Nick and Kristin devoted most of their adult lives to building and running the company they founded. While they’ve always made time to volunteer with some of their favorite charities, their business was the heart of their daily lives.
As they approached retirement, they envisioned a new chapter, which included traveling the world to volunteer and help children in need. Before selling their business, a friend encouraged them to meet with their financial advisor to explore charitable giving strategies tied to the upcoming business sale. Their friend knew how central giving had always been to them – and the impact of strategic planning.
In conversations with the advisory team, Nick and Kristen discovered that some of the most effective ways to reduce taxes and create meaningful impact happen before the business is sold. By planning ahead, they could align their wealth transition with their charitable values.
Why think about charitable giving before a business sale is complete?
While charitable planning is ultimately about impact, it’s also a powerful tool for tax management. With the right planning, donors can:
- Avoid capital gains on the gifted portion of the business donated
- Receive an immediate charitable income tax deduction
- Support causes they care about
Below we explore two powerful giving tools, Donor-Advised Funds (DAFs) and Charitable Remainder Trusts (CRTs) that can help business owners make the most of their sale from a philanthropic and financial perspective.
Donor-Advised Funds
A Donor-Advised Fund (DAF) functions like a personal charitable giving account. It allows you to make a contribution now, receive an immediate tax deduction, and then recommend grants to charities over time.
How It Works:
- You contribute appreciated business shares to a DAF before the sale
- You receive a charitable income tax deduction based on the fair market value deduction of the gifted shares (subject to IRS limits)
- The DAF sponsor sells the shares post-gift (no capital gains tax to you)
- You recommend grants to qualified charities at your own pace
Who Should Consider a DAF
- Business owners who want a simple and flexible solution
- Those unsure which charities to support immediately or who want to spread out their gifts over time
- Reducing taxable income in the year of the sale
Charitable Remainder Trusts (CRTs)
A CRT Charitable Remainder Trust (CRT) allows you to donate appreciated assets (like business interests) into a trust that provides income to you (or others) for life or a term of years. After the term ends, the remaining assets are directed to a charitable organization.
How It Works:
- You transfer business interests into the CRT before the sale
- The CRT sells the shares and pays no immediate capital gains tax
- You receive a partial tax charitable income tax deduction, based on the estimated remainder that will go to charity
- The trust provides you with an income stream, typically for life or a fixed term
- The remaining assets go to a charity or DAF when the trust ends
Who Should Consider a CRT
- Owners seeking both tax efficiency and retirement income
- High-income individuals wanting to defer and spread-out taxes
- Those planning a large charitable legacy while retaining income during their lifetime
If you’re planning to sell your business, charitable giving strategies should be part of your pre-sale planning conversation. With thoughtful structuring ahead of the transaction, you can minimize taxes, amplify the impact of your charitable giving, and create a lasting legacy that extends beyond your business success.
Disclosure: Please note that this article is for informational purposes only and is not intended to provide tax, legal or accounting advice. You should consult with your trusted advisors before engaging in any transaction or taking any action based on the information provided.
