December is the month of presents, holiday travels, and family time. It is also the time of year when most charitable giving happens!  Baby boomers are the wealthiest generation in American history and they’re about to pass down their wealth over the next few decades. A portion of this wealth is in the form of tangible assets that reflect the passions, interests and legacies of the individuals and families who owned them. However, what happens when the heirs are not interested in receiving the gift of art, jewelry, wine, furniture and other objects that their parents and grandparents have collected over the years?

Art and collectibles can have a tremendous amount of value so you may consider using these items to further your philanthropic interests. Historically most people have donated cash to their favorite charities.  Instead of writing checks, some individuals may consider converting their tangible assets such as art, jewelry, wine and other valuable collectibles into a philanthropic opportunity. Using tangible assets in a strategic philanthropy initiative presents families with the chance to work collectively to create a unifying legacy.

WHAT IS TANGIBLE PERSONAL PROPERTY?

Tangible gifts of personal property are defined as personal property other than land or buildings. Items that are included in this category are vintage cars, jewelry, artwork, wine, memorabilia, rare books, furniture, stamp and coin collections, and other types of valuable personal objects.[1]
If you are contemplating a gift of tangible personal property to charity, it is important to be aware of the complex tax issues it can present, which will need to be carefully evaluated by a tax professional in order to maximize your client’s gift and the possible tax deduction.

Below are a few issues to consider[2]:

  • Have you owned the donated object for at least one year?
  • Will the donated object be used by the charity in its tax-exempt function (related use)?
  • Has the Charity agreed to keep the object for at least three years?
  • Are you a collector or investor? If your are an artist or dealer, consult a tax advisor to understand the different IRS tax allowable deductions.
  • Have you obtained a qualified appraisal for the donated object?

WHAT IS RELATED USE?

According to the IRS tax code, in order for a donor of tangible personal property to be able to take full advantage of a tax benefit, the charity must use the object in a manner that is related to its exempt purpose. Examples would be a painting that is added to the collection of an art museum and a tall case clock created by a regional clock maker given to a historical society. [2]

CASE STUDY FOR RELATED USE

A client has owned a painting for the past 12 years that was originally purchased for $50,000.  The client has three heirs of whom none are interested in the painting. The client approached a local museum that is very interested in accepting the painting as a donation. In addition, the painting has appreciated over time and has a current fair market value of $225,000.  Since the art museum is planning to keep the painting, the donor can deduct the full $225,000 value of the painting.

If the donor wants to give the same painting to an unrelated charitable organization, the client should consult with their tax advisor. The client may only be able to deduct the $50,000 cost basis.  It is the donor’s responsibility to establish “related use,” so the donor should secure from the charity a letter stating the charity’s intent to use the property for a purpose related to its mission.

However a gift of artwork doesn’t necessarily have to be given to a museum to be considered for a related use. For example, gifts of artworks to a religious organization would be considered for a related use if the object would have religious and cultural significance. Similarly, gifts of artworks to a hospital may be for a related use if their display in common and patient rooms contributes to a healing environment.[3]

WHAT ARE OTHER PHILANTHROPIC OPTIONS FOR TANGIBLE ASSETS?

Charitable giving has never only been motivated by tax deductions. Even without the full tax advantage, clients still consider donating to passionate causes by converting their valuable objects into liquidity for a cause they really believe in.For example, a collector sold 800 bottles from his wine collection that had been assembled over three decades. The proceeds were donated to a charity that the collector supports which helps to improve the health and education of children and adults living in rural China.[4]In some cases where the need for a charitable deduction outweighs the importance for minimizing capital gains tax, it may make sense to sell the art, jewelry or other tangible assets, recognizing the income and offset it by making a charitable contribution to a donor advised fund. This allows the donor to possibly maximize their tax situation while unlocking art and other tangible assets for charitable dollars.If the donor contributes appreciated art or other appreciating tangible assets to a public charity (including a donor-advised fund), the collector potentially eliminates the capital gains tax that would otherwise be incurred in a sale resulting in more to give to charity.There are many advantages that come with the use of a planned giving vehicle. Nevertheless, should a client decide to donate tangible objects to an institution, donor-advised fund, or foundation, a tax specialist should be consulted to determine the best option.In conclusion, the field of strategic philanthropy is more sophisticated and complex than ever. More individuals are implementing a philanthropic strategy using collections of wine, art, jewelry and other tangible assets to help make a greater impact in the lives of others. Anyone that regularly writes checks to their favorite organizations and causes can develop a more strategic approach to giving by considering using tangible assets. Nonetheless, the philanthropic process involving these objects begins with understanding what your client owns and understanding the value.


[1] 1.14.4.1.5 (04-30-2018) Personal Property Management-Internal Revenue Service Terms/Definitions/Acronyms
[2] IRS Publication 526 (Cat. No. 15050A) Charitable Contributions
[3] IRS Publication 506 Charitable Contributions
[4] Sotheby’s Sale, The Philanthropist’s Cellar: An Extraordinary Collection sold to Benefit Charitable Causes, March 31, 2018.