A family business owner with philanthropic intentions may make a charitable gift of ownership interests in the family business, if planned properly. However, while doing so generally provides income tax and other benefits to the business owner, there are many potential traps which need to be properly planned for and navigated. The following six tips highlight some of the issues a family business owner will want to keep in mind when exploring charitable planning:
- Decide whether you are comfortable with a charitable entity (with a public charity, private foundation, donor advised fund, charitable remainder trust or charitable lead trust) owning a portion of your family business for an indefinite period of time—for example, until the ownership interests are purchased back by the company or by its other owners or by a third party in the event of a partial or total sale. The directors or trustees of the charitable entity (which may or may not be your family members depending on the choice of charitable entity) will control the gifted interests.
- Consider, in advance, whether any portion of the gifted business interests may be purchased back by the company or its other owners or may be sold to a third party.
- Consider whether you want any interests gifted to be subject to “tag along” or “drag along” rights in the event of a future sale.
- Determine that the charitable recipient is a permissible owner of your family business. This is a basic issue that is sometimes overlooked.
- Ensure the charitable recipient executes all the necessary documentation to become a successor owner of the gifted interest.
- Determine whether the business interests you are considering gifting are encumbered—for example, are they pledged as collateral to a bank or other lender?
Proper planning and competent legal and tax counsel are key to navigating these and the many other potential traps (including excise taxes applicable to charitable entities taxed as private foundations, unrelated business income tax, private inurement, private benefit and excess benefit transactions) for a family business owner seeking to carry out philanthropic goals.