Turning Your Family Business’ Passion for Philanthropy
into a Smart Tax Strategy
With the right planning, owners can maintain control of the family business while benefiting charity and reducing estate taxes. When owners neglect to employ lifetime strategies like gifting, annuity trusts and installment sales, they may struggle to find ways to tax-efficiently transfer the business upon death. By utilizing a foundation or a charitable lead trust, an owner can maintain control until death and minimize estate taxes, even when lifetime tax reduction strategies fail to do enough to minimize the estate.
The bequest of a family business to a private foundation or charitable lead trust can help family business owners transfer the business to their children while minimizing estate taxes and meeting charitable giving goals. This may be carried out after death by the bequest of a business interest to a foundation or charitable lead trust, along with a corporate redemption of the charitable entity’s interest. In some instances, the family may have the option to purchase the interest from the estate.
If the family business is expected to have a lot of cash upon the owner’s death, the owner can bequeath an interest in his business to an appropriate private foundation or charitable trust, and the estate will receive a charitable deduction, while leaving control of the business with the family. If the corporation offers to redeem, with cash rather than with note, all securities of the same class as was bequeathed to the charitable entity with the same terms, the charitable entity will receive fair market value for the stock, and the business will be excluded from certain excise taxes (general redemption exception). Alternatively, the corporation can issue a separate class of stock to be used for all charitable gifts so that stock owned by others will not be included in the redemption of the charitable entity’s stock.
Working for the greater good through a charity or foundation can not only help a good cause – it can also help your business. Consult with your tax advisor for details.
This article is for informational purposes only and is not a substitute for professional advice. Consult your tax advisor. Contributing Sources: “BUSINESS SUCCESSION PLANNING: Death, Disability, and Gifting” by Ami D. Desai and Nicole Erickson, State Bar of Texas REPRESENTING SMALL BUSINESS 2009; "Sophisticated Charitable Planning: Helping Your Clients Achieve Their Charitable Goals On A Tax-Enhanced Basis" by Cheryl Cain Crabbe, State Bar of Texas 30th Annual Advanced Estate Planning and Probate Course, 2000