Charitable planning for business owners in transition

As baby boomers exit their businesses, they're good prospects for charitable tools such as donor-advised funds

Mar 30, 2018 @ 2:44 pm

By Phil Cubeta

Boomer business owners are reaching an age at which they must exit the business and move into what used to be called "retirement." But many such boomers are still energetic and eager to put their money and their talent to work post-exit. As they exit, they are excellent prospects for charitable tools, including a charitable remainder trust, a grantor charitable lead trust, foundation, or, very likely, a donor-advised fund.

I've outlined these tools below and why they could be the right move for boomer business owners.

Charitable remainder trust. With the right set of facts, the client may be able to put all or part of the business into a charitable remainder trust, get a partial income tax deduction and an income stream for life, and avoid capital gains on the sale of the asset inside the trust. Think C corporations. They are the ideal prospect. Real estate can also work. S corporations do not.

Charitable lead trust. Say the client sells the business outright, realizing a significant spike in income. With a grantor charitable lead trust, a donor makes a gift into the trust, which then makes payments to charity for, say, 10 years. At the end of that time, the corpus can return to the donor. Going in, the donor gets an income tax deduction equal to the present value of the payments that will go out from the trust to charity. The downside is that each year, as assets inside the trust are sold to make the charitable payout, the donor will realize taxable income. But with good investment planning inside the trust, the taxes paid over time may be significantly less than the tax saved up front. These deals are happening. If you have such a client who has sold a business, or had any other big spike in income, be sure to consider the grantor charitable lead trust.

Donor-advised fund. Yes, in some cases, it may be possible to gift the business, or part of it, prior to sale to a donor-advised fund and then sell inside the DAF without paying tax. A donor might sell some of the business outside the DAF, and some inside. The tax savings on the gift to the DAF can offset the tax due on the portion sold outside the DAF.

(More: Billionaires donating to a Goldman charity unmasked by IRS error)

Foundation. Generally private foundations with closely held stock do not work. For one thing, donors only get a deduction for basis (or fair market value, if less). But a foundation does work to offset the gain once a taxable event, like a business sale, has already occurred.

As an advisor, here are a few ways to start the conversation with boomer business owners:

• "Barry, what is next for you? You have been a huge success in business. What comes next?"

• "Melinda, are there things in life you always wanted to do but never did? How can you still get back to that while you have time?"

• "Howie, imagine it is five years from now. You have exited the business in style. You are leading your best life. What are you doing? Sitting on boards? Volunteering? Leading a new venture? Or just taking it easy? What will give you joy?"

• "Todd, if you had a million dollars and could not spend it on yourself or family, where would you give it?"

• "Mel, beyond yourself and family, where in the world you like to make a positive difference while you are alive, or after you are gone?"

Start the conversation about life after exit and legacy, and you will quickly discover that boomer business owners are eager to learn more. How do you benefit? When the business is sold inside or outside a tool, you get to manage the money. More importantly, you become a trusted and referable resource to some of the most significant wealth-holders in town. Step up! The boomer business owners need you, and your town does, too.

(More: Giving to charity, the millennial way)

Phil Cubeta is the Sallie B. and William B. Wallace Chair in Philanthropy at The American College of Financial Services.


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