Donating Illiquid Assets to Charity: A Tax-Smart Opportunity for Business Founders
Key Highlights :
Donating illiquid assets to charity can be a tax-smart opportunity for business founders. But, how can financial advisors and their entrepreneur clients avoid missing out on this opportunity? There are effective ways to donate complex assets, and there’s good indication that entrepreneurs are primed to do so. Here are three tips that financial advisors and attorneys—and their entrepreneur clients—can use to make illiquid assets an effective part of their philanthropic strategies.
1. Reap tax advantages—and greater giving potential—during a wealth-triggering event.
When entrepreneurs start eyeing private business exits, public M&As, or pre-IPOs, it’s an ideal time to consider donating complex assets to charity. The potential tax benefits can be significant: a charitable deduction of the asset’s fair market value (if the entrepreneur owned the asset for over a year) and elimination of capital gains taxes that would be due if the asset was sold rather than donated. Entrepreneurs who anticipate wealth-triggering events can donate different complex assets—private stock (C Corp., S Corp., partnership), restricted stock, LLC and limited partnership interests, or real estate. It’s critical to secure an independent, third-party appraisal of the donated asset to substantiate the charitable tax deduction.
2. Build complex assets into tax-savvy estate and legacy plans.
Middle-aged founders—a group that’s primed to contemplate estate and legacy planning—are twice as likely to achieve successful exits as younger entrepreneurs. As these seasoned entrepreneurs prepare for potentially the greatest wealth-triggering events of their lifetimes, they should explore wealth management, legacy and estate planning, and philanthropic strategies cohesively. Complex assets can be important pieces of this puzzle. For example, an entrepreneur who makes a planned gift of private stock to charity via their estate plan can enjoy the same tax benefits as if they donated the asset during their lifetime.
3. Utilize a donor-advised fund (DAF) to maximize giving potential.
Donor-advised funds (DAFs) are a popular and effective vehicle for donating complex assets. Donors can open a DAF and make a charitable contribution of the asset, claim a tax deduction, and then make grants from the DAF to their favorite charities over time. A DAF also provides a way for donors to hold an asset in a tax-advantaged account and make grants to charity when they are ready. Donors can also use a DAF to streamline the process of donating complex assets. For example, if a donor wants to donate a private company stock, they can transfer the stock to a DAF before the company is sold, and then make grants from the DAF to their favorite charities.
Donating illiquid assets to charity is a great way for entrepreneurs to reduce their tax burden and maximize their philanthropic impact. By understanding the tax implications of donating complex assets, entrepreneurs and their financial advisors can create a tax-smart philanthropic strategy that maximizes their giving potential.
