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.

The gift by the business owner to the CRT also creates a current income tax deduction. The deduction is based on the present value of the future gift to charity and depends, in part, on the nature of the gift and the type of charitable beneficiary. In the event the deduction cannot be used entirely in the year of the gift, due to limitations on income tax charitable contribution deductions, the deduction may be carried forward for up to five additional years.

At the death of the income beneficiaries–in our example the owner and the spouse–the remaining assets of the CRT then pass to one or more charities. The designation of the charities can be handled in any number of ways–from a simple designation of one or more charities at the time the CRT is established to a more elaborate process of selecting the charities at some later point, perhaps by a committee including the owners children. The charitable beneficiary could also be a private foundation created by the business owner which could then have perpetual existence as a type of feeder organization that supports local charities with grants over the years.

In this plan, the business owners family can be protected with life insurance in a trust in an amount sufficient to replace the value of the CRT passing to the charities. This trust can be designed to provide an income and an estate-tax free benefit to the heirs.

The benefits of the charitable succession plan in these circumstances are clear:

A third-party sale by the CRT is a solid succession plan in many situations;
The tax management benefits of using a CRT include avoiding capital gains tax on the sale of the business, a charitable contribution income tax deduction on the gift of the stock to the CRT, and estate tax savings resulting from getting the value of the business and the proceeds of its sale out of the business owners estate;
The CRT can be an important source of retirement income for the business owner and spouse during their lifetimes;
The heirs are protected by life insurance placed in a trust for their benefit; and best of all,
All of these benefits for the business owner and his or her family are supplemented by the substantial charitable contribution that results from the CRT. Such a charitable benefit can constitute a lasting legacy that enables the business owner to contribute to the community in meaningful ways over many generations to come.

The charitable business succession plan may be ideal for any business owner whose goal is to provide for an orderly business transition, obtain retirement income and also benefit worthwhile charitable beneficiaries.

Richard C. Martin, JD, CLU, ChFC, CFP, is vice president advanced marketing, The Phoenix Companies Inc., Hartford, Conn. He may be reached via e-mail at richard.martin@phoenixwm.com.


Reproduced from National Underwriter Edition, February 10, 2003. Copyright 2003 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.