Philanthropy as part of your business estate plan

Keep philanthropy top of mind to mitigate capital gains taxes when contemplating the sale of your business

Cindy Luckman

As a business owner, you know the importance of giving back to the community. Whether you sponsor a community event or help fund an educational program, the marketing power and goodwill that surrounds your business name is priceless.

While many business owners plan to continue their philanthropic endeavors personally post retirement, one area that is often forgotten is including philanthropy as part of the business estate plan. From a tax point of view, there are several ways business owners might be able to mitigate capital gains taxes using philanthropic opportunities while also making a community impact.

Donor advised funds – Business owners can create a donor-advised fund using profits from the sale of the business. Donor advised funds allow the business owner to recommend contributions to the charity or multiple charities from an investment fund. Once the fund is established, the donor can deduct the tax benefit immediately – not only reducing the amount of capital gains tax from the sale of the business, but also increasing his or her overall deduction amount. The donor has administration oversight on the money in the fund. Because the fund can be invested, it has the potential to grow interest, possibly increasing the value of the overall donation over time.

Donor advised funds are also a better choice for those who want to remain quiet in their giving. Since the assets are held by an administering organization, the distributions from the donor advised funds can be kept anonymous, both publicly and to the nonprofits they support, if preferred.

Family foundations – When a family-owned business is sold and multiple members benefit financially from the sale, family foundations provide an avenue for everyone to continue doing business together; however in a philanthropic way.

Family foundations run in a similar manner to donor advised funds where money is donated and a tax deduction is received immediately. How family foundations are different is there is a board of directors overseeing the foundation and making decisions on how the money is invested and how it’s distributed. A private foundation offers substantial flexibility: one can be established for virtually any charitable purpose. At least one family member serves in a governing role, but many foundations will have multiple family members (investors) serving as trustees.

Charitable remainder trusts – A third philanthropic option is establishing a charitable remainder trust. When the business owner puts the business into an irrevocable trust, it keeps the asset out of his or her estate, therefore reducing the potential for estate taxes when the business is sold. It also can help reduce income taxes and the donor will receive an immediate charitable tax deduction. With trusts, the money does not go to the chosen charity until after the donor passes away; however the charity is aware of the future donation. The money is usually invested, with earned interest payments providing the donor with a potential income for the rest of his or her life.

You can receive a fixed percentage of the trust assets in which case the trust would be called a charitable remainder unitrust. With this option, the amount of annual income will fluctuate, depending on investment performance and the annual value of the trust. Or you can elect instead to receive a fixed income, in which case the trust would be called a charitable remainder annuity trust. This means that, regardless of the trust’s performance, your income will not change.

Business succession planning is very important for all business owners to do. I recommend they start working with their tax and legal advisors early in the life of the business, because one never knows when a business might need to be sold for any reason. And when working with clients who intend to sell on their business succession plans, I also recommend they think about philanthropy as a part of the sale. It’s a great way to continue giving back to the community, but also can be beneficial financially through tax deductions.

Cindy Luckman is senior vice president for The Private Client Reserve of U.S. Bank in Vancouver. You can follow her on LinkedIn at U.S. Bank and its representatives do not provide tax or legal advice. Each individual’s tax and financial situation is unique. Individuals should consult their tax and/or legal advisor for advice and information concerning their particular situation.

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