Selling a company is both one of the most exciting and most stressful moments in the lifecycle of an entrepreneur. Countless questions must be considered and decisions made in a compressed time frame to ensure the best outcome for both the business and the people who made it all happen. 

However, one question that too often goes unasked by entrepreneurs and their advisors before such a liquidity event is: “Does it make sense in my tax planning for any of these hard earned proceeds to go to my favorite charitable causes?”  When the answer is “Yes” – which is frequently the case in Utah (one of America’s most generous states) – entrepreneurs need to understand the significant tax advantages of donating private stock prior to any sale. In doing so, you not only succeed in avoiding capital gains but you maximize the taxable deduction – and have more resources to give to the charitable causes you care about. 

Those entrepreneurs who wait until post transaction to consider giving are painful for us to meet, because those fantastic and favorable tax benefits are in the rear-view mirror, and now they have less to give.  At the Community Foundation of Utah (CFU), we excel in helping entrepreneurs understand the best possible tax planning and charitable giving strategies so that they don’t land in this painful place. Over the past two years alone, CFU has facilitated nearly $40 million in private stock donations for charitably-minded business owners. These entrepreneurs understand the value of pre-tax planning or have the right advisors who do. If that does not describe you, please let us help you – we know this space.

Let’s start from the beginning: entrepreneurs often hold private stock with incredibly low-basis, because they’ve taken an idea and made it into a fabulously successful reality. Well then, how do you avoid paying a very large tax bill on the significant gain that is the fruit of your hard labor? Easy. If you donate this highly-appreciated stock in advance of a liquidity event (sale of your company!), you can avoid the capital gains tax for the amount donated on the highly appreciated asset while still claiming a tax deduction for the full amount of the gift. A double benefit. 

This sounds great in theory, you might say, but how does this really work in practice? Things are moving quickly. My favorite nonprofit doesn’t have the financial wherewithal to accept this type of gift and be party to a liquidity event!  Also, what if I want to give to multiple charitable organizations?  Do I have to get them all involved in the transaction? This is a busy time for me! Okay, what if I know I want to give, but I’m still not sure where? Oh, and the transaction is happening next week and I kind of have a lot of other things on my plate – how can I possibly make this happen?  I’ve never done this before!

What seems like a complex and time constrained reality has a very simple answer: donor advised funds. A donor advised fund is roughly analogous to a charitable savings account. The fund is held within a sponsoring nonprofit, such as CFU, the donor contributes the pre-sale assets into the fund, receives the corresponding tax deduction and the donor advised fund is then funded with the proceeds from the sale. The funds are invested and grow over time tax free – more money to give!  Any fees to establish the fund are paid with tax advantaged dollars from the donor advised fund itself.  And, guess what, you as the donor, get to advise on the distribution of these assets to the charitable organizations you care to support when you are ready.  

Here are three simple tips to keep in mind when donating private stock: 

1. When there is a potential liquidity event on the horizon, consult your tax advisor on the most tax-efficient structure for charitable giving or contact CFU. 

2. If donating private stock is the right strategy pre-sale (which is very likely the case), the donation must be made before any binding purchase agreement is signed (having a Letter of Intent in place is not a problem).

3. Philanthropy is a rewarding and multi-faceted discipline that many entrepreneurial and business skills transfer well to – you are going to be good at this! 

Happy giving!