The fastest growing charitable vehicle utilized in the U.S. currently is the donor-advised fund; however, the most under-utilized charitable vehicle used is supporting organizations. Most advisors and attorneys will not recommend use of a supporting organization to their clients because they do not understand them and do not realize the benefits of supporting organizations. One of the greatest benefits, is that often times affluent people desire to invest charitable dollars in assets (beyond publically traded securities and bonds). Think of your clients that are savvy real estate investors and serial entrepreneurs.
From a stewardship perspective, and in an effort to maximize investment return, some charitably minded clients would prefer to invest charitable dollars in assets other than cash and marketable securities. This can be challenging because historically, the vast majority of charitable assets are simply invested in the more traditional asset classes—stocks, bonds and cash.
Affluent people who give generously, and who have charitable dollars that are not currently being deployed for charitable purposes, often prefer to invest charitable dollars in a broader spectrum of investment classes. This is particularly true for those who built their personal wealth through alternative asset classes. Perhaps the two most common alternative investment classes in this regard are (1) family or private businesses and (2) real estate, although other assets such as intellectual property and interests in oil, gas and minerals might also be relevant.
Unfortunately, investing in alternative assets in a charitable context can be very challenging due to various issues and obstacles that arise under current tax laws. The most common charitable vehicles used to facilitate their giving include the following three alternatives:
Although the supporting organization is the least known and least used of the three charitable vehicles, it is generally the most effective and the most flexible charitable entity for investing in private equity, real estate and other alternative investments.
The effectiveness and flexibility of alternative assets are partially attributed to the fact that supporting organizations:
1. Provide a fair market value charitable deduction for gifts of such assets. Private foundations, by contrast, provide a deduction limited only to the assets’ income tax basis.
2. Are not subject to the self-dealing rules that apply to private foundations. These rules can dramatically restrict various transactions between the donor and the private foundation and its assets.
3. Are not subject to the excess business holdings rules. These rules apply to both private foundations and donor-advised funds that could restrict the donor’s desire for the charitable entity to hold and invest in such assets long-term.
Of course, even in the context of supporting organizations, investing charitable dollars in private businesses, real estate, and other alternatives investments must be done with great care and consideration of the various tax rules and issues. To find out more about supporting organizations please CLICK HERE and tune in for our next advisor webinar on June 13th at 9:00 am about supporting organizations, donor-advised funds, and private foundations.
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