Do Your Business Succession Plans Include Charitable Giving Strategies?

The following article was created out of an interview that recently took place between Dan Rice and a writer for a magazine that is aimed at business owners in the automotive industry. Of course, we think readers may find the interview to be of practical benefit for any charitably-minded business owner, who is engaged in succession planning with their advisors.

Writer: What is the process by which you help business owners do charity-based succession planning?

Dan: First, let’s agree that for most business owners the essence of succession planning is being able to keep and continue the business in the family. Secondly, the processes to successfully complete a succession plan focus primarily on two cans of worms: The transfer of the legal ownership of the business and the transfer of management control. Importantly, the good news is that the timing of these two types of transfers may be extremely different.

Next, the charitably-minded client can consider transferring their business ownership to the next generation using one or more of the following arrangements: A charitable remainder trust (click on the link for the charity I serve, charitable remainder trust), a charitable lead trust (see charitable lead trust), and a private family foundation. The children can still work in the business and develop their management competence and confidence while waiting to receive the actual stock ownership in the business.

Interestingly, in many cases, the money that would have otherwise been paid out to the IRS in the form of income taxes, capital gains taxes, gift taxes or estate taxes, can instead be given to the owner’s favorite charitable organizations or to a family foundation. The foundation can also be one of the owner's too.   

Remarkably, the business owner now has the greatest range of options, processes, techniques and tools for conducting their succession plans than at any other time in recent memory. Why? Chiefly because the federal gift tax, estate tax and generation-skipping transfer tax rates are the lowest, and the related exemption amounts are at an all time high. The catch however is that unless Congress takes action, these tax rates will increase, and all exemptions will decrease, dramatically, beginning January 1, 2013.

For example, if a business owner took action now and completed their succession plan in 2012 (by transferring the ownership of their business to their children), the business owner could remove up to $5.12 million ($10.24 million for a married couple) of their business assets out of their estate--free of gift and estate taxes. But what if the business owner still has concerns about giving up control over the management of the business in 2012?

Savvy business owners understand the difference between ownership of a business and control of a business. For example, if I give my daughter 99% of the stock in my business in the form of nonvoting stock and I keep the remaining 1% of the stock in the form of voting stock, I still get to call all of the shots. Period.

Writer: How should one go about finding the right succession-planning professional in your area of charitable planning expertise?

Dan: Fortunately, if the business owner is already actively giving to charitable organizations and at least one of them is one of the charities listed in the Philanthropy 400, it’s a safe bet that charity will have a Planned Giving department that can help. Another resource is the Partnership for Philanthropic Planning, an 8,000 member organization of people who can help the business owner wherever they might be located.

Writer: Based on your experience, what is the business owner concerned with the most, in using a charitable planning strategy?

Dan: Perhaps the greatest concern is a fear of losing control. However, when a cautious business owner is contemplating including a charitable trust or foundation as one of its business owners, he or she can also choose to serve as the Trustee of the charitable entity and retain legally permissible control over the stock held by the charitable entity. Business owners can also give non-voting stock, or stock subject to buy/sell agreements and also attach rights of first refusal on stock redemptions. These arrangements and others can enable business owners to give stock confidently to these charitable entities.

Plus, there is substantial flexibility in how the stock can be subsequently redeemed, owned, transferred or sold by the charitable entity. Business owners might find it comforting to know that the two largest and most valuable gifts transferred each year to charitable trusts, foundations and organizations are gifts of family owned business stock and real estate.  

Writer: What are some of the "right questions" that advisors should ask business owners?

Dan: The advisor may want to find out if the business owner is already actively involved in charitable giving. If so, then some good questions would be:

  • Have you ever considered giving away stock in your business as a substitutionary way of charitable giving?

  • Are you planning to sell any of your stock and give away a portion of the proceeds to charity?

  • Would you be interested in knowing the financial and tax-wise benefits of pairing your succession planning with your charitable gift planning?

Writer: Specifically what plans of action should business owners in the automotive industry take?

Dan: The business owner, who is also involved in regular charitable giving, should consider giving a planned giving expert a “test drive” (or a seat at the planning table). It’s a funny thing. Each year, many very wealthy business owners, who can afford the best advisors, pay enormous amounts of capital gains taxes in the same year that they also made significant charitable gifts. This is a fact that comes directly from the annually published IRS Statistics on Income.

The owner’s professional advisors have their heads down and focused entirely on their areas of expertise. The benefits of giving assets like stock, instead of cash, are overlooked. Wham! Unnecessary taxes are paid and the amount of discretionary income leftover for the business owner is severely impacted. A “planned giving coach” can help business owners save taxes, without the owner having to give more than they had planned to. It’s just a matter of giving a different way.  

Writer: What are the tax ramifications of choosing, or not choosing, charitable giving in succession planning?

Dan: Many business owners wouldn’t think of looking at charitable giving options or charitable trusts because it seems so counterintuitive to their succession planning. Wouldn’t a charitable gift be just another unnecessary planning cost?

Lets put it another way. As you moved your succession plan into play, knowing there was going to be a tax hit, and just then I told you that you had a choice between paying those taxes or giving that money to your favorite charities, what would you say?

Wouldn’t it be wise to take the extra time to compare what is leftover for you, in the form of discretionary income, if you decide to include or exclude charitable gift planning?

The tax threat especially arises when the business owner will be realizing a capital gain from a profit-generating transaction. Instead of having to recognize the entire capital gain, when you sell stock or other assets for a profit, you can avoid paying unnecessary capital gains taxes, by giving the charity that portion of the stock or other assets equal to the value you were planning to give away already. The income tax charitable deduction you get will also serve as your tax shelter on some of the gains you kept for yourself.   

Writer: Does economic uncertainty play any role in the owner’s plans and decisions?

Dan: Undoubtedly, there are owners who are still jammed up with succession planning paralysis. But it’s time to recognize that it would be hard to find a better year than 2012 to get unstuck.

Understandably, the business owner engaged in succession planning may be trying to figure out the best way to stay financially independent, after he or she cuts or reduces the ties to the business. If the business paycheck and business stock dividends have been the primary source of income, will the replacement sources of income be enough?

Next, the transfer tax cost of passing a business to the next generation has been greatly reduced, but only for those who act in 2012. Avoiding the cost of paying unnecessary taxes certainly adds an additional wall of protection against economic uncertainty.    

Writer: What are the best pieces of advice you can offer business owners about making good succession planning and wealth preservation decisions?

Dan: Don’t leave smart and complimentary charitable planning options on the table—especially when they can yield you significant leftover discretionary income, while allowing you to have an indisputable choice between paying avoidable taxes or making meaningful charitable gifts—from money that you are not going to be able to keep for yourself.

By: Dan Rice, Co-founder of CTAC

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