Gifts of Business Interests
By Jackie Jacobs
A charitable gift of an interest in a business entity can offer many advantages over a cash gift.
Given the vast wealth in this country made up of closely-held business interests (ranging from “mom and pop” shops, to shares in S corporations, C corporations, limited liability corporations, or partnerships) it’s not surprising that questions are asked with increasing frequency about contributions of closely held business interests to charity.
The proper answer is that it depends on the nature of the asset and the type of structure you want to use -private foundation, donor advised fund , charitable lead trust or charitable remainder trust.
As noted by financial advisors David Thayne Leibell and Emily Brunner of Wealthmanagement.com , there are certain tax traps that can get in the way of a successful gift. There can be many advantages in certain situations to gifting business interests to charity, but only if properly planned and executed. But a poorly planned or incorrectly executed gift can result in a lost charitable tax deduction for the donor and/or taxation to the charity. Knowledgeable professional advisors in this area is essential to making the idea a successful reality.
University of Indiana Foundation materials on this subject quote Thomas Edison: genius is 1% inspiration and 99% perspiration. “The professional advisor may have to provide the 99% perspiration to make a client’s charitable donation of a business interest work.
Understanding the benefits, pitfalls and requirements of such gifts is the key to success. When the charitable inspiration strikes, a well prepared advisor can help inspired clients reach their philanthropic goals and, in doing so, also further the goals of the selected charities.”
The rewarding but complex and tax-sensitive topic including charitable gifts of business entities should start with an examination of some of the potential benefits and problems for both donors and charities. But first, start with a review of the following checklist:
- You are an entrepreneur, member of a family business, or participant in a professional corporation.
- You hold an ownership interest in a viable enterprise, and are able to transfer your interest to third parties like a charity.
- Your interest will continue to generate revenues that can flow to the charity, or it is likely to be redeemed by the enterprise in the near future.
- Your interest is not encumbered by debt, and the charity will not be called on to make future contributions to or for the enterprise.
- You want to save both income and capital gains tax.
- Your interest is marketable.
Assuming that these factors apply to you, gifts of business interests such as stock in a closely held corporation, S-corporation stock, or shares in a professional corporation could be of benefit to both you and your favored charity. You could receive a charitable income tax deduction for the full fair market value of the shares, with no capital gains liability for the charitable transfer. In some cases, you might even be able to use the shares to fund a gift plan that pays lifetime income, like a charitable remainder unitrust, or that lowers the gift/estate-tax cost of passing a family business to the next generation.
Through some of these vehicles, charities could receive dividend income from the donated shares of the business enterprise, which could be used for your designated purposes. Alternately, the charity could offer the shares to the corporation for redemption or repurchase. Most charities would be delighted to consider a redemption of the shares, but there can be no prior written agreement between you and your business or a third party to offer such a redemption. If there is such a prior agreement, the IRS would impose capital gains tax on your gift transfer.
Planning points to consider are as noted:
- Since shares in a closely held business or an investment partnership don’t trade publicly, you will need to secure an independent appraisal of the fair market value of the shares you donate.
- Before proceeding, make sure that there are no restrictions on the transferability of the shares, and that you have not used the shares to secure a loan from the corporation or partnership.
- Be aware that shares of an S-corporation are subject to additional IRS regulations.
- Because the offer of a business interest involves issues of marketability, liability, and involvement in business operations, the charity must first review and approve any such transfer.
Plan Carefully. The twists and turns of gifting closely held business interests to charity aren’t for the faint of heart. Unless an advisor specializes in this area, it’s best to reach out to someone who does. Even then, based on the specific facts, it may not be possible to structure the gift in a tax-efficient manner. Not reaching out for specialty advice may result in the advisor and the client taking a trip to the land of unforeseen consequences.
Jackie Jacobs is the Chief Executive Officer of the Columbus Jewish Foundation, the Central Ohio Jewish community’s planned giving and endowment headquarters.
Article appears as originally published in the Ohio Jewish Chronicle, September 18, 2014.