Gifts of Property: What to Know Before You Say Yes
There is always the temptation, particularly among newly established community foundations, to accept any type of contribution. When a contribution consists of property other than cash, however, it must be determined if it is in the community foundation’s best interests to accept such property. Are there material restrictions or other significant liabilities associated with the property so that the community foundation should decline the contribution?
From a community foundation perspective, the most important issues concerning a contribution of property are the investment return from the property, its marketability, and any actual or potential liabilities (including liability for the unrelated business income tax) associated with the property. These concerns are consistent with state fiduciary laws and with federal tax requirements imposed on community foundations that require financial resources to be prudently invested. Every community foundation receives inquiries from potential donors who are interested in contributing hard-to-sell real estate or stock in a closely-held business that has little economic value. Community foundations should not be a dumping ground for junk, particularly junk that even the owner has been unable to sell through his or her own efforts.
A community foundation should have flexible policies concerning the type of property it will accept or reject. One guideline would be to reject property if it does not reasonably appear that the property can be converted into income-producing assets within a specific time frame, such as three to five years. This is particularly important for property held in designated funds. Exceptions could be made for non-productive assets that further a charitable purpose, such as a woodland preserve or program-related investment.
Donors Should Talk First
If someone anticipates making a bequest of property to a community foundation, it would be advisable to first obtain the consent of the community foundation to accept the property before the will is drafted. Since the individual is probably expecting a large estate tax charitable contribution deduction, there could be problems if, after the death of the donor, the community foundation first learns of the bequest and rejects the property as unsuitable.
A community foundation could reach an understanding with a donor who contributes property to establish a fund that the costs associated with the property will be charged to that fund. There should also be an understanding that the donor will contribute sufficient cash to the fund to cover maintenance costs. Prudence dictates that if the property could have contingent liabilities, such as environmental clean-up costs, then the donor should warrant that the property is free from such liabilities and will agree to pay such costs if they arise in the future. In some cases, it would be appropriate to incur investigative costs (such as surveys or sampling for environmental contamination), preferably at the donor’s expense, before accepting the property. It is very common for purchasers, lenders, and even charities to insist on a Phase One audit (typically costing between $2,000 and $3,000) before acquiring property. For example, before it accepted a bequest of a farm, the Milwaukee Foundation found chemicals on the property that had to be shipped to Finland for disposal.
One way a community foundation might be able to reduce, but not eliminate, the risk that an asset could pose is to have the contribution made to a separate corporation or trust rather than directly to the community foundation. This could limit the legal exposure from liabilities produced by the asset to the resources in the corporation or trust, thereby leaving the community foundation’s other assets unaffected. A few community foundations have established separate organizations to receive gifts of real estate.