Have a house you can't sell? Paintings, an orange grove, or some derivatives lying around? You can donate these illiquid assets to charity, create a tax deduction, and do a good deed - all at the same time.
Investors this time of year start to examine their portfolios for winners (on which they book gains at the time of sale) and losers (which they sell and book losses) by year-end. Come tax time, investors pay whatever the total capital gains taxes are on the winners, and offset those gains with any losses in their portfolio - sending the tax bill to Uncle Sam.
Wealthy investors known as the 1 percent have a strategy that the 99 percent of us can also use: Donating high-value holdings and deducting some portion of that charitable gift from their overall tax bill.
One of the lesser-known strategies they use is to donate illiquid assets - defined as valuable things not easily converted into cash, according to Eileen Heisman, the author of the annual Donor Advised Fund Report as well as chief executive of the National Philanthropic Trust.
"It's not common knowledge, but people don't just give cash or appreciated securities" to charity to lower their overall tax bill, she said in an interview. During the Great Recession, investors stuck with lots of hard-to-sell assets realized those valuables could be donated, too.
"You can gift your home, closely held or restricted stock, boats, rugs," Heisman added. "If the charity is willing to take it, [investors] vet it in the same way as liquid assets [such as stocks and bonds]."
Among the most unusual donation of illiquid assets Heisman has witnessed? Derivatives on mortgages, also known as the tongue-twisting credit-default swaps.
"Someone donated a CDS - it was a sizeable gift," worth about $10 million, she recalls. "I talked to some moral ethicists in the field and after getting over those hurdles, found out ... the money tied up in this instrument was usable as a charitable gift."
The charity accepted the donation and eventually found a buyer for the illiquid asset, and the $10 million was put to good use.
National Philanthropic Trust has also accepted the following quirky assets as donations: part of an orange grove, a home that the donor didn't have the time to sell, and shopping centers. The trust even turned down some oddities, such as a chain of adult bookstores and gaming stock in a Nevada casino.
Heisman was expecting some wealthy donors to gift restricted stock shares in Facebook, much as a lot of them did when Google was going public.
"But because of the fiasco of the Facebook IPO, we've seen none" donated, Heisman said.
Facebook's stock has fallen by about half since the social-media network listed for trading. Legions of investors have been disappointed.
Since its founding in 1996, National Philanthropic Trust, with more than $1 billion in charitable assets, administers what are known as "donor-advised funds." About 55,000 grants to charities worldwide have been made on behalf of those donor-clients. NPT ranks among the 25 largest grant-making institutions in the United States.
Heisman notes that Philadelphians are significant givers on the national scene. Philadelphia came in 20th out of 11,522 cities in the United States in overall giving - totaling $342 million in donations in 2011. Pennsylvania ranks seventh nationally with total contributions of $4.7 billion. Find out more at www.philly.com/giving.
For investors looking to learn about donating illiquid assets, Heisman also teaches at the University of Pennsylvania's graduate school of public policy. She says a course is usually offered for nonprofit management in philanthropy and fund-raising.
For particulars on what portion or percentage of any illiquid asset is deductible, be sure to consult your accountant, a tax lawyer, or an estate/financial planner.