Rare But Powerful “Charitable Exits:” Know it When You See it 

If your client base includes business owners, you’re no doubt aware of the benefits of giving closely-held business interests to charity. Most advisors encounter only a few of these situations, but when you do, our team at The Community Foundation can help you make the most of your client’s opportunity. 

Let’s take a look at a hypothetical client, Alex Monroe, who may have a few things in common with your actual business owner clients. 

When Alex began considering selling his company, he mentioned it only casually to you. Because Alex’s company has grown substantially over the years, if Alex sold now without additional planning, a large portion of the proceeds would go toward capital gains tax, potentially eroding the value he had worked so hard to build.  

Because Alex has given generous gifts to several favorite charities over the years, you suggest Alex consider giving a portion of the company’s shares to a Donor Advised Fund at The Community Foundation before any formal sale activities begin. By making this charitable gift well in advance of the eventual sale, the shares owned by the Donor Advised Fund will not trigger capital gains for Alex. Instead, the Donor Advised Fund will receive the proceeds free of capital gains tax and ready to deploy toward Alex’s philanthropic goals. What’s more, this technique delivers an estate tax advantage by removing the gifted portion of the business from Alex’s taxable estate. 

 Transactions like this take time and require navigating a few pitfalls.  Obtaining a qualified appraisal is crucial in order to comply with IRS rules for charitable deductions for gifts of non-cash assets. And for this type of transaction to avoid capital gains tax, it is important that no formal discussions about the sale, shareholder vote approving a transaction, or signed letter of intent are in place before the gift of shares. Otherwise, the IRS may disallow the charitable deduction. These transactions are also typically more effective when the stock is given to a public charity, such as The Community Foundation, rather than a private foundation.  

And best of all, your clients can give back to the causes they care about and the communities where they have worked and thrived. 

As always, our team of Chartered Advisors in Philanthropy (CAP®) is ready to help you whenever the opportunity arises to serve your clients’ philanthropic goals.