Managing Charitable Giving During the Sale of a Business
As successful business owners reach a point in their business when they are ready to sell, many also recognize both the need and opportunity to do more with their good fortune. To give back to their communities and help others facing challenges beyond their own making.
For business owners with such a charitable inclination and a readiness to have their business change hands, there are many options and considerations to weigh before setting out your course of action.
It is certainly common for business owners to owe a substantial amount of income taxes from the growth of their business over the years. If you plan to be charitable after the sale then you should build it in as soon as possible.
With planning, you can segment a percentage of your business and give that to charity prior to the sale. The charity can then sell that portion of the business without owing any tax. This strategy allows the charity (or charitable fund, which is discussed below) to receive substantially more money in return than if the owner cashes out the entire business and then makes the contribution.
Either method is entitled to an itemized charitable deduction for the fair market value of the gift. Appreciated assets with a gain and held for more than one year offer the best tax deduction benefit to owners.
Placing the funds into either a charitable fund or a foundation are two methods that many of our clients have used. These are not mutually exclusive and some have even utilized both of these methods.
Donor Advised Funds
Growing in popularity are Donor Advised Funds (DAFs), which offer an efficient and relatively cheap way to accomplish charitable goals. In such structures, cash or securities are given to the DAF, and an account is established in the donor’s name. The value of the account is equal to the gift, and the assets can even be invested with no subsequent taxes on the earnings.
The donor, and others designated by the donor, can suggest disbursements to the administrators of the fund. Such suggestions are almost always approved once the receiving charity is verified by the DAF administrators.
Most DAFs are easily administered through a website, and such funds are inexpensive because a small fee covers the IRS compliance guidelines, filings, and other legalities.
Another useful alternative is creating a Private Foundation, which, like a DAF, offers the ability to gift to charities, contribute appreciated assets and shield future earnings from taxes. The key difference is that a Private Foundation is more expensive as the set-up costs and annual costs are all assumed by the Foundation. This means that small gift amounts don’t make sense. From our experience, the minimum starting contribution is generally $1 million.
However, some still choose to go this path and bear the additional cost in order to maintain control and greater family involvement. A DAF has restrictions on hiring and compensating family members. Yet some donors want family members to work on setting philanthropic goals. They want them to work with charities and perform due diligence on gifting. Such efforts often require many hours to perform, and DAFs would not allow compensation to be paid for that work.
A Private Foundation set-up by a family would allow for such compensation. And, oftentimes this can promote intergenerational bonding and more focused benefits to society as families work together on inspirational causes that may also have personal ties to the family.