A recent Wall Street Journal article highlighted an important trend: behind traditional high-income professions, the largest source of wealth for top earners comes from owning medium-sized regional businesses. Combined with the fact that over 90% of small business owners support charitable causes, this creates significant opportunities for advisors who understand business interest gifts.
Why Community Foundation Funds Outperform Private Foundations
Many business owners establish private foundations, assuming they're the optimal vehicle for charitable giving. However, when it comes to closely-held business interests, community foundation funds deliver superior tax benefits and administrative simplicity.
Tax Advantages When clients donate closely-held stock to a community foundation fund, they typically receive a charitable deduction for the full fair market value of the stock, subject to 30% of adjusted gross income limitations. They also avoid capital gains tax on any appreciation—a potentially massive benefit for businesses held for years or decades.
By contrast, donations to private foundations are limited to the stock's cost basis (often minimal for long-held businesses) with deduction limits of only 20% of AGI. For a business owner with significant appreciation in their company, this difference can represent hundreds of thousands of dollars in lost tax benefits.
Administrative Benefits Private foundations come with ongoing compliance burdens: annual excise taxes on investment income, mandatory distribution requirements, self-dealing restrictions and complex reporting obligations. Community foundation funds eliminate these hassles while providing professional investment management and administrative support.
Critical Implementation Factors
Timing Strategy The most crucial element is timing. Business owners must complete charitable gifts before initiating any sale discussions or signing letters of intent. The IRS's step transaction doctrine can collapse separate transactions if they appear to be part of a unified plan to avoid taxes.
Proper sequencing ensures the community foundation receives full value for its portion of the business while preserving the owner's charitable deduction. We work closely with advisors to coordinate timing and documentation.
Valuation Considerations Recent developments make proper valuation even more critical. The Supreme Court's decision in Connelly v. United States changed how business interests are valued for estate tax purposes, particularly regarding life insurance proceeds. This decision often increases taxable estate values, creating additional incentive for charitable business gifts.
Clients need qualified business appraisals that comply with IRS requirements for charitable deductions. We can recommend experienced appraisers and help coordinate the valuation process.
Strategic Applications Business interest gifts work particularly well for:
- Owners planning exits within 2-5 years
- Families wanting to reduce estate tax exposure
- Clients with highly appreciated businesses
- Owners seeking to diversify concentrated holdings while supporting charity
The community foundation's expertise in complex gifts ensures smooth execution and maximum benefit for your clients. We've successfully handled gifts ranging from small family businesses to multi-million dollar enterprises across various industries.