It’s a good idea to discuss any planned gifts with charities before finalizing plans. This is particularly important for donations that place restrictions on the charity’s use of the gift, as well as donations of real estate or other illiquid assets. Many charities are reluctant to accept gifts of such assets, since they may expose the organization to liability or require an investment in order to convert the assets into operating funds. This article notes that there are options to enable donations while minimizing risks to the charity.
Estate Planning Red Flag
You haven’t discussed planned gifts with the charities that will receive them
If your estate plan includes charitable donations, it’s a good idea to discuss any planned gifts with the intended recipients before you finalize your plans. This is particularly important for donations that place restrictions on the charity’s use of the gift, as well as donations of real estate or other illiquid assets.
Some charities have policies of rejecting gifts that come with strings attached — they accept only unrestricted gifts. And many charities are reluctant to accept gifts of real estate or other noncash assets that may expose them to liability or require an investment in order to convert the assets into operating funds.
If a charity rejects your gift, the property will end up back in your estate and will go to any contingent or residual beneficiaries. If these beneficiaries aren’t other charities, rejection of the gift may increase your estate tax liability.
Real estate is particularly risky for nonprofits. The charity may be exposed to liability for environmental issues, zoning and building code violations, and other risks. It may require a cash investment to pay the mortgage or maintain the property. And certain types of property — such as rental properties — generate “debt-financed income,” which may cause the nonprofit to be subject to unrelated business income tax.
Even if a charity accepts gifts of real estate, it may place strict conditions on such gifts. For example, to minimize their liability, some charities require donors to place real estate in a limited liability company (LLC) and donate LLC interests. Another option is to donate property to a supporting organization that disposes of real estate on a charity’s behalf.
