There are a variety of ways to financially support charitable organizations and their causes. The most common are giving cash and making out a check. But, other options (i.e. giving appreciated investments like stock, mutual funds, and real estate) are often better for income tax purposes.
Business owners have another option because they own privately held stock or an LLC interest in their company. They typically do this by giving stock or a portion of their LLC interest to a donor advised fund. A donor advised fund is an account held at a charitable organization. When there is cash in that account, business owners can then recommend how it’s given to the charitable organizations they support.
A key issue in this planning is how cash becomes available to grant because the privately held stock or LLC interest that’s given to the donor advised fund doesn’t have a public market like other assets. There are three ways this can occur. The first is when a company make a distribution to its shareholders or LLC members. Since the donor advised fund is an owner of that company, it’ll receive cash just as the business owner does.
A second way this can happen is when the stock or LLC interest is sold. The company may have the resources to buy back or redeem the stock or LLC interest from the donor advised fund. Alternatively, the next generation of a family business (i.e. children of the current owners) or key employees could purchase the stock or LLC interest from the donor advised fund.
The last and most common way of generating cash for the donor advised fund is when the company is sold. The company would receive sales proceeds from the buyer which are then distributed to its owners (including the donor advised fund).
This is also a very tax efficient way for business owners to financially support charitable organizations that are important to them. If you have any questions about this planning, feel free to contact me at phmulder@cunninghamdalman.com.
