In the True Spirit of Giving -
Gifting Closely Held Stock
THE DAILY RECORD 13A
"I feel really good about that." These were the sentiments a client recently shared with us in reference to his decision to gift shares of his closely held company to a charity he had long supported - but modestly, due to his personal cash constraints.
In addition to the personal satisfaction he has derived and the program's appreciation for his support, he gained an immediate tax deduction for the fair market value of his donation and avoided the payment of capital gains taxes on the gifted shares.
At some later date, his company will redeem and retire the shares using corporate assets that have never been taxed to him. As that happens, his children's percentage ownership in the firm will automatically increase, again without tax.
A growing number of business owners with charitable intentions are gifting shares of their closely held companies to charity, and are accomplishing some truly significant contributions over time, while also benefiting their families and their businesses.
Objectives
Business owners often have to juggle a number of conflicting objectives. They want to create a sustainable business; provide for themselves, their spouse and children; reward loyal employees; and support community activities and charities.
At different points in the life cycle of a business, options are created and choices must be made: providing for retirement funds outside of the business; deciding whether to retain or sell; arranging for both management and ownership succession; deciding how to distribute accumulated wealth; and providing for the payment of estate taxes.
Too often, these choices are deferred and every dollar of cash is plowed back into the business.
Instead of deferring those important decisions, many owners of sustaining business with whom we have worked have "filled different buckets" along the way.
They have applied resources toward the owners' needs, as well as toward the capital and management needs of the business. In a sense, they have allocated some value-away from the business and toward the implementation of the owner's vision, which also includes a role for the family and more frequently now, the community/charity.
Illustrations
One university development officer told us the story of an alumnus who owned a successful business and wanted to make an important contribution.
To his credit, the officer suggested gifting stock of the business as an alternative to cash. The university would then sell the stock to his company.
The first year's gift was $50,000 in stock. Stock was gifted in each of the next nine years, by which time it was determined that a total of $2 million had been given. This generous and quite thrilled alumnus was made a trustee of the university.
In certain situations, an ESOP can be a very effective planning tool for business owners, the employees, the business and clearly, the charity.
In a number of cases, closely held stock has been gifted to a charity, which in turn sells the stock to the ESOP. The charity can immediately receive full value of the gift, the donor receives a deduction for the fair market value (subject to certain restrictions), and the ESOP acquires the stock in trust for the benefit of the employees.
In one variation, Tim Chase, of Wealth Management Services, and Jeff Gonya, of Venable, Baetier & Howard, mentioned a client who in 1990 sold 30 percent of his business to a newly established ESOP and reinvested his proceeds into a tax-deferred rollover account (Sec. 1042) comprised of marketable securities.
This option has certain investment restrictions, but allowed the applicable capital gains taxes that would ordinarily arise from such a sale, to be deferred.
In 1995, the company was sold. The Sec. 1042 account was gifted to a Charitable Remainder Trust, which paid to the donor a stream of income (minimum 5 percent of principal per annum) that was greater than the 2 percent to 3 percent yield being generated from the marketable securities. A specific tax deduction was able to be taken. At the termination of the trust, the balance will be transferred to the charity.
Structuring a gift of closely held stock through the many forms of Charitable Trusts can provide retirement income or fund wealth replacement life insurance for beneficiaries, who would otherwise have inherited a greater amount of stock.
These are a few of the variety of tools available that encourage the involvement of both a charity and the business in the owner's financial planning program.
Constraints
The practice can be more complicated than writing a check, and, there are legal and tax restrictions, some of which change from year to year.
Other constraints mentioned by business owners include: capital is needed for the business and redeeming a large block of stock is inconsistent with growth opportunities; dilution of control, or placing stock in the hands of a non-family member; and cost.
Taken in turn, starting with small gifts will not unduly constrain growth. At some point in the development cycle, it will make sense to begin filling buckets other than the exclusive growth of the business.
As for the control of stock, our experience is that charities are quite happy to accommodate the donor's plan. They will be delighted to end the day with cash or a promise of future cash and not to be holding an illiquid private security for an extended period of time.
Legal and tax allowances change with the congressional agenda, but not always for the worse.
For instance, one historic stumbling block was that charities were not allowed to hold stock in "Subchapter S" corporations, even momentarily. Since many privately held companies have chosen the "S-Corp" election, this had an adverse impact on charitable giving.
Involving your business in crafting a longer term strategy that balances the business, your family and your charitable vision, will be of benefit to each.
Ross Adams and Patrick Ring are principals of The Baker-Meekins Company, a Baltimore-based business valuation firm specializing in family business strategies and ownership conflict resolution.