Taking Stock — but Not Cashing It In

New economy prompts charities to rethink policies on gift securities

Most charities that receive gifts of stock traditionally sell the shares right away and convert them into cash. But spurred by donors and by the prospect of tapping new sources of gifts, some organizations are now rethinking that policy.

A growing number of market-savvy donors want to give securities that cannot be sold right away

or that are subject to other restrictions. And the buoyant economy and creation of new fortunes among entrepreneurs in high-technology and other companies have also led fund raisers and other non-profit officials to encourage the donation of such assets.

While some universities, community foundations, and other large institutions have accepted illiquid stock gifts for years, or occasionally have decided to hold donated shares, others are just beginning to do so. Some are bending their policies to make it possible, fearing that they otherwise might lose big gifts.

The growing incidence of unmarketable stock gifts is not just making securities more complicated for charities to handle. Non-profit officials must also be more knowledgeable about which securities are worth considering and which ones they should walk away from, experts say.

A few institutions — including the Massachusetts Institute of Technology and the University of Pennsylvania — have started reviewing their giving policies or training their staff members to better understand the range of potential stock gifts.

“It’s getting a lot more complex,” says Bruce R. Hopkins, a Kansas City, Mo., tax lawyer who specializes in non-profit issues. Charities that choose to keep donated securities must monitor them continually, for example — and may incur other expenses as well. Rules governing shares in privately held companies structured as so-called S corporations, for example, usually require charities to pay taxes on the dividends, and therefore could be more trouble than they are worth.

The long-held wisdom, still prevalent among many financial experts, has been that a charity’s investments must be determined by professionals using a prudent overall strategy — not subject to donors’ whims or to market fluctuations in whatever shares the charity happens to receive. Small charities with few resources to help them deal responsibly with illiquid stock may be better off turning down gifts like shares in family-owned businesses and other unmarketable securities.

But many institutions are finding that, by taking certain precautions, they can reap substantial returns from holding stocks or accepting restricted securities that they cannot sell until much later.

The current economic boom has caused an explosion of stock donations at many institutions. Duke University, for instance, accepted $14-million in donated stock in January alone. That’s more than four times the amount it received in stock gifts during all of fiscal 1994.

Many groups are increasingly being offered stock gifts with strings attached, whether in publicly traded or privately held businesses.

“We started seeing an increase in unmarketable stock gifts at year end in 1997, and they have really picked up since then,” says Teri Hansen, vice president for gift planning at the Cleveland Foundation.

Ms. Hansen’s observation is echoed by many of her peers, particularly at community foundations, some Jewish federations, universities, and other large non-profit institutions that are willing and able to handle complicated gift transactions.

“We are seeing a greater incidence of stock that cannot be sold and other hard-to-value assets,” says George Bittner, vice president for development at the Greater Kansas City Community Foundation, in Missouri.

“By working with these donors, we are allowing them to give back in ways they could not before,” he says.

An increasingly common type of gift for many charities is stock in new high-technology and other companies that will soon go public or that recently have done so. The stock donated by the officers of such companies is subject to a “lock-up” period of two years or more, during which Securities and Exchange Commission regulations say that it cannot be sold.

In other cases, charities are offered stock options, shares in privately held family businesses, or real-estate investment trusts — none of which can be turned immediately into cash.

In still other cases, entrepreneurs and other donors are demanding a say in how the shares they give are managed; they ask charities to hold on to their shares because they expect the value to increase.

But donors aren’t the only ones who are challenging the wisdom of selling all donated securities, even publicly traded ones, upon receipt. Some financial officers at charities are also re-examining policies that require them to unload donated stock right away.

“It’s a totally new investing environment,” says Gregory J. D’Angelo, a former trust banker and portfolio manager who is now director of planned giving at La Salle University, in Philadelphia.

Mr. D’Angelo has considered asking his institution to re-think its immediate-liquidation policy for stock gifts, after tracking the stellar market performances of some securities in recent months. The idea, says Mr. D’Angelo, would be for the university to hold donated securities only occasionally and with the advice of professional money managers. The institution, he says, could protect itself from losing money on such gifts by directing that securities it holds be sold if they decline in value by a certain percentage, for instance.

So far Mr. D’Angelo, who has floated his idea among colleagues, has not received much support for the plan from peers at other charities, who are loath to change their gift-acceptance policies.

Those policies are designed to protect charities from market losses or from donors’ dictating how they manage assets. But some non-profit officials say that too-rigid policies are hurting their ability to work with donors who have the wherewithal to make big gifts.

“We are now working in a whole new arena of entrepreneurs and more speculative gifts,” said one senior university official who asked that his name not be used. “There is a problem among institutions where the treasurers are being fiscally prudent but, because their policies are so restrictive, they are hampering fund raisers.”

Some charities do find ways to work within the strict policies of their treasurers.

Peter J. Ticconi, a senior planned-giving officer at Johns Hopkins University, recalls one donor who wanted to give the university some thinly traded stock in his own company. The donor, an experienced businessman, felt certain that the value of his company was rising, because of a new European market for its products. He asked the university to hold on to the stock — which the treasurer refused to do.

Mr. Ticconi salvaged the situation by persuading the donor instead to set up a trust independent of the university, using an investment-management company. He asked the donor to name Johns Hopkins as the trust’s beneficiary, and to stipulate that the university would automatically become trustee when he resigned.

The donor’s market prediction turned out to be correct. Three months after the trust was created, the stock’s $500,000 value increased to $1.2-million. The donor, satisfied that he had helped increase his gift significantly, resigned as trustee and the university immediately sold the stock.

“This is an important direction for us all to consider as we go forward with this new wave of donors,” says Mr. Ticconi. “Entrepreneurs and venture capitalists care, but often they only have certain types of assets to use. Continue thinking prudently, but don’t just automatically say, ‘We can’t do that.’ That’s what we used to say, and that’s what most charities still say. But if we can have a conversation with these people, something good can happen. Otherwise, what happens is nothing.”

Mr. Ticconi says that he feels comfortable working with restricted stock — as long as he knows the donor has a true charitable interest in making the donation. His best prospects for gifts of illiquid stock, he says, are entrepreneurs, corporate officers, and other investors who already have some tie to his institution. “I have never had one blow up,” he says. “I do not hesitate to say, ‘No, we won’t do that,’ if it looks too risky. But if the person is philanthropic, you don’t have the smelly ones coming to you.”

Still, when donors request that a charity hold on to a stock, many non-profit leaders are suspicious. They fear that honoring that wish would be tantamount to accepting a “material condition” from the donor, which in the eyes of the Internal Revenue Service would disqualify the stock from being considered a charitable gift.

But other non-profit officials say that as long as a charity makes it clear that it’s not bound by donor-imposed restrictions and that it has no written contract agreeing to such demands, the charity is free to judge each stock gift on a case-by-case basis and to act accordingly.

“Yes, we have a policy of not being bound by donors’ restrictions, and not accepting material conditions, but we play ball,” says Jack F. Murphy, a senior trust officer at Cornell University. “We’re more willing than some charities to take gifts of stock that cannot be immediately liquidated.” As a result, he adds, Cornell has seen a “tremendous increase” in such donations.

The university, Mr. Murphy notes, normally sells donated shares as quickly as possible. But rather than automatically turning down stock that it can’t unload right away, the institution has a special fund called the “Cornell Donors Special Portfolio” where it places some securities that officials think are worth holding.

The fund allows the university to accept illiquid stock more easily than is possible at many other institutions, where fund raisers must seek the permission of numerous officials or wait until the organization’s board can decide whether to make an exception and take the shares.

“We want a reputation of being easy to work with,” says Mr. Murphy. “The last thing a donor wants to deal with is a lot of bureaucracy.”

He says the special fund for illiquid stock also helps protect the university by ensuring that those securities — which generate little or no return in the short term — do not affect the overall performance statistics of Cornell’s other investments.

Mr. Murphy says that he and his colleagues have devised other ways to guard against financial loss from unmarketable shares. In some cases, he says, donors have agreed to cover the loss if a stock’s value has declined by the time Cornell can sell it.

As another precaution, Cornell generally does not allow unmarketable shares to be donated to capital campaigns and other building projects, where the university could find itself holding a worthless security at a time when it needs cold cash. And, until illiquid securities can be valued by a qualified appraiser, Cornell records their value as zero on its books.

Big institutions like Cornell can afford to hold and monitor such stocks, experts say, but many tiny charities cannot and should not, particularly when they have a choice, as in the case of stocks that donors ask them not to sell.

Many non-profit groups are simply not sophisticated enough to evaluate such securities, both in terms of risk and of how they might affect the organization’s investment mix, says J. Clif Christopher, founder of Horizons Stewardship Company, a Cabot, Ark., consulting firm that works with churches and other small charities.

“Our recommendation is that they convert shares of donated stock and not get into the business of holding it and trying to predict whether a stock is going to appreciate or not,” says Mr. Christopher. “That, more often than not, can blow up in their face.”

For example, following a bad experience two years ago, Community Services Council, a Salt Lake City charity that also runs a food bank, adopted a policy of always selling donated stock. Because the council lacks the staff and other resources necessary to adequately monitor securities, one stock gift languished in its account, dropping in value from $10,000 to $4,000 before officials even noticed the decline.

Even though the charity still achieved a net gain from the gift, the experience of losing several thousand dollars that could have been applied to programs was enough to convince officials that the constant monitoring and potential losses associated with holding certain stock gifts was not worth whatever modest gains might accrue. “If I had the luxury of having someone manage it, that might be another thing,” says the executive director, Richard K. Winters.

Other small non-profit groups have been able to avoid such losses, however, and to come out ahead.

At the First African Methodist Episcopal Church in Los Angeles, officials say the key to their success in holding some stock gifts is the charity’s reliance on frequent consultations with professional advisers and on keeping a tight lid on the percentage of the church’s entire portfolio that is tied up in stocks.

The church has a policy of not investing more than half of its portfolio in common stock — with no more than 25 percent of that in technology companies. It will not invest in dot-com and other companies that have yet to turn a profit, says the Rev. Steven D. Johnson, the church’s chief financial officer.

Working with its advisers, the church has held on to about 40 percent of the roughly $250,000 in stock gifts it has received over the last several years. None of those gifts resulted in a significant loss, says Mr. Johnson. Even with some small declines, the church’s portfolio has been appreciating by between 10 and 20 percent annually.

Some donated stock the church held shot up in value. In 1996, for example, a gift of stock in a supermarket chain worth $100,000 doubled its value within six months. The church currently is holding Qwest Communications stock, which was valued at nearly $16,000 when it was donated in August. As of last week, that stock had gained more than $3,300 in value.

With continual vigilance and safeguards in place, Mr. Johnson says, holding stock can work to even a small charity’s advantage. He adds: “There has to be a certain willingness to accept some risk, but we protect ourselves.”