Charitable Planning Can Enhance Business Succession Plans
A major challenge facing all business owners is planning for the ultimate succession of ownership and management in a way that will assure the businesss continuity, perpetuation and prosperity. In the case of a family business, adding to the challenge is the complex relationship between business objectives, family dynamics and personal financial goalsas well as the fact that the business interest often represents a substantial majority of the owners estate.
Additionally, in many cases, successful business owners are active and visible members of their communities, so philanthropy may be an important component of their financial plans and objectives.
In recent years, there has been a growing awareness and utilization of charitable remainder trusts and charitable lead trusts to accomplish clients goals in the context of personal financial planning, estate planning and philanthropy. But charitable trusts also can be an effective and tax-advantaged planning technique in a succession strategy for a family-owned business.
A charitable “bail-out” of a business interest may be used to get cash out of a C-corporation while minimizing corporate and individual taxes. It can also result in the transfer of business ownership to the next generation without adverse gift and estate tax consequences.
If the owner of a highly appreciated business interest sells it, substantial capital gains tax will be paid, and any lifetime gift of the business interest to successors will result in low carryover cost basis to the donees and potential gift tax. For the business owner who is charitably inclined, a charitable “bail-out” may provide an attractive alternative planning technique.
Consider the following examples:
A client and his children own shares in a C-corporation that has retained earnings. The client can transfer some of his shares to a charitable organization or charitable trust, and the corporation can then use the retained earnings to redeem the shares transferred. The client will receive an income tax deduction and thus increase after-tax income, the corporations retained earnings will be reduced, and the client will make a significant charitable gift while transferring equity in the corporation to his children without any gift tax.