Selling a Business Provides Unique Philanthropic Opportunities

The opportunity to sell your family business might represent the pinnacle of your life’s work – and possibly the work of generations of family before you, as well. It can be an even more meaningful experience when you use the sale as an opportunity to achieve your philanthropic objectives, which is possible with proper business and tax planning.

Case Study #1: Proper Timing for a Sale of Stock

Michael was an education professional with entrepreneurial dreams, and he had successfully developed and operated several for-profit colleges late in his career. Michael established his business through a privately held corporation and achieved success early on. After operating the colleges for just a few years, he was approached by a company that wanted to buy them in cash. Michael had planned to retire soon, and he jumped at the opportunity. However, he needed to decide whether to sell his corporation’s stock with the goal of contributing cash to his family foundation or simply to contribute the stock itself to the family foundation.

SEE ALSO: What is Your Desired Retirement Lifestyle?

Michael consulted his financial advisor and realized it was best to sell the stock before executing the agreement with the buyer, and then make a cash contribution to the family foundation. In his scenario, this made sense for two reasons: First, contributing the stock would have resulted in a charitable contribution deduction equal to Michael’s adjusted basis in the stock, rather than for the fair market value of the stock that would be reflected in the sale price. Second, his foundation would eventually have to sell most of the stock off in order to avoid violating excess business holdings limits after 60 months.

Given these two realities, it was optimal for Michael to sell the stock and contribute to his family foundation with the cash proceeds. This allowed him to claim a charitable deduction for the full amount of his cash contribution.

Case Study #2: Selling to a REIT

Rebecca was an accomplished interior designer who had worked for design firms for years before finally taking the leap and establishing her own interior design and planning company through an S corporation where she was the sole stockholder. Rebecca’s business grew and expanded over the years, and her reputation earned her a unique opportunity to sell her business to a publicly-traded real estate investment trust (REIT). The once-in-a-lifetime offer was structured to qualify as a tax-free reorganization, as Rebecca would receive stock from the REIT in exchange for all of the stock from her S corporation. There would be a lock-up period of 90 days, after which Rebecca could sell or gift the stock.

Rebecca worked with her tax advisor and together they determined she should form a family foundation, then gift the REIT stock to the foundation. The REIT stock would be subject to long-term capital gains tax because the holding period for Rebecca’s S corporation stock was tacked onto the lock-up period for the REIT stock.

SEE ALSO: When it Comes to Taxes, Plan for Your Future Self

Rebecca and her tax advisor also considered the fact that her S corporation stock was converted into publicly-traded stock tax-free. This allowed Rebecca to take a charitable contribution deduction for an amount equal to the fair market value of the stock when she gifted it to her family foundation, rather than a deduction that was limited to the stock’s adjusted basis.

Case Study #3: An Estate Tax Deduction for a Partnership Interest

William was a cofounder and 50 percent owner of a limited partnership that invested in commercial retail space. His longtime friend and business partner, who is unrelated to him, owns the other 50 percent. William has an estate plan in place that includes a bequest to his family foundation of a 30 percent profits interest in the partnership, with the remaining 20 percent going to his children and grandchildren. Upon his death, his estate was able to obtain an estate tax deduction for the fair market value of the partnership interest because the estate received a step-up basis on his death. Additionally, with more than 95 percent of the partnership’s revenue coming from real property rent payments, the family foundation was able to retain ownership of the partnership interest under the excess business holdings rules. The foundation isn’t able to sell the partnership interest to George’s living family members due to IRS rules prohibiting some transactions with insiders, but the foundation is permitted to sell its interest to a third party or to have it redeemed by the partnership.

Final Thoughts

If philanthropy is important to you, selling your business can represent an opportunity to achieve your charitable goals and monetize your business at the same time. However, you should not underestimate how much thoughtful tax planning will be necessary in order to make sure you don’t face negative consequences. Work with your tax advisor to ensure you can accomplish your goals and avoid financial surprises.



Case studies presented are purely hypothetical examples only and do not represent actual clients or results. These studies are provided for educational purposes only. Similar, or even positive results, cannot be guaranteed. Each client has their own unique set of circumstances so products and strategies may not be suitable for all people. Please consult with a qualified professional before implementing any strategy discussed herein. No portion of these case studies is to be interpreted as a testimonial or endorsement of the firms’ investment advisory services. Hypothetical examples are used to explain concepts and are not indicative of potential results you could receive; past performance is not a guarantee of future results, and results are not indicative of any particular investment or income tax situation; your results will be different and could be lower or higher. All investments involve risk and investment recommendations will not always be profitable.

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