Better Yacht Donations Without IRS Risk

We encourge charitable donations. Anyone considering a yacht donation should be commended. But what if it could be a "yacht" more rewarding & with less risk?

Before donating a yacht, why not see if YES has a better deal- for you, the broker, and the nonprofit & without the IRS risk of many yacht donation programs?

YES Can Be Your Ensured Sale: More Rewarding With Less Risk

YES has a standing commitment to purchase yachts as part of Net Worth Neutral yacht ownership that ensures clients preserve their net worth and at least break even on yacht ownership & the yachting lifestyle.

While each transaction is uniquely designed to the priorities of the seller, they do share common terms.

That includes buying at their price that is sufficient to make them whole. Then we agree on terms like: how best to allocate resources, how much profit to make, how fast & which chairities to support.

In almost all scenarios, a YES structured purchase would be more rewarding for everyone - and with less IRS risk - than the conventional yacht donation programs currently promoted by many nonprofits.

Consequently, YES is now open to purchase yachts of non clients that meet our criteria. Why not sea what YES can do for you?

So What's A Yacht Donation Really Worth To The Donor- Best Case?

The value of a non cash charitable donation largely depends on the interplay of several factors including but not limited to:

the donor's effective tax rate,
the classification of the nonprofit,
the donor's basis in the asset to be donated,
the Fair Market Value (FMV) of the donated asset .

Determining the value and limits of charitable donations is not always clear. It depends on what's being donated, by whom, and to what kind of nonprofit or charity classification. Limits range from 20 - 50%.

For our discussion purposes, and without getting too wonky, we simply presume the best case most valuable scenario.

Thus, to find the maximum value to a yacht owner of a potential yacht donation, simply take the allowable donation FMV value, and multiply it by the tax payer / donor's effective tax rate. With annual donation limts, it may take several years to finalize.

The tax code allows for the maximum donation of non-cash assets in any one year to be limited to 50% of the tax payer's Adjusted Gross Income (AGI). In case the value of the donation exceeds the annual donation limit, the donation can be carried forward to future years.

For example, if the donor's AGI is $1,000,000, the maximum annual donation is $500,000. If the AGI is $10,000,000, the maximum annual donation is $5,000,000.

If you don't already know your effective tax rate, it's easy to find using online calculators.

But generally speaking, the higher the AGI the greater the effective tax rate since a greater percentage of the income is taxed at the higher tax rates.

For example, the effective tax rate on an AGI of $1,000,000 is about 35%. The effective tax rate on an AGI of $10,000,000 is about 39%.

However, it's well established that many of the more affluent pay little to no federal income tax.

Thus, its also possible that yacht donors could have other tax strategies that substantilly reduce their effective tax rates.

Consequently, for any specific yacht owner, a yacht donation may have substantially less value than it might have for other yacht owners.

Nevertheless, generally speaking, the greater the AGI - and the greater the effective tax rate then the greater the tax savings will be from making a donation.

Conversely, even with a high AGI, the lower the effective tax rate- the less value there is in making a charitable donation.

Let's Consider Two Scenarios

Consider two scenrios of yacht owners contenplating a yacht donation:

An AGI of $1,000,000 considering a yacht donation of a $1,000,000 yacht
An AGI of $10,000,000 considering a yacht donation of a $10,000,000 yacht.

Scenario 1

AGI of $1,000,000 is limited to a maximum first year deduction of $500,000. Multiply the deduction amount times the effective tax rate of 35%.

The actual first year cash value of the tax savings is only about $175,000.

Adding insult to injury, in many cases the donor has to pay a 10% yacht broker fee on the donated value of $1,000,000- that only leaves about $75,000 of actual value to the tax paying yacht owner.

The following year the tax payor can carry forward the balance of his $1,000,000 donation- which provides another $175,000 in actual cash value.

Total value to the yacht owner donating a $1,000,000 is $350,000 over two years - minus any yacht broker commissions or other fees like appraisal and legal to comply with the IRS regulations.

Thus the actual value to the yacht owner is roughly the effective tax rate times the donation value.

Scenario 2

AGI of $10,000,000 is limited to a maximum first year deduction of $5,000,000. Multiply the deduction amount times the effective tax rate of 39%.

The actual first year cash value of the tax savings is only about $1,950,000.

Adding insult to injury, in many cases the donor has to pay a 10% yacht broker fee on the donated value of $10,000,000- that only leaves about $950,000 of actual value to the tax paying yacht owner.

The following year the tax payor can carry forward the balance of his $10,000,000 donation- which provides another $1,950,000 in actual cash value.

Total value to the yacht owner donating a $10,000,000 is $3,900,000 over two years - minus any yacht broker commissions or other fees like appraisal and legal to comply with the IRS regulations.

The actual value to the yacht owner is roughly the effective tax rate times the donation value.

The Siren Song Of Abusive Appraisals Can Tempt The Unscrupolous

Other than the donor's effective tax rate - the most important factor is the donation value of the asset being donated. That is determined by a Fair Market Appraisal - which is ripe for all sorts of abuse and mischief.

How favorable of an appraisal is too favorable? Where do you draw the line? Where does the IRS draw the line? What's the difference between a Fair Market Valuation, a Favorable Valuation, and a Fraudulent Valuation?

This is just too much temptation for many to ignore. The lines between tax avoidance and tax evassion are already often blurry and over time could easily get pushed further and further.

After all, most criminals continue their crimes until they get caught.

Consider the same two scenrios - except let's double the donation by an overly agressive appraisal that doubles the Fair Market Value of the donated yacht.

An AGI of $1,000,000 considering a yacht donaiton of a $2,000,000 yacht
An AGI of $10,000,000 considering a yacht donation of a $20,000,000 yacht.

Scenario 1

AGI of $1,000,000 is limited to a maximum first year deduction of $500,000. Multiply the deduction amount times the effective tax rate of 35%.

The actual first year cash value of the tax savings is only about $175,000.

In this scenario, while the donor is responsible for a 10% yacht broker fee on the donated value of $1,000,000- as is often the case let's presume that the nonprofit will pay the broker fee.

The following year the tax payor can carry forward the balance of his $2,000,000 donation- which provides another $175,000 in actual cash value. And he can take this deduction for until the carry forward is consumed.

Thus with the inflated appraisal / donation - the yacht owner's benefit is 4 years of $175,000 for a total of $700,000 for what is REALLY a yacht that is probaly less than $1,000,000.

And in most cases, the only reason these yachts are donated is becasue the owner can't sell them at the price they are asking and they are tired of paying the annual operating cost.

Scenario 2

Now we have an appraisal of $20,000,000, but everything else is the same: AGI of $10,000,000 is limited to a maximum first year deduction of $5,000,000. Multiply the deduction amount times the effective tax rate of 39%.

The actual first year cash value of the tax savings is only about $1,950,000.

In this scenario, while the donor is responsible for a 10% yacht broker fee on the donated value of $1,000,000- as is often the case let's presume that the nonprofit will pay the broker fee.

The following year the tax payor can carry forward the balance of his $20,000,000 donation- which provides another $1,950,000 in actual cash value- as well as in years 3 and 4.

Total value to the yacht owner donating the yacht now appraised at $20,000,000 is $1,950,000 over 4 years - minus any yacht broker commissions or other fees like appraisal and legal to comply with the IRS regulations - roughly $7,800,000 or about 78% of the real value / asking price pf $10,000,000 and it relieves the owner from the other current operating expenses.

Nonprofits: Patsies, Facilatators, Or Co-conspirators?

The temptation to make fraudulent donations using abusive appraisals only exists becasue too many non profits either don't know of the potential abuse, knowingly turn a blind eye, are ok with it if the ends justify the means to support their organization, don't think it's much of a problem, or not their responsibility - or in fact actually promote the abuse because they benefit.

In this regard, it might be instructive to think of nonprofits like pawn shops or banks that can be used to lauder stolen goods and illegal proceeds.

Much like pawn shops and banks, even the best and most honest present venues where the unscruplous can exploit. While most pawn shops and banks are legit, some are known to be fences for stolen goods and open to qestionable activities. Others perfer to feign ignorace and profit by keeping their eyes closed so they can claim plausable deniabilty.

The potential for yacht charter donation abuse. When tax fraud becomes the business model.

One of the more common practices that promote and facilites potential abuse is that rather than immediately selling the donated yacht - which could reduce the actual amount that the donor could deduct - many participating nonprofits require a three (3) year charter with a lease purchase option as an attempt to circumvent the 3 year reporting requirement of the tax code.

Why would a charity require a 3 year charter lease purchase versus just selling the donated yacht for immediate cash?

The non profit has received a donation of a yacht that is valued somewhere between $5,000,000 which was the current best offer the yacht broker could secure and the "appraised: FMV of $20,000,000.

The nonprofit wants to quicky monetize the donation for their constituents and programs and stop paying the monthly operating costs, dockage, insurance, etc.

However if the nonprofit sells the yacht within 3 years of the donation, it must report the sale price to the IRS which would thereby reduce the allowable donation value the donor would be able to deduct from his taxes. Thus to circumvent this 3 year reporting requiement by the IRS - the nonprofit enters a 3 year charter lease purchase option.

They admit it's to "protect the donor". Protect the donor - from what? Could it be tax fraud?

Consider how the examples above can change depending on the value of the appraisal.

A yacht owner has a yacht that he would like to sell for $10,000,000. He can't sell it for his asking price as the true market value is somewhat less than the $10,000,000 asking price.

In this example, the best offer is for $5,000,000- which the owner rejects as too low.

The yacht broker suggests a yacht donation - which he helps orchastrate with participating appraisers / marine surveyors and nonprofit.

Using "creative, optismitic, and abusive" criteria, often unreasonably relying on "replacement values', the yacht owner is able to get an appraisal where the supposed Fair Market Value is $20,000,000.

The yacht owner makes the donation to a participating nonprofit of a yacht with an "appraised" FMV of $20,000,000.

The yacht owner with a $10,000,000 AGI gets to deduct $5,000,000 from the first year taxes and for the remaing 3 years until the carry forward is consumed. At the 39% effective tax rate that is a cash tax saving of $1,950,000 for 4 years for a total of $7,800,000.

Thus the nonprofit enters into a three year charter lease purchase at the current price of $5,000,000 - often with only 40 - 50% down and the balance paid over three (years).

Oh, and the nonprofit ususally agrees to pay the yacht broker commission so the yacht owner doesn't have to. In this example, that would be 10% of the orginal listing of $10,000,000 -or $1,000,000.

So to summarize.

The yacht owner listed his yact for $10,000,000 agreeing to pay a 10% commission to the broker upon sale. Netting $9,000,000. Under this donation scenario, the yacht owner nets $7,800,000 over four years, and is immediately relieved of the current operational expenses of dockage and insurance, etc. Considering how long the yacht has been for sale, the current offers he has or has not received, this could be a satisfactory alternative.

The yacht broker has received a full 10% commision of the listing price on a yact that was difficult if not impossible to sell given current market conditions and the seller's objectives.

Even after paying the yacht broker's commission, the non-profit will recieve a substantial donation from a new funding source.

There's only one reason why nonprofits require a 3 year charter lease purchase option - as opposed to just selling the yacht at the current market price - that's to provide cover for the fraudulent appraisals- and continue the scheme to secure future donations.

Don't Be Deceived: The IRS May Be Slow, But They're Not Stupid

We are not against yacht donations or suggest that all yacht donations are fraudulent, or that all parties that promote or participate are suspect.

However keep in mind that the most successful and most egregious of offenders, the worst pawn shops and money launderers are so successful becasue they sprinkle the illegal transactions in with the mix of mostly legitimate transactions.

Promoters claim that some nonprofits have used this structure for years- without problems. That's probably true as there is nothing technially wrong with the structure.

The potential problem rests with the legitimacy of the appraised donation value and the size of the donation.

How long someone has been doing something is of little value. How long a pawn shop has been in business does't tell you how many transactions they have done or how many of those transactions might actually have been illegal.

The same is true for those brokers, appaisers, and non profits that act like the fact that they have not been caught yet as some type of justification.

Again, there are very specific requirements in order to be fully compliant, and there is nothing improper with makeing yacht donations. The potential problem comes overvaluing the donated yacht. And it's only a matter of time until a disgruntled employee, divorced spouse, business competitor or just someone looking to collect the bounty for tax fraud blows the whistle.

Large Charitable Donations Are IRS Audit Red Flags

We encourage tax payers to take every deduction for which they are entitled. But keep in mind that it is the tax payer's responsibilty to prove they are entitlted to every deduction and the amount.

Tax professionals know that one of the red flags for IRS audits are unusually large charitable donations. Unusully large compared to the tax payer's peer goup as well as unusually large compared to the individual tax payer's history.

The IRS reports the few high income tax payers make donations exceeding 2-3%. What percent of your income do you ususally donate to charity? Probably less than the 50% of your AGI as most yacht donations would create.

While large charitable donations are encouraged by the tax code, they are also more likely to be scrutinized by the IRS. So proper documentaion is all the more important.

In case of any donation challange, the tax payer has the burden of proving the deduciton and the value thereof. In case of a yacht donation the tax payer will have to justify the valuation claimed.

This will be in an IRS tax court, with IRS professional appaisers refuting your appraisal, and if applicable your unsuccessful attempt to sell the yacht at the appraised value and the nonproit's failure to sell the yacht at the claimed donation value.

And if the IRS suspects fraud, there is no statute of limitations as to how far they can go back to audit.

So when making a yacht donation, be prepared to be looked at by the IRS. And playing games with valuations is not wise.

Just because no one has been caught yet is no secutirty for the future. Just look at Son Of Boss and how the IRS has changed on conservation easments.

Better Alterntive To Yacht Donations Without IRS Risk

Buy Non Client Yachts

Before makeing a yacht donation, check with YES to see if we can make a better deal to buy your yacht.

Essentialaly, our standing offer is your price our terms. Then it's just negotiating acceptable terms.

We are not yacht brokers, but we can pay yacht broker fees - much like many nonprofits will pay the broker commissions on dontated yachts. Unlike yacht brokers, our relationship extends beyond just buying or selling a yacht. We are in regular and routine contact with our clients, many of whom may become friends and / or partners.

And since we are not yacht brokers, we are not transaction oriented and compensated by commissions. Rather we only make money AFTER our client / partners make a profit.

YES Has Programs To Buy Client Yachts

YES Yacht Executive Solutions has been specifically created with the luxury yacht owner in mind – yacht ownership from the yacht owner’s long term perspective.

Rather than fee or transaction based, our compensation is largely determined by our clients’ long term financial success. In this case, minimizing any adverse impacts that yacht ownership may have on a client’s net worth. Our goal is for yacht ownership to be net worth neutral or even profitable.

We take more of an investment banking philosophy when working with our clients, strategic partners, yacht owners, brokers, and advisors. Not only do we help structure and facilitate transactions that can get to that immediate YES and closed – but we maintain long term mutually beneficial relationships.