Charitable Gifts of Limited Partnership Interests

October 13, 2020

By George Dulgeryan, J.D., LL.M., C.S.P.G.

Gifts of appreciated, non-cash assets often make for the most tax-efficient contributions to nonprofit organizations and donor advised funds. For example, private equity interests (i.e., interests in limited partnerships) often grow significantly in value, far exceeding the investor’s initial contribution, making the interests subject to significant capital gains tax upon sale. Private equity investors who wish to support charitable causes that they are passionate about may consider making a charitable contribution of their interests in limited partnerships. By donating their limited partnership interests to a donor advised fund, investors can maximize the amount of money available to support their chosen charities, avoid the potential capital gains tax liability on distributions, and take advantage of a current year tax charitable deduction equal to the fair market value of the limited partnership interests contributed.

How does this work?
An investor may contribute their limited partnership interest to a donor advised fund (“DAF”) and the DAF will hold the limited partnership interest until the limited partnership terminates. Accordingly, the investor eliminates their capital gains tax liability on the portion they contribute to their DAF. Moreover, the investor is entitled to a charitable contribution deduction for the fair market value of the interest they contributed, subject to certain conditions (below).

When the limited partnership terminates, the proceeds are allocated to the DAF and the investor, i.e., the donor, may recommend grants to support various nonprofit organizations from their DAF over time. Moreover, the proceeds within the DAF may be invested for growth to maximize the amount granted to charities

Considerations

Gifts to public charities (including DAFs) have greater tax benefits than gifts made to private foundations. Whereas many public charities lack the resources to properly manage complex illiquid financial assets, such as limited partnership interests, organizations like the California Community Foundation often have the capacity to accept such assets.
Many modern partnership agreements authorize the transfer of LP interests to nonprofit organizations, without requiring the nonprofit to sell the interest back to the partnership. However, it is recommended that limited partners work with the private equity fund’s general partners to determine the transferability of fund interests.
The charitable contribution deduction is limited to 30% of the donor’s adjusted gross income. Any portion that is unused in the year of contribution can be carried forward for up to 5 years. Moreover, gifts of non-cash assets worth more than $5,000 (such as limited partnership interests) require a qualified appraisal by a qualified appraiser.
Charities will generally not assume liabilities in connection with a donated limited partnership interest. Accordingly, in addition to the donated interest, the charities may require the donor to also contribute sufficient cash assets to the DAF to cover capital calls, unrelated business income tax, “clawbacks”, or other financial obligations.
Generally, charities may hold limited partnership interests for up to five years and, in certain circumstances, up to 10 years.

How CCF May Help
At the California Community Foundation, we specialize in converting appreciated assets into philanthropic dollars, all while maintaining the highest level of tax efficiency. If you have any questions about charitable gifts of private equity interests, or any other charitable gift planning matters, please contact us to discuss how we may be of assistance.

George Dulgeryan is a Senior Development Officer at the California Community Foundation.

[1] For an overview of the Coronavirus Aid, Relief, and Economic Security Act’s (the “CARES Act”) charitable giving provisions relating to cash donations, please see our article, The CARES Act: Charitable Giving Incentives.

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