Set Free the Captive Wealth of S-Corp SharesSubmitted by American Endowment Foundation on January 27th, 2020
By Eric Kinaitis
It is estimated that there are nearly 4.8 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) can pave the way to building the legacy that the business owner wants to establish in a way that can help the causes that they want to aid.
Could a business owner attempt to donate such shares to a charity directly? One issue to recognize is that some charities may not have the capability nor desire to accept S-corp shares. An underlying difficulty for many charitable organizations is that they are structured as a corporation vs a trust. Their underlying corporate structure may cause them to pay Unrelated Business Income Tax (UBIT) on the gift that could reduce the gifts' value by up to 20%.
An illustration of how a donor could gift S-corp shares to a charity is featured below:
There is a way that a 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 illustration above, the clear advantage of a donor advised fund intermediary is 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 their charitable interests.
The financial advisor of the donor benefits by managing client assets that were not otherwise available while in their illiquid form.
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.
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.