Unlocking the Wealth in S-Corp SharesSubmitted by American Endowment Foundation on February 12th, 2015
By Eric Kinaitis
S-corporations are the most prevalent business structure in the US; it is estimated that there are nearly 4.5 million individual businesses that are structured as S-corps, with an estimated value of nearly $3 trillion in assets.
However, due to the nature of S-corp structure, the value of these assets are in an illiquid form. When a business owner is ready to exit their business, the ability to unlock the trapped wealth within these closely held shares presents an opportunity for the business owner to build a tax-smart charitable legacy. A donor advised fund (DAF) paves the way to that legacy.
An illustration of how a donor could gift S-corp shares to a charity is illustrated below:
Avoiding the fact that some charities may not have the capability nor desire to accept S-corp shares, there is a way that the donor could make a donation of these closely held shares that is tax-smart and allows more money available for charitable gifts. Let's look at the example below:
From the example above, the clear advantage of donor advised funds are evident. By implementing a DAF, the donor received an immediate tax benefit from their illiquid S-corp shares, and was able to retain a larger share of the gift to support his or her charitable interests.
Although the strategies to handle illiquid assets can be as varied and numerous as the assets themselves, providing insight to a DAF administrator concerning the scope and type of assets the donor is looking to give, and the donors’ charitable intent, are starting points. For the donor, they will be guided down the best path in doing charitable good while remaining tax-smart.
The financial advisor of the donor benefits by managing client assets that were not otherwise available while in their illiquid form.
At American Endowment Foundation, we look forward to discussing the creative ways that a donor advised fund can be used to unlock the wealth in S-corp shares. Contact us or call at 1-888-660-4508 to learn more about the innovative ways that we can help the interest of donors and their trusted advisors.