Selling a Business, Helping Others
There is no better time for your client to make a difference than when selling a successful business. Timing is everything when it comes to giving.
November 15, 2007
by Ellen Uzelac
The sale of a business. A buyout arrangement. A golden parachute. All three situations stand to trigger a spike in your clients’ income that can suddenly turn them into charitable donors. Community foundations are increasingly stepping in to help professional advisors match their clients’ financial needs with their philanthropic impulses. When anticipating a large spike in income from a client, advisors may want to consider the value of working with a community foundation to make a charitable gift.
A Business Sale Creates a Fund
After running a successful construction company in Colorado for 22 years, entrepreneur Barbara Grogan decided it was time to sell her business and make a substantial charitable gift. A week after the sale she brought her family and a large check to The Denver Foundation and established a donor advised fund to benefit several non-profit organizations recommended by Grogan and her two children.
“When people who are charitably or community-minded find themselves in this situation, they or their advisors tend to think of philanthropy,” says Betsy Mangone, vice president of philanthropic services for The Denver Foundation. “And that’s where your community foundation can help.”
Grogan, who comes from a family of philanthropists, quickly identified one of the strongest features of community foundations: a support system that includes research on giving outlets, due diligence and administrative assistance. Foundations can also provide a layer of anonymity between donors and the charities they support.
Grogan, who now calls herself a full-time philanthropist, says that one of the appeals of the community foundation was that she didn’t have to worry about investing the proceeds. “It was such a relief for me,” she says. “I could rely on money managers who had an extraordinary record of success.” She also says she trusts the grant-making reputation of the community foundation. “It just makes our philanthropy so much better, so much more informed and intelligent,” she says. “Truthfully, it’s one of the best decisions I’ve ever made.”
Maximum Tax Benefits
When donors create a donor advised fund at a community foundation, Mangone says, they receive an immediate income tax charitable deduction. She explains that:
“For people selling businesses, this means that a gift to a donor advised fund will provide maximum tax benefits available at a time when it is really important,” Mangone says.
A business owner may choose to give ownership or equity in a firm to a donor advised fund before the business is sold, rather than after. In that event, the donor may avoid capital gains tax on the asset donated. By contrast, when the proceeds are used to create a donor advised fund after the sale of a business, the tax benefit comes solely in the form of an income tax deduction.
Creating a charitable structure prior to the sale of a business is the better case scenario because of the tax advantages, according to Randy Fox, a certified financial planner and president of the International Association for Advisors in Philanthropy. Typically, he says, the seller will place his assets or stock in a charitable vehicle such as a remainder trust. The buyer then makes the purchase from the trust, creating an income stream for the seller.
The sale must not be pre-arranged before the charity is given ownership. If even verbal discussions with a potential buyer have taken place, the capital gains tax deduction will be forfeited. “It has to be very well planned,” Fox explains. “I want the call that says: ‘Here’s what I’m thinking of doing prior to a sale.’”
However, transactions like this occur less frequently than they should, Fox says. “The general public is totally uninformed about strategies like this, and a lot of advisors are equally uninformed. But a good community foundation will have resources in-house or they will have the resources in the community to structure that sort of transaction.”
The Charitable Option
Over the past decade, Mangone says, community foundations and professional advisors have increasingly become proponents and partners in the philanthropic process. “The nonprofit sector has fully realized that relationships with professional advisors are not only important — they are imperative,” says Mangone. In fact, she adds, advisors today represent “a gatekeeper for philanthropy.”
How does the process work? Typically an advisor who anticipates a client’s upcoming spike in income would mention “the charitable option,” as Mangone calls it, and then set up an appointment with a community foundation to discuss the various opportunities.
Among the considerations:
“The great thing about all of this is that giving becomes much more of a planned method,” Mangone says. “If people give this kind of gift — even if it is their first venture into philanthropy — if the gift is stewarded correctly and the donors find it an enjoyable experience, they will want to continue their fund and the legacy they’ve created.”
To contact your local community foundation, log onto www.communityfoundations.net.
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Ellen Uzelac is a freelance writer based in Chestertown, Maryland.
Copyright © 2007, Council on Foundations
Used with permission.