Charitable Giving As Part of Your Business Exit Strategy

By: Laurie Valentine- COO & Trust Counsel


     Business owners nearing retirement must consider how they will “exit” their business. While some will transfer ownership to a family member, for many the transition out of the business will be through its sale.

     A charitable gift of a portion of the business, as part of the exit plan, can provide several benefits: reduction of what may be a significant capital gains tax liability; a charitable income tax deduction based on the market value of the gift; a potential increase in your income if you use a life income charitable gift; and a means of demonstrating your love for the One who entrusted and blessed you with so much.

     Jane and Sam Jones, ages 65 and 68, have owned ABC Corporation for 40 years. They have decided it is time to retire and plan to “exit” through a sale of their business. ABC’s current market value is $5,000,000. The Jones’ cost basis is 0, which means an outright sale will result in $750,000 of capital gains taxes, leaving $4,250,000 for Jane and Sam to invest. Investing the sale proceeds to earn 5 percent a year gives them $212,500 per year in income.

     Adding a charitable gift of some of their ABC stock to their exit planning, before a deal is struck to sell the company, could be beneficial to Jane and Sam. A gift of 30% of the stock ($1,500,000) to a 5% charitable remainder unitrust reduces their capital gains tax liability. Their gift entitles them to a charitable income tax deduction of $538,635, which will provide additional income tax savings. The unitrust will pay Jane and Sam five percent of the value of the trust assets, as revalued each year, for the rest of their lifetimes ($75,000 in the first year) and the remainder of the trust will be distributed, at the survivor’s death, to the charitable organization(s) they name in the trust agreement allowing them to set up significant future support for Kingdom causes important to them. The combination of the unitrust income and the income from investing their net sale proceeds ($2,975,000) results in potentially more income for the Jones’ each year ($223,750 in first year assuming 5 percent earned on sale proceeds).

     Exiting a long-owned business provides a unique stewardship opportunity for business owners.

The information in this article is provided as general information and is not intended as legal or tax advice. For advice and assistance in specific cases, you should seek the advice of an attorney or other professional adviser.