The Charitable Giving Side of a Business IPO or Acquisition

Gregory A. Van Slyke, FSA, CFA®, CFP® BY: Gregory A. Van Slyke, FSA, CFA®, CFP® 07.30.18

What to Consider to make a Business Change an Opportunity for Giving

Suppose you have a low basis concentrated position held more than a year in a company approaching a transaction. If you would like to minimize tax drag and are charitably inclined, you will want to avoid taxes on some of your unrealized gain by gifting shares, rather than proceeds, to charity. The charity will then effect or participate in the sale. The concept is simple but there are plenty of details to consider.

Timing the Gift and Sale of Shares

Typically, you want the same timing for both the gift to charity and the sale of the stock to maximize both your deduction value and any sale price. In practice, however, synchronizing the two may be challenging and could sometimes be disadvantageous.

Perhaps your business is headed toward an initial public offering (IPO) or an acquisition for stock by a public company.  One option is to make share gifts to charity after the deal is complete. You will have daily price visibility, but will likely face other constraints:

What if your company’s IPO will allow investor sales and you would rather not take the price risk that comes with waiting out the lockup period? The capitalization table is usually frozen before the road show and pricing meeting. If you want a charity to be eligible to sell at the IPO, you face making a gift before the price is set and even before the final decision to go public is made.

An acquisition for cash will set the sale timing for you. But the gift to a charitable entity needs to occur early enough, before shareholder and other approvals have been obtained, to avoid the risk of treatment as a deemed sale prior to the gift. This means taking some risk that the deal could fall through after you have already made the gift.

How to Time When the Charity Gets the Money

At Lake Street, many of our families use a charitable conduit entity, such as a donor advised fund or a private foundation. With either, you can optimize the timing of your deduction and sale but choose a later date for the ultimate charity to receive cash. Each entity type has advantages and disadvantages with respect to control, privacy, costs, flexibility, taxation, administrative ease, and other items. Working with each family and their advisory team, we help navigate the pros and cons. Sometimes it even makes sense to have both.

One key distinction between donor advised funds and private foundations involves the value applied to the charitable deduction. Donor advised funds are public charities and the charitable deduction for gifts to them is set at fair market value. The charitable deduction for gifts of non-publicly traded stock to private foundations is limited to basis, generally eliminating private foundations from consideration unless the stock is public and not restricted.

What if you want a lifetime cash flow stream from the proceeds? A charitable remainder trust (CRT) may be the perfect option. After you, or you and your spouse, have passed, trust assets can go to charity, including a foundation or donor advised fund. While the gain on the sale and subsequent investment activity is taxable, taxes can be deferred over many years.

Additional Tax Considerations

The above is just a brief flyover on charitable timing. There are many more details that may be relevant, a few of which are touched on below.

From this list of items, it is clear that your advisory team, including your tax and estate advisors, should be involved early and often.

let's talk
The path to your financial security starts with a simple, friendly conversation...
Tell us a little bit about yourself so that we can set up a meeting with one of our specialists and get you started.
  • This field is for validation purposes and should be left unchanged.