Technical tip: Using artwork to fund a donor-advised fund.
Let’s talk about artwork and DAFs! Seems like a strange combination, but together offer a powerful way for people to impact organizations they really care about and a few tax savings.
I decided to write about how to fund DAFs with artwork as my husband and I inherited 4 paintings, some of which have appreciated significantly. We don’t love the paintings, we understand a qualified appraisal is needed to accomplish our goals, and we are philanthropic - so it got me thinking how we can use these paintings to accomplish our philanthropic goals.
If we were to sell and give the money to charity, we’d have to pay the 28% capital gains taxes imposed on collectibles. They are family heirlooms we inherited, thus the cost basis is stepped up to the FMV on the date of the last owner’s death (in our case, a grandparent). He died many years ago, and some of them have appreciated recently, meaning we’d have a tax bill.
We thought about donating them outright to a museum. If put to related-use, we’d get a FMV deduction. However, museums are not our philanthropic passion and we aren’t really motivated by the deduction.
We also thought about donating them outright to an organization we love, but that means they’d be put to unrelated use and the deduction would be the lesser of FMV or cost basis. More importantly, it would mean the organizations would have to be capable of taking such an asset and selling it. Unfortunately, many of our philanthropic priorities are with less sophisticated organizations that don’t have the resources and expertise to sell such items. In other words, it wouldn’t be a good gift for them.
But what if we funded a DAF with this artwork? The DAF would have to be willing to take the artwork and sell the paintings for us and we’d get a deduction only for basis, BUT we’d avoid capital gains on the sale and the entire sale would fund our DAF (as opposed to selling outright, paying cap gains, and funding a DAF). We could then support any organizations we so choose with that DAF. This is the route we will be going.
Funding a DAF with artwork would be even more advantageous for someone who purchased artwork and in their lifetime it appreciated significantly. The 28% capital gains taxes would be calculated according to the purchase price (no stepped-up basis at play here) and if the artwork went to a charity for unrelated use, the deduction would be lesser of FMV or cost basis. However, funding a DAF would eliminate the capital gains tax and fund the DAF with the amount of the entire sale. It’s a worthy consideration.
We are not the only individuals with appreciated artwork. I’ve read the Boomer generation has invested heavily in real estate and collectibles, yet my experience working with such donors is that many are unaware of how they can use these illiquid assets in their philanthropic vision.
Donor-advised funds and charitable remainder trusts are flexible charitable giving tools that can parlay illiquid assets into real impact and provide donors with real financial advantages. It should be in the toolbelt of any wealth adviser!