Your June Content

Gifting Business Interests: Many of your clients likely own their own businesses, and most of those clients are likely supporting charities in the Gulf Coast region. That’s why it’s so important to know the benefits of giving closely-held business interests to a fund at Gulf Coast, as well as understand how to avoid pitfalls and mistaken assumptions that using a private foundation is the best move.

DONATING BUSINESS INTERESTS:

Why a Fund at Gulf Coast is the Ideal Recipient

If your client base includes business owners, you probably weren’t surprised by this observation in a recent Wall Street Journal article about the “stealthy wealthy”: “Behind a paycheck, the largest source of income for the 1% highest earners in the U.S. isn’t being a partner at an investment bank or launching a one-in-a-million tech startup. It is owning a medium-size regional business.”

Given our region’s affinity for helping others through any number of charities, chances are very good that most of your business-owner clients are charitably-inclined. Indeed, more than 90% of small business owners have supported charities and community activities in the last year.

I wanted to take this time to refresh you on the benefits and mechanics of giving closely-held business interests to charity. When properly executed, this technique can be extremely effective to achieve the client’s financial and philanthropic goals.

Here are three very important components of this strategy:

Stop before you use a private foundation. Some of your business owner clients probably have established a private foundation. But the private foundation is not the ideal recipient of private business interests. Donating closely-held stock to a fund at Gulf Coast is generally more tax effective than giving it to a private foundation due to several key differences in how the IRS treats these gifts. When your client donates closely-held stock to the foundation, your client can typically deduct the full fair market value of the stock, up to 30% of adjusted gross income and also avoid paying capital gains tax on any appreciation. By contrast, if your client donates the same stock to a private foundation, the deduction is limited to cost basis up to only 20% of AGI, which is a significantly less favorable tax outcome.

Mind the timing. Encourage a business-owner client to start planning for a gift of closely-held stock before putting out feelers to potential acquirers and absolutely before any part of a deal is inked. This is crucial because a gift to charity will avoid substantial unrealized capital gains that have accrued in the business over the years only if the gift and the sale are genuinely separate events, avoiding the step transaction doctrine. Careful planning will help ensure that the client’s fund at Gulf Coast will receive 100 cents on the dollar for the portion of the stock it owns and the deduction won’t be thrown out.

Respect the rules of valuation. Counsel your clients about securing a proper valuation for charitable deduction purposes at the time the business interest is contributed to the fund at Gulf Coast. Valuation has always been a critical factor in any type of tax or estate planning strategy. Recently, the additional wrinkle presented by the Supreme Court’s decision in Connelly v. United States makes things even more interesting. The Connelly decision impacts the way business interests are valued for estate tax purposes. In Connelly, the Supreme Court held that life insurance proceeds indeed ought to be included in the value of a company without offsetting the redemption obligation. This could translate to higher taxable estates for your business-owner clients, creating further incentive to leave a portion of closely-held stock to charity. The decision is also a reminder that careful planning can potentially avoid pitfalls.

Powerful Planning Strategy

For clients who are contemplating the sale of a business and are seeking both a charitable deduction and tax-efficient planning, a Charitable Remainder Trust (CRT) presents a compelling opportunity. This strategy is especially attractive to individuals who want to make a significant charitable impact but may be hesitant about making an immediate outright gift.

By contributing all or a portion of their business interests to a CRT prior to a sale, the donor can achieve several financial and philanthropic objectives simultaneously. First, they are eligible to receive an immediate charitable income tax deduction based on the value of the gift. Second, the CRT—being a tax-exempt entity—can sell the business interest without triggering immediate capital gains taxes, which would otherwise be incurred in a direct sale. This preserves more value inside the trust for long-term benefit.

In return, the donor (or another beneficiary they designate) receives a stream of income from the trust, which can last for their lifetime or for a fixed term not exceeding 20 years. At the end of the trust term, the remainder of the assets is distributed to a designated public charity, such as a fund at Gulf Coast.

This approach not only maximizes charitable impact, but also provides a reliable income stream, reduces estate and income taxes, and facilitates a more strategic and values-driven business exit. For business owners looking to align their financial goals with their philanthropic vision, a CRT offers an elegant and powerful solution.

Tax Consequences of a Gift

To see an illustration of the tax consequences of a gift, click above!

Your Resource.

As you serve your philanthropic clients, we strive to be your resource and sounding board. Understanding the charitable side of the equation allows us to serve as a secondary source for you as you manage the primary relationship with your clients.

Connect with us anytime! It’s our pleasure to work with you in partnership as you help your clients achieve their charitable giving goals for this year and many years beyond tomorrow.