Selling a Business, Helping Others
When it’s time to sell a business, community foundations allow clients to fulfill charitable intent and make substantial savings on their taxes. Advisors can assist clients by coming to the table with a package that includes a charitable legacy alongside a large spike in income.
The sale of a business. A buyout arrangement. A golden parachute. All three situations stand to trigger a spike in income that could turn your clients into charitable donors. In a national trend that is gaining traction, community foundations are helping professional advisors match their clients’ financial needs with their philanthropic impulse. 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
In 2004, 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 nonprofits recommended by her 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 stress 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:
• Because they are giving to a public foundation, rather than a private foundation, they will receive all the tax benefits available for gifts to public charities.
• For example, gifts of cash are deductible up to 50% of adjusted gross income when establishing or contributing to a donor advised fund.
• If gifts of cash are used to establish or contribute to a private foundation, the gift is deductible only to 30% of adjusted gross income.
“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 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 uniformed. 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 non-profit 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:
• Should the client create the charitable gift prior to the spike in income or after?
• What are the tax consequences?
• What are the gifting possibilities?
“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.”
A Win-Win Situation
The deepening partnership between community foundations and advisors represents a huge win for philanthropy, according to Fox.
“So many community foundations do interesting and provocative work and add a lot to the community,” Fox says. “Advisors have expertise, and sometimes we have expertise that the foundations don’t. This is a way for us to add value to them and a way for us to add value to donors, and that’s good for everyone.”
Creating a Lasting Legacy
Since its inception, the Grogan Family Fund has given grants to honor teachers in the Denver public school system; endowed a scholarship at Denver University in honor of Barbara Grogan’s father; helped underwrite a capital campaign for a day shelter for women; and supported a small organization that provides scholarships to private Catholic schools.
“One of the compelling reasons I did this was so this fund would go on after I’m not here,” says Grogan, long an active volunteer in the Denver area. “It’s going to be multi-generational, and that was important to me to know that my children and grandchildren are going to have this support behind them. I have always told my children: ‘This isn’t just about writing checks. You need to be part of this.’”
Grogan says she knew the instant she sold her business that the next chapter of her life would be involved in philanthropy. Her hope for others? “My advisors didn’t really know a lot about philanthropy. Professional financial advisors should do this,” she says. “If they do, they will become heroes to their clients. Everyone needs to know about this.”
Ellen Uzelac is a freelance writer based in Chestertown, Maryland.
Copyright 2006, Council on Foundations and Community Foundations of America
Used with permission