By Bethany M. Griffith, CFP®, EA
Running a business is full of decision points, strategy planning, and opportunities. All of these factors remain when it is time to sell the business. The sale of a business can be an exciting, yet overwhelming, process riddled with complexity and unknowns. Business owners with charitable intentions have options to maximize their after-tax income from the sale while simultaneously maximizing the charitable impact on their communities and organizations they value.
While multiple opportunities exist for the sale of a business, a donor-advised fund or a charitable trust are two of the most appealing options for joining your business sale planning and your philanthropic goals.
Through a donor-advised fund (DAF), you can donate a portion of highly appreciated business shares to the fund and receive an income tax deduction for the fair market value of the contribution. Additionally, the donation minimizes (or eliminates) the capital gains tax of the business shares in a future sale transaction. The proceeds from the sale of the business remain in the DAF for investing and to fund charitable contributions in future years.
The creation of a charitable trust allows the grantor to contribute shares of the business to a trust and structure an income stream to support his/her cash flow needs in retirement. Once the grantor passes away or the term expires, the funds remaining in the trust go to the charities the grantor has selected. A charitable trust allows the business owner to minimize (or eliminate) the taxes associated with the sale of a business and to receive a current year income tax deduction based on the portion of the trust which will ultimately benefit charities.
1. Timing is critical when utilizing a charitable strategy in conjunction with a business sale. Sale opportunities can be fast tracked, and thus charitable planning may need to be as well. If you can execute a charitable plan before the sale of a business, you reduce both income taxes and capital gains taxes. If you wait until after the business sale and contribute the proceeds, an income tax deduction is available for the charitable contribution, but the net income from the sale is reduced by capital gains taxes. To maximize the tax benefits from a charitable strategy, you have to initiate the contribution of shares before a legally binding agreement for a future sale.
2. Organize company documentation and governing documents such as shareholder agreements, membership agreements, or limited partnership agreements to ensure that owners have the ability to transfer shares without restriction. Planning ahead allows for understanding and confirmation of the legal parameters in place, and, if necessary, document amendments or waivers to allow for the transfer.
3. Plan for the appraisal. A qualified appraisal from an independent, third party is necessary to substantiate the value of the gift for determining the charitable tax deduction. Obtain an appraisal no earlier than 60 days before the donation, and no later than the date you file your income tax return.
4. Select your charitable strategy. Consider your personal financial goals along with your goals for the contribution. Working with a financial advisor, attorney, or CPA can provide insight and support as you work through your options.
5. Outline a timeline for your charitable contribution. Once you identify your charitable plan, and organize the business for a contribution, map out a timeline of next steps.
Just as running a successful business requires planning, planning for the sale of your business can minimize the stress and complexity of the business sale, ensure the optimal personal tax strategy, and maximize the benefit to the charity.
Bethany M. Griffith https://www.abacusplanninggroup.com/bethany-griffith/ is a 2010 graduate of the University of South Carolina with a B.A. in Business Administration and a double major in Finance and Economics. She was awarded the CFP® certification in February 2012, and the EA designation in May, 2015. Bethany also recently completed her Certificate in Family Business Advising with the Family Firm Institute.
As a member of the Financial Planning Team, Bethany works closely with clients to understand their goals in order to develop and implement a comprehensive financial plan to achieve those goals. Bethany is one of seven Abacus shareholders.
Abacus https://www.abacusplanninggroup.com/ is a financial advisory and investment counsel firm known for its passion in creating abundance for clients and family businesses through skillful listening and smart financial decision making. Managing over a $1.2 billion on behalf of its 225 plus families, Abacus consists of a team of multi-disciplinary experts who work collaboratively to serve its clients.