By Sandra Lucas, Esq., AEF Alternative Giving Strategist

Like many advisors who partner with American Endowment Foundation (AEF), you may have a growing number of clients who are planning exit strategies for their privately-held businesses.  Incorporating a charitable gift of C-corp shares before a sale as part of your client’s exit plan may help your client not only achieve significant tax savings, but also have a much greater charitable impact than by first selling the business and then making a cash donation.
Piggybank in Safe

A Threshold Consideration: Your Client’s Charitable Intent

Does your client: Have one or more preferred charities?  Want to involve his or her children in philanthropy?  Intend to leave a charitable legacy?  Maybe you are already aware of your client’s philanthropic interests.  If not, speak with your client to see if charitable giving fits into his or her overall plans.

If your client wants to develop a charitable strategy involving C-corp stock, be sure to involve the donor’s charity of choice in your preliminary conversations.

  • Not every charity is willing or able to accept direct donations of C-corp stock.
  • A donor advised fund (DAF) sponsor like American Endowment Foundation may be the solution.  AEF can, in many cases, accept gifts of privately held stock, such as C-corp shares.  Once the shares gifted to the DAF are sold, those net proceeds remain in the DAF for your client’s charitable giving.  Donating shares to a DAF instead of a specific operating charity enables the donor to have great flexibility in deciding where and when to send grants.
  • With a DAF, the donor may recommend grants to one or more charities of his or her choice for years to come— and even name his or her children as successor advisors for the DAF.  At AEF, you have the ability to manage assets held in the DAF created by your client.

General Tax Advantages

Generally speaking, when donating long-term appreciated assets like C-corp stock, donors who itemize their deductions can receive an immediate income tax charitable deduction for the fair market value (determined in accordance with IRS requirements) in the year he or she contributes to a DAF.  Since a DAF is administered by a 501(c)(3) public charity, contributions qualify for maximum income tax benefits, subject to IRS limitations.  Moreover, donors may potentially pay no capital gains tax in connection with the gifted shares.

Your client should consult his or her CPA or tax professional to understand the tax implications for his or her unique situation.

Assemble the Team

In addition to identifying a charitable partner like AEF, you, as your client’s trusted advisor, can bring the right professionals to the table.  The charitable partner cannot provide advice on legal or tax matters.  Your client must have independent legal and tax counsel.  The following professionals can help shape a strategy that fits your client’s tax and personal planning objectives:

CPA / Tax professional:

  • Your client should ask his or her CPA to “run the numbers” and determine the tax considerations that are appropriate for the client’s situation.
  •  Your client and his or her tax professional should understand when your client must obtain an IRS qualified appraisal to determine the fair market value of the donated C-corp shares on the contribution date.  The qualified appraiser must sign IRS Form 8283, which is then signed by the charity and used to complete the donor’s tax filing for the year of the donation.  These steps are crucial in ensuring the client complies with IRS requirements.

Estate planning or corporate counsel:

  • Your client should consult his or her attorneys regarding the transfer of C-corp stock, including any restrictions on transfer, and documentation requested by the charity for due diligence, in addition to the client’s overall planning considerations.

Financial advisor:

  • At AEF, financial advisors can manage those assets held in the DAF.   The investments in a DAF appreciate tax-free.

Other Considerations:

  • A charitable gift of C-corp stock requires time and planning, and, once made, is irrevocable.  Both your client and the receiving charity need time to analyze the proposed gift.
  • The receiving charity will have its own due diligence process.  Like any other shareholder, AEF will ask to see audited financials, corporate governance documents, transfer agreements and other documentation to better understand the proposed gift.
  • Be sure to consider charitable planning strategies and discuss them with the receiving charity well in advance of any binding agreement to sell the business.

Your business owner clients invested decades of their lives in building successful companies.  When they are preparing to sell, you can add value to their exit strategies and help them solidify their legacies by introducing charity as part of the equation.

This article is intended as a general overview of basic charitable planning considerations and is not intended to provide legal or tax advice.    Contact us or call 1-888-966-8170 to begin a conversation about how AEF can serve as a charitable partner for you and your business owner clients.