West Michigan is blessed with many business owners who are very generous and give to a variety of non-profit organizations and causes.
The most common way they give is by making cash distributions from the profits of the business. In other words, the business owner takes a distribution, pays tax on it, and then gifts the cash to the non-profit or a faith-based organization. There are two drawbacks to this approach. First, it is not particularly tax efficient. Business owners pay tax on the distribution from the business and then give cash from the net amount. Second, this approach limits the size of the gift. Business owners can only distribute so much cash because of the operational and future cash needs of the company.
One planning technique that minimizes these two drawbacks is to gift a portion of an ownership interest (i.e. stock or LLC units) to what is called a Donor Advised Fund. A Donor Advised Fund is an account that is held by a charitable organization (typically a local community foundation, a Christian organization like National Christian Foundation or Barnabas, or a large institution like Schwab and Fidelity Charitable). The business owner will be the advisor on the fund and have the ability to direct grants to the non-profit and faith-based organizations that they support.
This donation must be done with a plan to have the ownership interest liquidated. Without that liquidation, there would be no cash to be held in the Donor Advised Fund and granted to organizations. The most common way this occurs is when a gift is made prior to the sale of a business. This works by the business owner donating a percentage of the ownership. That ownership is subsequently sold to a buyer of the business. Cash is then available in the Donor Advised Fund to be granted out. The most important aspect of this planning is the gift be done before a sale of the business is legally binding.
The other option that is lesser known but should be considered, applies to family businesses. Transition of ownership in a family business is very often done in part by sale. This is necessary because the current generation of owners needs to diversify its holdings and have cash to be able to retire on. This approach works by the current ownership gifting stock or LLC units to the Donor Advised Fund. The child then purchases it from the fund. This purchase creates cash in the Donor Advised Fund which can later be granted to those various charitable organizations.
If you have any questions regarding this planning, feel free to contact me at phmulder@cunninghamdalman.com.
