The past year-and-a-half has been a period of rapid innovation and transition for businesses. Despite myriad challenges, many companies have survived—and even thrived—during the pandemic. Business owners looking to the future and considering whether the time is right for a full or partial sale of their businesses should consider the benefits of incorporating charitable giving into their plans.
If you are a business owner, or an advisor to a business owner, with a sale on the horizon, partnering with The Chicago Community Trust can unlock the value in your business while furthering your personal values and goals. Making a gift of business interests in advance of the sale allows you to eliminate or reduce taxes and creates a vehicle for advancing social impact and funding charitable giving into the future.
Business owners, and the advisors who counsel them, are currently faced with many unknowns and perhaps some surprising opportunities to cash out. First, the environment for merger and acquisition activity is relatively strong. The second half of 2020 saw a flurry of activity, and that momentum has continued into 2021. Access to capital for deals remains strong, interest rates continue to provide favorable financing, and valuations for many sectors are strong. Meanwhile, supply chain woes and inflationary pressures are contributing to ongoing operational challenges in certain sectors. These combined factors suggest the second half of 2021 may continue to present incentives for owners to sell.
Business owners are also navigating potential tax law changes, especially on long-term capital gain rates. While the Biden administration announced its intention to nearly double capital gain rates for taxpayers with an adjusted gross income of more than $1 million, it is still unclear whether—if enacted—the increased rates would be applied retroactively, and if there will be any exceptions or carve-outs made for certain types of businesses.
The Benefits of Giving Business Interests
Entrepreneurs receiving a significant income bump from an anticipated sale or liquidity event may be looking to make a charitable gift to offset some of the tax liability. An after-sale gift of cash is one approach. However, giving business interests to the Trust in advance of a sale allows the donor to get a charitable deduction for the gift’s fair market value and eliminates the capital gains on the sale of the gifted interests.
While tax planning is an important benefit, it isn’t the only benefit to donating business interests. Many entrepreneurs we work with at the Trust have long held aspirations for spending more time and resources on philanthropy. But those aspirations were often put on the back burner due to time spent running and growing a business and liquidity constraints.
The value of giving business interests before a sale or liquidity event extends beyond taxes and into the support and advice that comes with partnering with the Trust. For example, a business owner who funds a donor advised fund with us will have a philanthropic advisor assigned to the fund who can help the donor craft a giving strategy and identify organizations to support. Donors will also benefit from connecting with philanthropists who share the same interests and attending networking and learning opportunities we offer.
The Process for Giving Business Interests
The Trust vets all potential gifts of business interests, and ultimately the Gift Acceptance Committee must approve any potential gifts. In the vetting process, we will ask for a variety of information, which include:
The governing documents for the business, such as:
Articles of Incorporation
Recent K-1 (when applicable)
Valuation provided by the donor
Confirmation that the interests are not subject to an existing sale agreement
In addition to reviewing the information above, the Trust will need to understand the anticipated holding period for the business interests and any likely tax liabilities the Trust may incur during the time it holds the interests and at the time of sale.
The Trust will also ask the donor to sign a non-cash gift acknowledgment form that spells out the expectations and responsibilities of each side and the fees and expenses that come with vetting, accepting, and selling gifts of business interests.
Options for Giving
Donor Advised Fund – For donors who value flexibility
A donor advised fund (DAF) is the most popular giving vehicle at the Trust due to its ease and flexibility. A donor funds a DAF with business interests, obtains an immediate income tax deduction, and can focus on the fun part of philanthropy – giving money away.
A donor who creates a DAF at the Trust receives additional support and services simply by being a fund holder. For example, DAF holders can access our proprietary online system to recommend grants to charities, check account balances, and download contribution receipts. The philanthropic advisor assigned to each DAF can help a donor explore charitable interests, engage family members in philanthropy, and connect donors to educational and networking opportunities.
Further, donors who opened a donor advised fund in excess of $1 million can recommend their own investment manager and a custom asset allocation.
Field-of-Interest Fund – For donors who value a trusted partner to pick the best organizations
A field-of-interest fund equips a donor to support a particular cause, as opposed to an institution. The donor specifies the area of interest to receive annual support while allowing the Trust’s Community Impact team to select qualified recipient organizations.
As your philanthropic fiduciary, the Trust will continue to support the issues you care about now and into the future through your field-of-interest fund. Any philanthropic field of interest can be used to structure your fund. Popular fields of interest include:
Basic human needs
An entrepreneur may consider a field-of-interest fund if she feels strongly about supporting a specific issue area or neighborhood but would prefer to leverage the expertise of the Trust for grant making. For example, if a business owner wants to support entrepreneurship in disinvested neighborhoods but doesn’t have the time or bandwidth to research and choose organizations, a field-of-interest fund may be a perfect option.
Designated Fund – For donors who value supporting specific organizations
A designated fund provides one or more specifically named charities with annual support. Many donors make consistent yearly gifts to a set of organizations they feel strongly about — organizations that may operate in completely different areas of charitable focus. A designated fund allows for continuous support to one or more named organizations, either for a set period or in perpetuity.
Designated funds are an effective tool for donors who wish to continue to provide annual grants to specific organizations but who prefer not giving a large outright gift during life or through their estate.
Entrepreneurs who wish to leverage business interests to support one or more named organizations may find a designated fund to be the perfect solution. This approach may be especially beneficial for entrepreneurs who want to support smaller nonprofits that may not have the ability to accept a gift of business interests.
Entrepreneurs who have dedicated their lives to starting and growing their businesses often put other passions on hold. If philanthropy is one of those passions, the Trust is ready to serve as your trusted partner in achieving your philanthropic goals. Contact Tim Bresnahan, senior director of gift planning, at 312-565-2832 or firstname.lastname@example.org, or Don Gottesman, director of gift planning, at 312-616-6141 or email@example.com, to start the conversation.