Most donors begin their philanthropy with gifts of cash. It’s easy to give and straightforward for nonprofits to receive. A smaller percent comes as publicly traded securities, a non-cash asset by technical definition, but very liquid and also relatively easy to manage. But for ultra-high-net-worth individuals and families, however, cash and securities combined represent a statistical minority of aggregate wealth. About 90 percent of wealthy families’ wealth consists of other non-cash assets such as real estate, private companies, art, collectibles, intellectual property, or life policies (Stanford Social Innovation Review).
These non-monetary, or “complex,” gifts represent a unique opportunity for the nonprofit community. They allow donors to give without reducing liquidity but also afford large tax benefits and free up latent wealth for mission-critical purposes. In a recent study, Fidelity Charitable reported that 57% of the donations they processed during 2022 came from non-cash gifts, and those donors who donated appreciated securities actually grew their gifts by as much as 20% compared with cash gifts.
While the potential cannot be denied, complex gifts, as compared to money, involve nuances of valuation, transfer, restriction, and nonprofit preparedness. The act of generosity can turn into a headache for the target charities without planning. The truth of the matter is that complex gifts are excellent tools, but they need cautious handling.
The Appeal of Complex Assets
The rationale for giving complex assets is simple. Donors desire liquidity, but also want to make a large commitment to charity. Appreciated assets offer tax efficiency by bypassing capital gains and creating a charitable deduction. Some gifts such as art, family businesses, or intellectual products have strong personal meaning that a legacy donor may want tied to their giving.
Regardless of the assets in question, their donation requires planning and communication between the donor and the nonprofit. The most common categories of complex assets—securities, real estate, business interests, art and collectibles, intellectual property, life insurance, and even mineral and gas rights—each embody a unique set of considerations.
- Securities. Even liquid securities like publicly held stock could pose an issue unless adequately dealt with. In one case, a previous client of ours contributed securities that weren’t immediately liquidated and sudden market event reduced the impact of the gift. The lesson: donors and nonprofits need to communicate a plan, and securities need to be liquidated within the plan’s guidelines.
- Real estate. Giving farm or commercial property seems generous, but hidden costs like taxes, maintenance, or environmental obligations may quickly outweigh the intended good. Without a plan for sale or allowance for ongoing costs, real estate can become a liability rather than a blessing.
- Business interests. Business interests in a close corporation may be restrained by shareholder agreements, difficult to transfer, or result in governance issues if a nonprofit becomes an overnight minority owner. The paper-looking deal quickly becomes an illiquid headache and an expensive bill to financial or legal counsel.
- Art and collectibles. Donors generally wish for their art to be used, and the intention is well-placed. But the museum doesn’t always have a place for it, and the cost of storing, insuring, and air conditioning the art can be prohibitive. Donors are occasionally asked to pay these costs personally. If the right conversations don’t transpire and the transaction isn’t managed well, the art may not reach the public audience the donor intended.
- Intellectual property. Patents, copyrights, or trademarks may sound valuable, but these often require special licensing or enforcement not within the power of a nonprofit. In the absence of an active market, the gift may not have much real-world effect.
- Life Insurance Policies. Although these can be written into large gifts, we’ve seen nonprofits receive policies with ongoing premium obligations. In a few cases, charities have been forced to turn them in for a percentage of their intended value.
- Oil & gas rights. In one famously cautionary tale, one American nonprofit exchanged mineral rights for anticipated regular royalty income, only to grapple with volatile commodity prices, environmental compliance factors, and steep management fees. The asset had to eventually be marked down and sold.
In all of these scenarios, what began as a benevolent act may come up short if the donor’s intentions do not mesh with the ability of the nonprofit to take in the asset and handle it suitably.
Aligning Donors, Advisors, and Nonprofits
The risks, however, shouldn’t deter the use of complex assets. Instead, they should remind us that these gifts require careful planning and infrastructure. Success comes when donors, their advisors, and nonprofits all work together in harmony:
- Advisors ensure compliance and structure gifts for maximum tax efficiency.
- Organizations put their resources to the test, often calling in outsiders to advise whether the gift can safely be removed and making final plans for selling securities and other assets.
- Donors, with due guidance, may include advanced gifts as part of their broader estate and legacy planning rather than thinking of them as one-time acts of generosity.
When these factors align, complex assets can be transformative for causes donors care deeply about, while maintaining a donor’s liquidity and creating a lasting legacy.
Closing Thought
Rather than receiving cash, employing illiquid assets as a nonprofit vehicle for gifts lets donors give more but keep their money liquid. Handled properly, they may generate lasting results. Handled unsystematically—whether by failing to sell securities quickly enough or by not providing enough due diligence, they may bring headaches for nonprofits as well as for donors.
Strategic Philanthropy, Ltd. partners with donors, advisors of donors, and nonprofit institutions to navigate the nuances and opportunities of using complex assets as part of the donor’s portfolio of charitable gifts to accomplish what every donor seeks: substantial, lasting impact.