Gifting Using Complex Assets

Transcription

1 Charitable Liquidity Event Planning Gifting Using Complex Assets Prepared for: The Business of Family Business Seminar December 1, 2011 Los Angeles Chamber of Commerce

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3 Donating complex assets a tax-efficient way to give For many people, charitable contributions of non-publicly traded assets private C-Corp stock, restricted stock, limited partnership interests, and other privately held assets may be tax efficient to donate. These assets can be highly appreciated and donating them to charity potentially avoids capital gains exposure on the sale of the asset. In addition, donors are also generally entitled to a tax deduction of the full current market value 1 (and not just the original cost basis, as in the case for a donation to a private foundation). 2 Benefit from our expertise in handling complex assets Individual single-mission charities may not be well equipped to handle contributions of non-publicly traded assets and may have to outsource the compliance and liquidation work; therefore, the net amount available to the charity could be reduced. The Jewish Community Foundation has internal experts and resources to ensure that the contribution is handled as efficiently as possible, allowing the highest possible percentage of the funds from the sale to be available to help create an income stream for the donors or for their charitable giving. Diversify assets and giving Because these non-publicly traded assets are often the most highlyappreciated assets in a portfolio, they can cause the portfolio to be overweighted. Donating all or a portion to charity can help rebalance your client's holdings without triggering capital gains. Donors are also able to diversify their giving with one asset by recommending multiple grants to many charities from their donor-advised fund accounts as opposed to donating the asset (or assets) to one nonprofit organization.

4 Maintain giving for the long-term By making a contribution to the Jewish Community Foundation, a large public charity, donors are eligible for a tax deduction on that contribution, in a specific year, while spacing out their distributions to charities over a period of years. CHARITABLE REMAINDER TRUST (CRT) (GENERALLY

5 Charitable Gifting Case Study A Tax-Effective Way to Sell a Closely Held Business Eddie and Shirley Singer, both age 60, started a family business over 30 years ago. With hard work and a lifelong commitment to building the business, they now have over 30 employees. Over the years, Eddie and Shirley have branched out into a number of different areas, one of which is an online venture. This aspect of the business has done extremely well and the company has grown substantially over the past three years. The company should be worth between $5 million and $6 million at sale. Eddie and Shirley feel the time has come for them to slow down, since hey have been working for 50+ hours per week on average for most of their lives. Working with an investment banker and their corporate attorney they were recently offered $5.5 million for their "C" corporation stock and another $1.5million for a three year consulting arrangement. The $1.5 million would be paid in equal installments over the three year period. After discussing the terms of the sale with their advisors over the past several months, Eddie and Shirley feel that this is a very fair sales price. They like the idea of retirement but are not willing to quit working entirely. Therefore, a three year consulting arrangement is very appealing to them. The main obstacles to selling their business are the income and capital gain tax consequences. Their tax attorney let them know that the capital gain taxes on the sale alone would be $1 million, since their basis in the stock is close to zero. Then, in addition to capital gains taxes, the ordinary income taxes on the consulting agreement are projected to be about $600,000. Eddie and Shirley were taken back by the amount of these taxes and asked for recommendations.

6 Question: Eddie and Shirley were both charitable and felt they wanted to give something back to their community. They had considered making a sizeable gift after the sale to the Jewish Community Foundation. The big question was: Could charitable giving, before the sale, help them shelter some of their income and help mitigate their huge potential tax burden? Solution: Their tax attorney along with their trust and estates lawyer gave them the following solution that would maximize their tax savings. First, the Singers would create a Charitable Remainder Unitrust (CRUT) and transfer $3 million of the company stock to the trust prior to the sale. Their advisors suggested a payout rate of 5% which would yield an income tax deduction of over $870,000. Then, $500,000 of the stock would be transferred to the Jewish Community Foundation to fund a Donor Advised Fund. The other $2.5 million in stock would be retained and sold for cash. This $2.5 million would be subject to capital gains tax, but the CRUT and gift deductions would reduce the net tax payable. The Jewish Community Foundation would have also sold its $500,000 share of the C-Corp stock and cashed out their position fo the benefit of the Singer s Donor Advised Fund which will now be completely liquid and ready to help the Singers help charities important to them. Last, the Singers would create an irrevocable life insurance trust (ILIT) for their children. By contributing approximately $20,000 to the trust each year for about eight to ten years, the ILIT should be able to purchase a second-to-die life insurance policy well in excess of $1 million. When Eddie and Shirley pass away, the insurance will pass to the children gift and estate tax free. Also, this will

7 preserve their lifetime exemption equivalents. They may still use their estate tax exemptions to transfer additional sums to the children free of estate tax. An incredibly tax-efficient solution By creating the charitable remainder trust and the Donor Advised Fund, no capital gain taxes will be due on the sale of $3 million of company stock. The charitable deductions generated by these two charitable transfers will result in significant tax savings. These savings would significantly reduce the tax on the sale of the retained stock and the income received from the consulting agreement. Eddie and Shirley have named the Jewish Community Foundation as the Remainderman to the trust and on their passing a projected additional $6.8 million based upon their life expectancy and an overall trust return of 8% to their Donor Advised Fund at The Foundation and be available for charitable distributions by their three children. A Windfall for both the Singers and their Donor Advised Fund In the end the Singers will have received a payout from their CRUT of $125,000 a year and created a philanthropic pool to benefit the charities of their choice through using their Donor Advised Fund of $7.3 million.