With NCF as their guide, countless business owners have multiplied their impact for the causes they love most by giving business interests. If you’re thinking about selling your company, planning your giving before a future sale may increase the amount you can give. Today, we’ll take a detailed look at how it works.
For every business owner, the prospect of selling the company they’ve worked so hard to establish is exciting, but it often can be a complex process with many practical, emotional, and financial implications.
For the Christian business owner, in particular, there’s an additional element of spiritual impact. Of all the chances an entrepreneur might have to affect the kingdom and his or her family, approaching the sale of a profitable business can be one of the greatest.
For many, this is the opportunity of a lifetime, and how much can be gained or lost for eternity boils down to wise stewardship and planning. In this planning process, timing is everything.
Maximizing giving to do more good
Many Christian business owners have ministry in mind as they are contemplating what they will do with the proceeds from a sale of their business. They plan to give a portion of it away once they have liquidated. While this approach is laudable for its intent, business owners may be able to maximize their giving by contributing some of their business interest to charity now, instead of later.
When you contribute business units or shares to a public charity like NCF, the fair market value of the gift is usually deductible. Contrasted with a gift of proceeds after liquidation, a gift of appreciated business interests can maximize the amount you can give. Since each situation is unique, you should consult with your tax and financial advisors prior to making this type of gift.
Let’s take a look at a hypothetical example that illustrates the difference giving before the sale can often make.
A practical example
Tara is thinking about selling her business and donating 20 percent of the net proceeds from the sale to her church and other ministries. Her cost basis in the business is low, which would mean the tax bill on a future sale would be significant.
If Tara donates 20 percent of her business stock to charity now, she may claim a fair-market-value deduction for the gift. When the company eventually sells, 20 percent of the proceeds will flow to charity, enabling her to give more to her church and other ministries at no additional cost to her family.
If she wants to keep some of the proceeds received from a future sale for retirement, this may be accomplished through a split-interest gift. Tara can choose to make both an outright gift and a split-interest gift to charity to accomplish her charitable giving goals and satisfy her future income needs. The following case study includes these considerations.
A couple saves significantly
John and Sally’s industrial supply business had expanded impressively over the last 20 years. The couple had personally worked hard to develop the business and cultivate important relationships with employees, customers, and vendors. They’d reached a point of transition in life, and they wanted to begin engaging in more charitable activities. So, they began to explore the possibility of selling their business.
The couple wanted to use their time and resources to support a charity that had been on their hearts. The charity helped young children in the foster care system by providing opportunities for camping experiences in a Christian environment. John and Sally saw that they could minister to the kids through these experiences, which offered direct opportunities to share the love of Christ. But they also recognized they were going to need to retain some of their interest for retirement.
John was intrigued with the advantages of a Giving Fund (donor-advised fund, or DAF) at NCF. After considering the idea of a private foundation, he concluded (for a variety of reasons) that the simplicity of a Giving Fund would be the best fit for his family’s objectives.
One factor in this decision was that, if John gave his stock to a private foundation, his deduction would be limited to his tax basis in the gifted shares. However, if he gave his stock to a public charity, such as NCF, his deduction would be equal to the fair market value of the gifted shares.
Operating a private foundation would require administrative duties similar to those he was wanting to relinquish by selling his business. The start-up and ongoing costs associated with creating a private foundation were substantial. John and Sally also wanted to give quietly, without drawing attention to themselves, and they learned that gifts from their Giving Fund can be made anonymously.
John and Sally began to closely examine the merits of making a gift of their business stock to NCF. Even if their pursuit of a sale of the business didn’t bear fruit as soon as they hoped, they were comfortable with NCF becoming a shareholder of their business until a sale could be negotiated and completed among the shareholders – including NCF and a buyer.
When their advisors decided a gift of stock would enable them to give more for the causes they loved most, it was an exciting discovery for the couple. They were exhilarated by the thought of leveraging the assets God had allowed them to earn. So they executed on their plan to give the stocks to NCF. If they had waited to give cash after selling their business, they would have had less money to give to charity.
John and Sally were challenged by their advisors to think about what to do with the remaining stock. Initially, they thought about selling it and simply investing the net proceeds for retirement. However, their two children were well provided for already, and John and Sally had some concerns about leaving them the entire amount. Their children were responsible, but they wondered whether such a large inheritance would help or hinder their children’s spiritual and character development and commitment to serving God.
Considering these things, John and Sally’s spiritual, financial, and tax advisors suggested they consider using a substantial amount of the remaining stock to fund a deferred Charitable Gift Annuity (CGA).
A CGA is a simple arrangement that would allow the couple to make an additional gift to charity and receive annuity payments beginning some time in the future and continuing for the remainder of their lives. The eventual sale of the business would provide the liquid funds the charity would use to make those annuity payments. While John and Sally would receive those annuity payments to help support them during retirement, this “split-interest” type of gift would also yield a substantial contribution to the charity.
John and Sally decided to transfer several million dollars’ worth of business stock into a CGA. Additionally, they still had several million dollars on hand following the sale of their business for outright personal use. As time went on, they would decide whether to leave those amounts as a bequest for their children or to make more charitable gifts during their lives or in their estate planning documents.
John and Sally achieved their retirement, estate planning, and charitable goals by gifting business interests outright to NCF and funding a CGA. With thoughtful planning, John and Sally found joy in giving several million dollars to charities they loved.
John and Sally exemplify how a family can step into a new phase of stewardship. By planning ahead before getting too far down the path in marketing their businesses for sale, they successfully negotiated continued provision for their families while giving more than they ever expected for use in advancing God’s kingdom.