This article is an excerpt from Charitable Gifts of Noncash Assets, a comprehensive guide to illiquid giving by Bryan Clontz, ed. Ryan Raffin. Published by the American College of Financial Services for the Chartered Advisor in Philanthropy Program (CAP), with generous funding from Leon L. Levy. For a free digital copy, click here, and to order a bound copy from Amazon, click here.
By Phil Cubeta
This book is intended for several audiences:
Today in gift planning we have an historic opportunity, if we can seize it through canny collaboration among professional advisors, national gift funds, local community foundations, single issue charities, and nonprofit gift planners.
Boomer business owners (think of them as The Rotarians) are reaching an age at which they must exit the business that has been their baby and their identity. As they exit, they are very good prospects for a charitable tool or gift, both to reduce tax upon sale of their appreciated business interests, and also to transition to a new way of life, post-exit, as community leaders. These can-do people, when they exit, want to do more than take their name off the trucks and their building, and put it on a gravestone. They want to go from "success to significance," set a good example for their heirs, and as one said to me, "make my last stand.” They made their money in town, will die in town, and often want to give locally. They see giving generously, post-exit, as stepping up rather than stepping down, or stepping aside. They step up into leadership and set an example for their heirs.
As the case in point below shows, there are better and worse ways to exit a business and turn to philanthropy.
Todd (not his real name) came to our wealth transfer firm the day after he sold his business, a C corporation with zero basis, for $100 million. His capital gain was $100 million. Tax due was $20 million. He said, “Help me wipe out my $20 million tax bill.” We helped him some, but the truth is he came to us at least one day too late.
Charitable planning for noncash assets, particularly for closely held business interests and commercial real estate, is one of the most complex areas of the tax code. Proper planning requires a team with at least a tax attorney, a CPA, a business exit specialist, a qualified appraiser, an investment advisor, and perhaps an insurance professional.
To see the value of proper planning, consider how Todd might have done better. Assume he gave half his firm to charity, say, in a donor-advised fund (DAF). What would be the effects?
Note the effect on assets under management (AUM).
Note the effect on potential gifts from the DAF.
We are pleased to begin our series that will ultimately publish the entire content of Charitable Gifts of Noncash Assets. Noncash assets represent a tremendous opportunity for both advisors and charities but they are, by their very nature, complex. This series will provide you with all of the rules, regulations, and nuances of these assets.