We can help you consider these and other options.
The Office of Gift Planning is happy to help you and your advisors evaluate your charitable gift choices based on the type of business interest you own. We can also provide written overviews and numerical examples, consider pre- and post-sale gift options, review tax benefits, and more. For more information, or to follow up on the questions posed here, please consider contacting our Office of Gift Planning.