03.26.20

Charitable planning is a must before the sale of a business

A new decade frequently inspires closely-held business owners to start thinking about an exit strategy. Before your business-owner client starts putting out feelers to potential acquirers, be sure to counsel your client about the benefits of contributing an ownership interest to a charitable organization, especially to a flexible Donor-Advised Fund at the Community Foundation.

 

No doubt your client has substantial unrealized capital gains that have accrued in the business over the years. Upon a sale, capital gains tax will be triggered on the proceeds of the client's asset. No capital gains tax will apply, however, to any portion of the business owned by a charitable organization. The charity will net 100 cents on the dollar for the portion it owns. So, in the case of an interest in the business owned by a donor-advised fund at the community foundation, the proceeds of the sale will create an immediate "charitable giving account" for the business owner to enjoy by recommending grants from the proceeds to favorite charities, in whatever amounts and according to whatever schedule the business owner desires.

 
Be careful, though, that you counsel your clients about securing a proper valuation for charitable deduction purposes at the time the business interest is contributed to the charity. In addition, it is critical that no deal is on the table at the time of the contribution. Don't get caught in the step transaction trap that is a risk in any pre-sale gift to charity of real estate, closely-held stock, and other alternative assets.