Retiring and selling a business is major financial event that often involves complex considerations for business owners. In addition to navigating the sale process, they must also address wealth management and legacy planning. As reported by WealthManagement, a charitable donation of privately held business interests can be an effective strategy to achieve tax savings while fulfilling philanthropic goals. However, charitable planning must be integrated into the overall exit strategy. Here are several key steps prepared by Fidelity Charitable, to help business owners maximize the impact of charitable contributions during a business exit.
Start Charitable Planning Early
Timing is crucial when it comes to donating non-publicly traded assets. Conversations with advisors, clients, and potential charitable recipients should begin early. Sales can happen quickly, and delayed planning may diminish tax benefits. For instance, if a sale is too far along, an owner may lose the opportunity to donate shares tax-efficiently, as evidenced in situations where business sales fell through and gave business owners a second, less efficient, chance to donate shares. By working with experts, owners can transfer business interests to charity without delaying the sale or losing tax efficiency.
Ensure Company Documentation Is Ready
Before making a donation, business owners should review governing documents, such as shareholder or partnership agreements, to identify any restrictions on transfers. Companies often require approvals from other shareholders, boards, or managing members for ownership transfers, including charitable donations. These hurdles can usually be overcome through waivers or consents. Once informed, shareholders often become interested in pursuing similar charitable strategies. A well-prepared approach helps streamline the donation process and can even inspire others to follow suit.
Secure a Qualified Appraisal
To substantiate the charitable tax deduction, donors must obtain a qualified appraisal for non-publicly traded securities. Appraisals can be conducted no earlier than 60 days before the donation and are must be completed by the tax filing deadline for the donation year. Engaging a valuation firm early ensures a smoother process and allows for better preparation. Early appraisals also prevent last-minute scrambles during tax season, maximizing the financial benefits of the contribution.
Choose the Right Charitable Vehicle
Donors have several options for charitable giving, including direct donations to operating charities, private foundations, or donor-advised funds (DAFs). Each option offers different benefits:
- Operating charities: Donors can deduct fair market value up to 30 percent of their adjusted gross income (AGI). However, charities may not always have the resources to handle non-cash donations efficiently.
- Private foundations: Contributions are generally deductible up to 20 percent of AGI, but only at the lower of cost basis or fair market value. This method may also limit donor anonymity.
- DAF programs: Donating through a DAF sponsor allows for deductions up to 30 percent of AGI at fair market value, often providing better tax benefits and flexibility. DAFs, such as those offered by Fidelity Charitable, typically have expertise in managing complex assets, making the process smoother for the donor and more advantageous for the receiving charity.
Leverage Expert Guidance
Enlisting the support of experienced advisors is crucial. Trusted attorneys, accountants, and financial advisors can provide holistic guidance, helping business owners navigate tax consequences and ensure their philanthropic goals align with overall financial strategies. Additionally, charitable organizations with expertise in handling non-publicly traded assets can help donors convert complex assets into charitable funds efficiently.
By incorporating charitable giving into a business exit strategy, business owners can maximize both the financial and philanthropic impact of their exit. Thoughtful planning, along with the right expert support, ensures that donations are handled efficiently while offering significant tax advantages.
Financial Advisor Transitions consults advisors nationwide to explore employment transition options and to preserve and protect their practice in any transition that they make.
