Donating private equity interests to charity

Do you own private equity interests in a portfolio company nearing a liquidity event or a fund currently winding down? Donating a portion of your interests to charity could result in two significant benefits:

1. A charitable income tax deduction for the fair market value¹ on the date of contribution.
2. A larger gift to charity. Charities are generally exempt from capital gains tax, maximizing the value of your contribution to causes you care about.²

There’s another upside to donating private equity to a public charity with a donor-advised fund program, such as the Fidelity Charitable Giving Account—the opportunity to recommend how the contribution is invested and potentially grow it tax-free, ultimately providing greater charitable/philanthropic support.

¹Fair market value of the appreciated securities as determined by a qualified appraisal, held more than one year.

²This assumes all realized gains are subject to the maximum federal long-term capital gains tax rate of 20% and the Medicare surtax of 3.8%, and that the donor originally planned to sell the stock and contribute the net proceeds (less the capital gains tax and Medicare surtax) to charity.

How it works

Consider this example. Ellen is a managing director at a private equity firm. The firm that she works for distributes portfolio company stock to their managers as part of their structure. As such, among other assets she owns, she has non-publicly traded stock³ from ABC Company (a portfolio company of the firm). Her firm is getting ready to sell ABC Company, and Ellen would like to donate a portion of her interests before the sale.

Fueling philanthropy with appreciated private equity interests

Ellen loves giving back and wants to find the most efficient way to make a difference to a whole community. As a managing director at a private equity firm and the general partner (GP) for several PE funds, she’s in the perfect position to do it.

Ellen’s firm is preparing to exit ABC Company. She owns four distinct non-publicly traded assets that may be candidates for charitable giving:

• Carried interest (entity formed as an LLC).
• LP interest in PE Fund III: Giving this interest will allow the anticipated distributions to flow to the charity.
• Co-invest LLC interest: Giving this interest will also allow the anticipated distributions to flow to the charity.
• Shares in ABC Company: Some PE firms are structured so that it is possible for the firm to distribute portfolio company stock to the managing directors in advance of a possible liquidity event. Ellen could then contribute that stock to charity.

One Way to Donate Private Equity Interests

From her four options, Ellen chooses to donate shares in ABC company before it is sold. These shares are part of a privately held C-corporation.

She calls Fidelity Charitable well in advance of the sale to arrange the donation. Her contribution of non-publicly traded assets offers two significant tax efficiencies. First, her gift is magnified by minimized capital gains taxes. Instead of giving $3.8 million, she’s able to contribute $5 million, all because she chose to donate pre-sale shares. She will also be entitled to a fair market value tax deduction on the shares.⁶

Working with Fidelity Charitable allowed her to support a free after-school program, in addition to a brand new community center. This one simple change will affect the lives of families for years to come.

⁶Fair market value of the stock as determined by a qualified appraisal, held for more than one year.

This hypothetical case study is provided for illustrative purposes only. It does not represent an actual donor, but is meant to provide an example of how a donor-advised fund can help individuals give significantly more for the causes they care about.