Donating Business Interests

If your client base includes business owners, you probably weren’t surprised by the observation in a recent Wall Street Journal article about the "stealthy wealthy:” 

What’s more, the chances are very good that most of your business-owner clients are charitably-inclined. When properly executed, giving closely-held business interests to charity can be extremely effective to achieve your client’s financial and philanthropic goals. 

Here are three important components of this strategy: 

Stop before you use a private foundation.

A private foundation is not the ideal recipient of private business interests. Donating closely-held stock to a fund at The Community Foundation is generally more tax effective than giving it to a private foundation as 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 The Community Foundation 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 for valuation.  

Counsel your clients about securing a proper valuation for charitable deduction purposes at the time the business interest is contributed. Valuation has always been a critical factor in any type of tax or estate planning strategy.

As always, please reach out to The Community Foundation anytime the topic of charitable giving arises in client conversations. We are honored to be your first call on all matters of philanthropy.