The charitable stock bailout is an attractive strategy for business owners who want to leverage their companies’ closely held stock for achieving charitable planning objectives. The 2 case scenarios described below show how to secure 2 of them: charitable gifting that avoids using personal income; and gifting for attaining succession and estate planning objectives.
The first case is one in which the owner of the closely held stock wishes to make a contribution to charity, but does not wish to use personal funds for that contribution.
Consider the following case pattern:
1. Mr. Jones, age 60, is the 100% owner of Jones Enterprises, a C corporation.
2. The business is valued at $4 million (fairly appraised) with a good cash reserve and strong cash flow. The corporation is experiencing an accumulated earnings tax problem.
3. Jones is in a personal combined income tax bracket of 40%.
4. Jones has been an active alumnus for many years with his university, which has approached him about making a major gift to fund a project.
5. He would like to make a gift, but does not want to use his personal income to fund the gift.
Mechanics of the charitable stock bailout
1. Jones gifts $100,000 worth of Jones Enterprise to his university, an outright gift with no strings attached.
2. At a future date, the university will offer its stock in Jones Enterprise (no pre-arranged obligation) back to the corporation; the corporation uses its cash reserve to purchase its own stock.
What is accomplished
1. Jones receives a $100,000 tax deduction (equal to the gift’s present value) and a tax savings of $40,000 (40% of $100,000).
2. Jones spends no cash personally.
3. Jones still controls the company. And the university has cash for its project.
4. Jones has avoided dividend treatment of stock the corporation can redeem for cash.
Jones can use this strategy to make ongoing gifts as long as the gifts are complete and irrevocable; and as long as they require no formal or informal agreement, nor retention of substantial rights, such as voting rights.
The second case is one with which many of us as financial advisors are confronted. How does the owner of a closely held corporation pass on the ownership of stock to key employees, use the wealth for retirement purposes, reduce the potential tax liabilities of the transfer and treat family members fairly?
The use of the charitable stock bailout strategy, (along with other financial tools), can provide a useful tool to accomplish these objectives. Consider the following case pattern:
1. Mr. and Mrs. Field are 55, married and have 2 children (neither is involved or interested in Mr. Field’s business).
2. Mr. Field owns 100% of Field Enterprises, a C corporation, which is valued at $5 million (basis of $1 million) and has a healthy cash reserve and consistent strong cash flow. Given the business’ current financial plan, Field Enterprises’ stock value would be subject to estate taxes.
3. With the current plan, other assets owned by the Fields would be exempt from estate taxes.