Guide for Philanthropic Major Gifts of Alternative Assets
Secondary Private Equity Market Commentary
by Laurence G. Allen
NYPPEX, one of the world’s leading providers of secondary private equity liquidity, today announced its year-end Guide for Philanthropic Major Gifts of Alternative Assets.
Alternative assets include restricted securities in venture-backed private companies and interests in private partnerships such as buyout, venture, infrastructure, oil and gas, natural resources, real estate and hedge funds.
The NYPPEX Guide provides best practices to manage risk for donors seeking to optimize tax benefits, as well as for charities seeking to optimize fund raising goals.
NYPPEX believes that when charities accept gifts of alternative assets, they increase their opportunity to obtain multiple-year major gift pledges as donors have greater flexibility in how to annually fund gifts whether from cash, appreciated stocks/bonds, real estate or alternative assets.
NYPPEX defines major gifts of alternative assets as having a fair value greater than $1 million.
NYPPEX believes this is an opportune time for donors to consider making major gifts of alternative assets as many financial assets are considered fully valued at a time when the U.S. Federal Reserve intends to begin reducing monthly purchases of financial assets and increasing the fed funds rate in the near future.
I. For Donors Of Alternative Asset Gifts:
Guideline One: Donate To “Qualified” Charities
Qualified Charities are those whose donors’ contributions are tax deductible. Some highlights include:
Nonprofit Types Contributions Deductible?
501c1 Corporations ………………………………………………….………………………………………………………….. Yes
501c3 Religious, Educations, Scientific Organizations……………………………………. Yes
501c4 Civic Leagues, Associations of Employees Organizations……….…… No
501c5 Labor, Agricultural Organizations…………………………………………………………………. No
See IRS Publication 562: Charitable Contributions for details.
Guideline Two: Donations Above $500,000 Require Qualified Appraisals
Determine the value of your donation with an appraisal from a Qualified Appraiser.
See IRS Publication 561: Determining the Value of Donated Property
Guideline Three: Name The Charity & Initiate The Transfer
NYPPEX believes donors should name the charity and/or purpose of the gift on the charity’s in-kind gift form.
Donors may initiate transfers of alternative assets by either electronic transfer from the donor’s custodian or by emailing/mailing donor endorsed transfer documents as provided by the underlying partnership or company.
Guideline Four: Obtain A Gift Acknowledgement Letter
NYPPEX believes donors should receive a letter from the charity that acknowledges acceptance and includes a description of your alternative asset gift.
For gifts of interests in alternative funds, the letter should include the partnership name, commitment amount and effective transfer date.
For gifts of securities in private companies, the letter should include the company name, class of securities and the effective transfer date.
Guideline Five: Allow the Charity To Perform Due Diligence
NYPPEX believes some charities may reject gifts of alternative funds with large uncalled commitments unless a secondary advisor provides guidance that a secondary sale and settlement would likely occur in a timely manner.
Guideline Six: Execute Transfer Documents As Requested
II. For Charities Seeking To Accept Alternative Asset Gifts
Guideline One: Have A Gift Acceptance Policy For Alternative Assets
Guideline Two: Select A Secondary Advisor With A Track Record
NYPPEX believes charities should select a secondary advisor with a track record for executing a high percentage of transfers of alternative assets.
NYPPEX believes an experienced secondary advisor can assist in due diligence of the proposed gift, coordinate with underlying partnerships or companies and manage the transfer and settlement process on behalf of the charity.
Guideline Three: Charities Should Not Pre-Market Alternative Assets
NYPPEX believes an experienced secondary advisor can provide accurate bid indications without shopping transfers of alternative asset to prospective buyers.
Guideline Four: Position Charity To Achieve Optimal Cash Proceeds
NYPPEX believes that optimal price executions occur when marketing strategies include: (1) proactive marketing, (2) a competitive process, either through a managed auction or first come, first served approach and (3) inviting a limited number of buyers that seek your alternative asset’s profiles.
Guideline Five: Know Your Responsibilities As A Transferor
NYPPEX believes charities should understand (1) the transfer instructions of each underlying partnership or company and (2) each jurisdiction’s’ tax and securities laws.
As an example, a secondary interest transferred in a Swiss based private equity partnership incurs a 0.15% Swiss Securities Transfer Tax (“SSTT”), calculated on the buyer’s gross proceeds.
NYPPEX believes a secondary advisor with experience divesting “global” partnerships or companies can assist charities to understand and prepare for these issues.
Guideline Six: Mitigate Settlement Risk After Execution of Documents.
NYPPEX believes one of the biggest causes of failed settlements for charities, despite achieving a price match and the parties having executed transfer documents, results when an underlying partnership cannot permit any more secondary interest transfers for the current year because the partnership has no remaining safe-harbor exemptions under IRS Regulation 1.7704.
NYPPEX believes charities should select a secondary advisor with experience as a Qualified Matching Service (“QMS”) as per IRS Regulation 1.7704 and an IRS private letter ruling, which can provide a QMS safe harbor exemption that allows the general partner to permit more secondary interest volume in the current year.
For large portfolio divestitures, NYPPEX believes the advisor should also have a private letter ruling from the IRS which formally recognizes the advisor’s QMS, because transfer documents typically require the investor to assume liability if the partnership incurs an adverse tax consequence that resulted from the investor’s secondary interest transfer.
With these guidelines, NYPPEX seeks to provide donors and charities a better understanding of the risks and best practices when seeking to make major gifts of alternative assets.
Copyright 2021 NYPPEX Holdings, LLC. All rights reserved.
About NYPPEX Holdings
NYPPEX Holdings operates a global private marketplace that provides price data and the opportunity for qualified investors to access secondary liquidity in alternative investment funds in a fair and ethical manner. Its clients include alternative investment funds, financial institutions, endowments, foundations, institutional investors, family offices, private clients and their respective advisors worldwide.
Since 2004, the NYPPEX QMS™ has been formerly recognized by the U.S. Internal Revenue Service as a Qualified Matching Service for private partnerships though a private letter ruling under Internal Revenue Code §1.7704.
Its private securities are privately offered to qualified investors through NYPPEX, LLC and only in jurisdictions were permitted. NYPPEX is regulated in the U.S. by the SEC and FINRA. Member FINRA, SPIC.
Risk Disclosure: This information contained in the Guide is market commentary by NYPPEX. NYPPEX provides its Guide for informational purposes only. The Guide is incomplete, relies on information from 3rd parties and such information may be incorrect or change at any time without notice or update to the Guide. For current and complete charitable contribution rules, please consult with tax professionals.
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