It can be a challenge to encourage donors to think broadly about how to leverage their wealth for philanthropic purposes. Writing a check or transferring appreciated stock is often the default choice for donors. After all, cash and securities are easy to value, simple to transfer, and easy for charities to accept.
For some of your clients, there may be an opportunity to think more holistically about their wealth and how to leverage certain assets—including art—for philanthropy.
The Chicago Community Trust can be a resource for you and your clients who are looking to convert art into dollars that can be used for other charitable purposes. Specifically, we can help your clients by receiving contributions of art that can be sold and used to fund a donor advised fund, designated fund or other charitable giving vehicle.
A passion asset…but for who?
Art is commonly referred to as a “passion asset.” Yes, art and collectibles can have tremendous monetary value. Unlike other assets, it is not uncommon for an owner of a painting or a sculpture to have an emotional connection to the art, too. The art may be a treasured family heirloom or a piece that was purchased because the art captured the buyer’s imagination.
But not all art owners feel the passion and connection.
Suppose your client inherited a painting from his grandmother several years ago and, aside from appreciating the gesture, your client has no emotional connection to the art. It is even possible that the art is contrary to his entire aesthetic.
What should he do?
He could sell it, but have to deal with a capital gain rate of 28%. Or, he could find a way to use the art to further his true passion: philanthropy.
Your clients can, and perhaps should, consider their art holdings as a way to further their philanthropic interests, including charitable gifts of art that can fund a donor advised fund.
Gifting art to The Chicago Community Trust
It is possible to gift art or collectibles to The Chicago Community Trust for the purpose of funding a donor advised fund. As with other illiquid assets, gifts of art are considered on a case-by-case basis. In determining whether or not to accept a gift of art, The Chicago Community Trust considers the condition and marketability of the art, the authenticity of the piece, the ability to take clean title to the art, storage and maintenance needs and other factors that may turn on the nature of the art.
Your clients can, and perhaps should, consider their art holdings as a way to further their philanthropic interests, including charitable gifts of art that can fund a donor advised fund.
When it is time to execute the donation, the donor will transfer title to The Chicago Community Trust. The Trust may then take physical possession of the art, or it may consign the art to a gallery or dealer in anticipation of a sale.
Once the art has been sold, the proceeds of the sale, less any fees, can then be applied to a donor advised fund established by the donor. At that point your client can use those assets to fund their charitable interests.
For example, your client may want to recommend grants to organizations that promote arts education in underserved communities, or she may want to establish a scholarship fund at a university to support emerging artists. Having the flexibility to support a number of charitable endeavors is one of the greatest benefits of contributing art to The Chicago Community Trust.
Can the donor get an income tax deduction?
In order for a donor to deduct the full fair market value of a donated piece of art, many requirements must be met.
First, the art must be long-term capital gain property, meaning that the owner held the art for more than one year, and that the art qualifies as a capital asset. Art created and held by the artist, or as inventory by a dealer, will not qualify as a capital asset.
Additionally, a donor will need to obtain a “qualified appraisal” to substantiate the value of the donated art. The term “qualified appraisal” is more than a term of art (forgive the pun), it is a technical term that carries with it certain requirements. For example, the appraisal must be done by a “qualified appraiser,” meaning a person who is qualified to appraise the kind of art that is being donated. The appraisal itself must contain specific information, such as a description of the art, the expected donation date and identifying information about the appraiser.
In order for a donor to deduct the full fair market value of a donated piece of art, many requirements must be met. First, the art must be long-term capital gain property. Art created and held by the artist, or as inventory by a dealer, will not qualify as a capital asset.
Third, and perhaps less understood, the charity receiving the contributed art must plan to use the art in a way that relates to the charity’s mission. This so-called “related use” test is easy to understand in the context of a gift of art to a museum. An art museum’s core charitable mission is to promote, protect and exhibit the art it collects. Thus, a gift of art to a museum will almost always satisfy the related use test.
A gift of art to The Chicago Community Trust will not satisfy the related use test, in part, because the core mission of the Trust is not centered on art. That means when a donor contributes art to The Chicago Community Trust for the purpose of funding a donor advised fund, the deduction amount will likely be limited to the cost basis of the art. For some potential donors, this deductibility limits may deter them from donating art to the Trust. But for many others, the benefits of making the gift may make the donation worthwhile.
Is a gift of art the right fit for your client?
As discussed, if a donor contributes art to The Chicago Community Trust for the purpose of establishing a donor advised fund, the deduction for that gift will be limited to basis. While that may not be ideal, there are many reasons why it might make sense for your clients to consider such a gift.
If you have clients who inherited art that they are considering gifting to charity, those clients may have received an upward basis adjustment on the art when they inherited it. That may make the value of the deduction much greater than if there had been no step up in basis. You may also have clients who are more motivated by a desire to get a piece of art out of their estate and convert the art into grant making dollars than they are motivated by the deduction.
A Case Study
Sylvia purchased a painting from an up-and-coming artist thirty years ago for $5,000. Over time, the artist has grown in prominence and fame, and as a result her art is now selling at a premium.
Sylvia recently had the painting appraised, and discovered the estimated value is now $250,000. She considered selling the art, but she would like to avoid the 28% tax on the capital gain from the sale of art.
Sylvia contacted two local museums to see if they might have an interest in receiving the art as a gift. Both museums expressed interest, but during further conversations, Sylvia learned that both museums would plan to store the work indefinitely until such time that the art aligned with an exhibition and would be suited for display. Sylvia preferred to have the art wind up in the hands of a person or organization that would treasure the work as much as she does.
Sylvia mentioned her quandary to her estate planning attorney, who recommended that she speak with The Chicago Community Trust about potentially donating the work to the Trust to fund her existing donor advised fund. Sylvia learned that she could donate the painting to the Trust, the art could be sold without the Trust recognizing the capital gain, and the proceeds could be added to her donor advised fund.
Sylvia was not deterred by the fact that her tax deduction for the contribution would be limited to $5,000, as she makes gifts of cash and stock to organizations already that allow her to claim a deduction on her federal income taxes.
Sylvia was thrilled by the idea of the Trust being able to sell the art at auction to a collector who would value the work as much as she did, and that the proceeds would be available for Sylvia to grant to education and social service agencies in the community.
Let us help
Understanding the rules around making charitable gifts of art is just one part of the equation. It is equally important to understand a donor’s motivations and goals, and then explore solutions that make those goals a reality. Gifting art should include a robust conversation about the donor’s ultimate charitable goals, and The Chicago Community Trust is happy to help you start or continue those conversations.
For more information, please contact Tim Bresnahan at 312.616.8000 ext. 158 or by email at tbresnahan@cct.org.
