Karen Johnson has spent her entire career working to facilitate private, philanthropic support for Harvard—first for 30 years as an attorney at Ropes & Gray LLP and now as an attorney and director at Harvard Management Company (HMC). Today at HMC, she helps donors find the most effective way to support Harvard and plan for their financial futures. We recently spent some time talking with Karen about her work at Harvard and in particular her work with donors who are interested in making gifts of complex assets.
What do you enjoy most about your work at Harvard?
Working with our exceptional donors is very rewarding. I’ve had an opportunity to witness the pure, mission-focused philanthropy that’s embedded in the culture at Harvard. Alumni and friends keenly understand the power and impact of their charitable contributions to the University, and they are committed to ensuring that future generations of students have access to all that Harvard has to offer. In my role at HMC, I’m able to interact with donors in a holistic way—from the beginning to the end of the gift process—helping them to define their goals and to develop a gift strategy to get them there. I also enjoy working with the incredible team of gift officers at the University. These talented and seasoned professionals find creative ways to structure gifts and provide donors with the opportunity to witness the difference their gifts make in the lives of students and faculty.
How did your previous experience prepare you for your current work at Harvard?
Having an established relationship with Harvard made the transition to HMC seamless for me. At Ropes & Gray, I worked externally with HMC on gifts of complex assets as well as with the University Planned Giving staff on charitable gift opportunities and strategies. I did this in addition to my wider portfolio of legal work, which included private equity analysis in connection with endowment investments. Harvard has long been committed to helping donors understand the most tax-efficient way to make a charitable gift to the institution. If an individual’s wealth is in the private funds space, we can help the donor consider whether the gift of a private fund interest helps maximize their ability to give.
How do you assist donors in making gifts of complex assets?
The starting point for any conversation with a donor is determining the donor’s philanthropic goals. Harvard is uniquely positioned to help donors look across their entire portfolio to see what sorts of assets might make sense to contribute and what gift structures are responsive to their charitable and personal goals. I would note that gifts of complex assets require diligence, and Harvard is methodical in identifying potential challenges that may arise for both the University and the donor and working through those challenges with the donor and the donor’s advisors toward creative solutions. The exciting part of this work is that in many cases, gifts involving these more novel assets can unlock a bigger charitable impact than the donors might have anticipated—one they would not have necessarily been able to achieve with just liquid assets.
What are examples of gifts of illiquid financial assets that Harvard has received? How were these gifts advantageous for Harvard and for the donors?
We’ve received gifts of hedge fund interests, private equity—both limited partner and general partner interests —and private company stock. With careful structuring and a little patience, we have realized significant upside from these sorts of assets, and that upside is put to work in the endowment to support charitable purposes selected by the donor. These include areas like financial aid, research, and programmatic developments that help define Harvard excellence.
Is Harvard able to accept gifts of partnership (or fund) interests?
Absolutely! Harvard is unique in that it has the infrastructure in place—including gift officers, the University Planned Giving team, and the legal office at HMC—to accept gifts of fund interests. Typically, if an individual wants to make a gift of a partnership interest, they might make such a gift to a larger, commercial donor-advised fund, because many charities do not possess the expertise to accept fund interests directly. At Harvard, we have an internal team that is responsive only to Harvard donors, and that means we can act swiftly to evaluate potential gifts. This level of efficiency is important, especially for donors facing a tight timeline due to, for instance, the potential tax issues of the sale of a company. We are not juggling a number of clients and priorities. At Harvard, we have one mission—and we’re committed to fulfilling it.
Can you please explain the process of making a gift of real estate to Harvard?
A highly appreciated asset such as real estate can be a tax-efficient way of giving to Harvard. The donor’s charitable deduction is based on the fair market value of the real estate—determined as of the date of the gift—and the donor does not pay any capital gains tax on the unrealized appreciation. Harvard can sell the asset and put the full value to work for the University. There are two techniques that can work particularly well: retained life estates (RLEs) and specially structured charitable remainder trusts (CRTs).
With an RLE, the donor retains the right to live in their home for their lifetime. After the donor passes away (or otherwise terminates the life estate), the title passes to Harvard, and Harvard then sells the property. The sale proceeds are used to support a fund or purpose previously identified by the donor. As a donor, you get to stay in your home, you receive a charitable deduction, and you support the University.
With a CRT, the donor contributes real estate to a trust. The trust sells the property, and the proceeds are invested in the endowment or as part of the CRT tax-efficient strategy as selected by the donor. The donor (or a specified beneficiary) receives a lifetime income stream, and the remaining assets are transferred to Harvard at the conclusion of the trust. The CRT is a charitable giving technique that provides advantageous tax benefits to donors who may be interested in selling their home or another piece of real estate. Funding a CRT allows donors to convert the value locked in the real estate into a diversified investment portfolio (without having to pay tax on the appreciation) and reserve an income stream based on the value of the trust. In addition, the donor is entitled to a charitable deduction for the remainder value of the CRT that will eventually pass to Harvard when the trust terminates.
Do you see any trends or opportunities in the types of assets that are being given
Wealth, including individual wealth, is migrating to the private capital space—hedge funds, private equity funds, and stock in private companies. In order to help donors implement a charitable giving plan involving these sorts of complex assets, a charity requires the right infrastructure as well as patience to help donors realize the full potential of this sort of philanthropy. Harvard has the staff and expertise to facilitate these kinds of gifts, and we are excited to talk with donors about how to achieve their charitable goals.
In the current economic and tax environment, are there planning situations people should be aware of, and are there gift vehicles that are particularly advantageous?
It is always advantageous to consider a gift of an appreciated, low-basis asset. As noted above, Harvard will benefit from the full value of the asset, and the donor will be eligible for a charitable deduction equal to the fair market value of the asset (as of the date of the gift) without paying tax on the appreciation. In the current interest rate environment, many donors are exploring the use of a charitable lead trust to benefit Harvard during the term of the trust and to ultimately return assets to family members at reduced transfer tax costs.
This story is featured in the Spring 2021 issue of the Gift Strategies newsletter. For more information about charitable giving techniques, please visit our webpage or please contact us here with any questions.