Infusing Philanthropy (and Tax Benefits) into Your Succession Plan

In our two-part series on succession planning, we highlighted the key questions and decisions that businesses should be addressing as they create a succession plan, as well as some of the pitfalls that owners of middle market businesses must navigate.

However, many business owners have a bigger picture question on their minds as they contemplate exiting the business that they’ve spent years or decades building: what will their legacy be?

Successful business owners are often some of the most charitably-oriented and civically-minded individuals in a community. Business owners see firsthand how a strong community can help a business thrive. Local communities supply the workforce needed to grow a business and they’re often the most loyal customers of a product or service.

As a result, many business owners donate generously to local causes that are near and dear to them; philanthropic giving often becomes a core part of their identities as individuals and business owners. Many owners worry that exiting their business will mean stepping away from their role as a community leader as well.

However, according to Eaton Dunkelberger, President & CEO of the Community Foundation of Northern Nevada, succession planning is an ideal time for a business owner to be intentional about creating their charitable legacy.

“Whether a business owner is already an active donor or wants to start focusing on philanthropic causes post-exit, integrating goals for charitable giving into their succession plan is the most effective way to ensure that a business owner can meet their giving and financial goals,” said Dunkelberger.

“Especially if an owner plans on selling their business as part of their succession plan, charitable giving can mitigate negative tax implications and allow a business owner to be financially secure and philanthropic at the same time,” Dunkelberger added. “At the Community Foundation of Northern Nevada, we have worked with a wide range of business owners to identify the right charitable giving and tax solutions based on a business owner’s aspirations and needs post-exit.”

Dunkelberger identified several common charitable giving solutions his team at the Community Foundation utilize to empower charitable giving by business owners as part of their succession plans; however every community foundation has different options for the region they serve. The Council on Foundations maintains a comprehensive list of reputable community foundations; visit their interactive tool to find a community foundation in your region. Some of the most frequently used approaches as described by Dunkleberger include:

• Charitable Remainder Uni-Trust (CRUT): Similar to an annuity, a business owner funds a CRUT with business assets, stock or cash and then receives regular payouts over the course of their life. After the owner passes, a charitable organization receives the remainder of the assets to be used for charitable purposes. Business owners often choose to establish a donor-advised fund at a Community Foundation with the charitable remainder , establishing a long-term philanthropic legacy.
• Zero Tax Sale: Instead of selling a business, paying capital gains tax and then undertaking charitable giving, a zero tax sale allows an owner to donate a portion of the business to a charitable foundation and leverage that donation to lower or eliminate any capital gains taxes upon sale.  
• Supporting Organization of a Community Foundation: A business owner can also choose to donate their business to a charitable foundation so that the business continues to operate with that foundation as the owner/sole shareholder, with profits going to fund charitable endeavors through a donor-advised fund.

Sparks, Nevada-based Duraflex is an example of how utilizing charitable giving can ensure an owner’s vision endures over time. Duraflex manufactures the iconic blue-green diving boards that are used for diving around the world, from a high school pool to the highest levels of international diving competitions. The company’s founder, Raymond C. Rude, wanted to ensure that after he passed away, the company would both continue to keep manufacturing in Sparks and give generously to support the sport of diving.

After he passed away, the business was donated to a supporting organization of the Community Foundation. The revenue generated from the company is directed to support charitable efforts to expand access to diving opportunities and operates under a board of directors appointed in part by CFNN. This approach allows Duraflex to continue to thrive as a business and the founder’s goals to be realized beyond his lifetime.

Charitable giving opens new opportunities for business owners to secure their personal legacy in their community and increase charitable giving to the causes they care about, all while maximizing tax savings.

“We highly encourage folks who are in the succession planning process to engage with us and understand what their options might be, especially early in their planning process,” added Dunkelberger. “Many business owners we work with are surprised that they can lower their tax liability and increase their community impact at the same time. We’re here to help them understand what their options are in the biggest picture of their succession plan.”