A Charitable Business Succession Plan Can Yield Many Benefits
By Richard C. Martin
Many closely held business owners are prominent civic leaders who are actively involved in local charitable organizations. When the circumstances are right, these business owners may be able to use a business succession strategy that benefits both their families and their favorite charities. It is called a charitable business succession plan.
A charitable business succession plan may enable the business owner to accomplish a smooth ownership succession, while also generating significant income and estate tax savings, and a dependable source of retirement income. Best of all, a charitable business succession plan can create a significant charitable legacy to organizations that the business owner has spent his or her lifetime supporting.
The basic idea behind a charitable succession plan is fairly simple. For many business owners, especially those who have no natural successors–such as children working in the business or key employees willing and able to purchase the company–a succession plan amounts to finding a third-party purchaser when they want to retire. The usual result to this scenario is to invest the after-tax proceeds to provide a retirement income for the owner, his or her spouse, and ultimately to leave a legacy to the children or other heirs.
A charitable succession plan involves gifting the business to a charitable remainder trust (CRT) as an initial step. The trustees of the CRT will then negotiate and consummate the sale of the business to a third party, or in some cases, even to an inside management group of key employees.
The sale of the business by the CRT avoids capital gains tax on the gain from the sale of the business. This means the CRT can invest the entire proceeds, not just the after-tax gains, to provide the business owner and spouse with the retirement income that they desire. This income interest can be designed using standard CRT methodologies, such as a unitrust interest that will pay out a specified percentage of the annual value of the CRT each year during the joint lives of the owner and the spouse.