Consider Section 1202 in the sale of your business.

Business foundersSelling a business: Incorporating strategic philanthropy

June 16, 2022

Key things to know

  • An exit strategy that includes philanthropy can secure your legacy, reduce tax exposure, and help maintain wealth.

  • For optimal results, philanthropy should be baked into the sale plan well before the sale takes place.

  • Foundations, donor advised funds and charitable trusts are three common ways to include philanthropy in the exit plan.

For many successful business owners, their company is a key part of their identity. It represents their wealth, identifies their character and embodies their influence. So, when the time comes to sell the business, they plan the transition carefully. They want to maximize their financial gain while preserving their legacy.

Including philanthropy in the business transition plan can address both of those objectives.

“Charitable giving can play a key role in a business owner’s exit plan,” notes Ashlee Woods, managing director of philanthropic impact at Ascent Private Capital Management of U.S. Bank. “A carefully crafted plan that integrates philanthropy early on can cement the owner’s legacy and, if needed, help maintain wealth for the owner and their family.”

Include philanthropy in the exit strategy plan early on

Selling a business is like having a second job. Even under ideal circumstances, there are typically hundreds of decisions to be made and countless details to consider. That means planning a business sale and a philanthropic plan at the same time may not be feasible.

Woods advocates for putting the pieces of the philanthropic plan together well before a sale commences.

“Doing both your philanthropic planning and your exit planning at the same time can be a heavy lift,” she says. “That’s truly one of the reasons why a business owner should be talking about philanthropy with their advisor early. You don’t want to have to address philanthropic planning when there are so many other irons in the fire.”

Choose the right type of philanthropic vehicle when selling a business

There are several common types of philanthropic strategies for incorporating charitable giving as part of an exit plan, and each has its benefits from a tax and legacy-building perspective. The right philanthropic vehicle choice for a business owner depends on the type and amount of assets being donated, the timing involved, and the level of control the donor desires.

  • Put the proceeds of a business sale toward a private foundation. If you’re interested in creating an ongoing philanthropic vehicle, a private foundation can function as a personal or family legacy and act as the source of all or most of your future charitable giving. “We're working with a client who’s planning to sell his multinational company in the next year or two and use the proceeds to expand his private foundation,” Woods says. “For this business owner, the sale of the business represents the lifeblood of his legacy, and his foundation is the vehicle he is using to maintain that.”
  • Use a donor advised fund. This is an investment account designed solely to support charitable organizations of your choosing. Timing is important here: The business owner must gift the business, or part of it, to the fund prior to the sale. When the portion of the business inside the fund is sold, no income tax is due on the proceeds. That tax advantage can help offset any income taxes due on the portion of the business that is sold outside of the donor advised fund. An advantage of philanthropy through a donor advised fund is confidentiality. While a foundation is a public entity, donor advised funds may fund charities without disclosing the name of the giver.
  • Place business sale proceeds in a charitable trust. A charitable trust involves assets being placed in trust, with an income stream going to one or more parties during the lifetime of the trust, and the assets remaining in the trust being distributed to one or more parties at the end of the trust's term. A charitable remainder trust (CRT) is an excellent option when the grantor wants to provide a current benefit to themselves, or their descendants, for life or a term of years, with the remainder going to a charity of choice. A charitable lead trust (CLT) operates essentially the opposite of a charitable remainder trust and allows a grantor to benefit a charity immediately for a specified amount of time, move some wealth out of the estate, and provide a benefit to heirs when the time period ends.

“A carefully crafted exit plan that integrates philanthropy early on can extend wealth and purpose across generations.”

-Ashlee Woods, managing director of philanthropic impact, Ascent Private Capital Management

Foundations, donor advised funds and charitable trusts are three common types of philanthropic/charitable strategies for business owners to integrate tax-wise charitable giving in their exit plan, but there are others. A knowledgeable wealth advisor or estate planning attorney can guide you in these plans.

Pass along a legacy of philanthropy when selling a business

A business owner’s exit strategy is much more than a retirement plan. It’s an opportunity to extend values to coming generations. Successful exit planning requires examining philanthropic and family goals and creating a plan to grow wealth and build a legacy while taking these issues into account.

For example, while maximizing the tax advantages of a private foundation requires careful planning and depends on the type of assets being used to fund it, a foundation allows you and your family to retain a great deal of control of how the funds are used.

In the case of the Ascent client mentioned above, the foundation will expand on the legacy of philanthropy that was previously established and will serve to model a philanthropic attitude that future generations can adopt. The Ascent team is helping the business owner design and implement a charitable strategy needed to scale up the foundation to meet increased charitable assets and activities.

“A good wealth advisor helps their clients to extend wealth and purpose across generations, and in the case of this business owner, a foundation is ideal for that goal,” Woods says. “If a business owner is not passing the business itself to the next generation, they can still pass along their family values and their legacy of philanthropy.”

Learn how Ascent Private Capital Management works with and supports business owners and founders.

Request a call.

Let’s start a conversation. Please request a call and an Ascent wealth management professional will contact you shortly.

Find an office.

Ascent’s regional team locations across the U.S. offer personalized support and a full suite of wealth management services.

BUSINESS FOUNDERS

Early planning key to successful business transition

When giving up the reins of your company, early planning can protect you, your family and your business through the transition.

PERSONAL LEGACY PLANNING

Maximize Giving with Donor-advised Funds, Qualified Charitable Donations & Gifts of Appreciated Stock | U.S. Bank

Charitable giving strategies that extend beyond traditional gifts of cash can have a greater impact on your preferred charities and allow you to potentially take advantage of tax savings.

Start of disclosure content
Disclosures

Investment products and services are:
Not a deposit ● Not FDIC insured ● May lose value ● Not bank guaranteed ● Not insured by any federal government agency

The information provided represents the opinion of U.S. Bank is not intended to be a forecast of future events or guarantee of future results. It is not intended to provide specific investment advice and should not be construed as an offering of securities or recommendation to invest. Not for use as a primary basis of investment decisions. Not to be construed to meet the needs of any particular investor. Not a representation or solicitation or an offer to sell/buy any security. Investors should consult with their investment professional for advice concerning their particular situation.

U.S. Bank and its representatives do not provide tax or legal advice. Your tax and financial situation is unique. You should consult your tax and/or legal advisor for advice and information concerning your particular situation.

Family Office Services are not fiduciary in nature and Ascent serves in a non-fiduciary role when providing these services. Family Office Services may include leadership and legacy consulting services in order to facilitate your self-assessment of family office services issues. Ascent does not engage in the practice of psychology.