Five questions to ask — and key details to explore — before donating stock, business assets, or other business interests to charity.
At some point while owning and operating a business, you may wonder whether you should donate a portion of your business interests to charity.
Perhaps your business has been more successful than you ever dreamed it would be and you want to share the wealth by contributing to your favorite nonprofit organization. Or maybe you’re considering retirement and you’re looking for a way to reduce your capital gains tax liability by divesting some of your business interests prior to selling the business. (Learn more about tax considerations of selling a business.)
“For many business owners, the business is their largest asset,” says Bill Bardwell, senior vice president and senior philanthropic trust advisory specialist with Wells Fargo Wealth & Investment Management. “Philanthropy and tax benefits are probably the most common reasons owners would choose to donate a portion of the business to charity, but they may also want to create a charitable legacy that will unite the family around shared values or a shared vision.”
While the decision to give can be a simple one, deciding how to give and what assets to give can be more complex because every owner’s situation is unique and can come with specific requirements. Before you make a decision, Bardwell recommends consulting with your advisors.
Here, Bardwell outlines three common methods for donating business interests to charity — and shares five top questions to ask your advisors.
1. Donor-advised fund
A donor-advised fund (DAF) allows donors to give to IRS-qualified public charities over time — even years later — while gaining a tax benefit in the year in which the contribution to the DAF is made. In 2022 alone, DAF grants totaled an estimated $45.74 billion, up 28.2% since 2020.1
“This is the easiest charitable strategy to set up,” says Bardwell. To do so, you need to complete an application with a fund sponsor, designate grant advisors, fund the DAF, and select investments. A fund sponsor can be a national charity/sponsor or community foundation, or an educational institution. Grants then may be recommended by you or your designated grant advisor to qualified charities of your choice.
However, some business owners don’t want the ongoing responsibility of distributing the assets within the DAF. In that case, they can appoint someone, such as a family member, to serve as grant advisor for the DAF.
2. Charitable remainder trust
If you want income during your lifetime, consider establishing a charitable remainder trust (CRT) and funding it with shares of the business if appropriate. CRT donations, which are irrevocable, qualify for a partial charitable contribution2 and may offer other tax benefits depending on how the trust is structured and managed.
Whether you choose a CRT will depend on the type of business assets you have and your individual financial needs.
“For example, you should never put S-corporation stock into a charitable remainder trust because it may cause the S corporation to lose its S election and become a taxable C corporation,” explains Bardwell. “But you may be able to donate other types of assets to the CRT and create an income stream and a charitable deduction. The charitable deduction will not be for the full fair market value of the asset or assets used to fund the trust.”
3. Direct donation
A third option is a direct donation from your business to a charity. You can give stock, physical assets, or cash to a charity as long as the gift meets the recipient’s gift acceptance guidelines. (Contact your charity of choice to learn more.)
“Some charities may not want to accept closely held S-corporation stock or other business interests that may generate Unrelated Business Taxable Income, for instance,” says Bardwell. The hesitation for some charities may be due to these charities assuming that they may have to pay the Unrelated Business Income Tax on the Unrelated Business Taxable Income. “But I think with many charities, as long as they can easily convert a noncash gift to cash, they may accept it.”
Direct donations are treated like other nonbusiness charitable donations, with the value (qualified appraised value where required) of the asset itself possibly being eligible for a charitable deduction.
What to know before you give
With every type of philanthropic plan, there are a number of variables that may need to be addressed, Bardwell says. That’s why he suggests exploring these five questions with a Wells Fargo philanthropic trust advisory specialist before making any decisions.
- 1. What do I want to accomplish with my philanthropy? “I always start by asking business owners why they want to make a donation,” Bardwell says. “What are your philanthropic goals? How do you want to make a difference in your community? Which causes do you want to support? What kind of legacy do you want your donation to create?”
- 2. What business interests could I consider donating? “There really is no IRS prohibition on the type of business interests that can be donated, such as LLC interests, partnership interests, closely held S-corporation or C-corporation stock, or other types of business assets,” Bardwell explains. “The type and amount of business interests you have to give will help us consult with you and your advisors to determine a strategy to help accomplish your philanthropic and wealth and estate planning goals.”
- 3. What are the tax and financial implications of my donation? “A lot of noncash gifts, such as business interests, may have embedded tax implications that need to be evaluated,” Bardwell says. “Donors should understand how making a donation may affect their philanthropic and wealth/estate planning goals and their tax benefits.”
- 4. When is the right time for me to make a donation? “If you choose to donate business interests to charity, you should do it before you enter into a legally binding agreement to sell the business,” Bardwell says. “Otherwise, you may not be able to avoid being taxed, under the prearranged sale/assignment of income doctrine rules on the capital gains associated with the gifted business interest(s).”
- 5. Who else should I consult before finalizing a donation? “Donors should assemble their team of advisors and engage them in the planning process prior to a completed gift. The team may include the donor’s CPA, attorney, and wealth management team (financial advisor and philanthropic trust advisory specialist).
1. “2022 Donor-Advised Fund Report,” National Philanthropic Trust, November 22, 2022
Wells Fargo Wealth & Investment Management (WIM) is a division within Wells Fargo & Company. WIM provides financial products and services through various bank and brokerage affiliates of Wells Fargo & Company.
Wells Fargo & Company and its affiliates do not provide tax or legal advice. This communication cannot be relied upon to avoid tax penalties. Please consult your tax and legal advisors to determine how this information may apply to your own situation. Whether any planned tax result is realized by you depends on the specific facts of your own situation at the time your taxes are filed.
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