Charitable Giving: Considerations Prior to Sale of a Business
Most business owners are interested in charitable giving to help others, but taking action toward making it happen often gets overshadowed by the responsibilities of managing the day-to-day business and financial picture. Many want to give, but aren’t sure how to go about it.
This is a scenario Dave MacCulloch, Seattle Senior Fiduciary, within the Wealth Management & Advisory Services group at Washington Trust Bank, sees often. The main point of contact for his clients, MacCulloch meets with them regularly, bringing them up to date on their investments, and staying informed of their life changes, such as the impending sale of a business, all to help them meet their financial goals.
“Many people are so busy running their businesses, they don’t have time to do their estate planning or investments,” he says. “Prior to someone selling a business, or signing a letter of intent or notice of sale, they should be meeting with a wealth advisor to plan for the best way to effectively manage the proceeds, and minimize the tax impact.”
When a business is sold, there often is a liquidity event which needs to be managed in a tax-efficient manner, so that more of the proceeds go back to the business owner than are paid in taxes. Creating a charitable trust is one way to do that. “If a client has a philanthropic bent, a charitable trust is a strategy we can employ that meets philanthropic goals while also minimizing those taxes,” MacCulloch explains.
A charitable trust that holds as assets low cost-basis/highly appreciated shares of stock can sell those highly appreciated shares and not pay any income and capital gains taxes that would normally result from the sale, because the charitable trust is a legally recognized tax-exempt entity.
Simply stated, if a business owner has a charitable inclination and is going to sell a business that will result in a significant liquidity event, charitable strategies are available to help reduce the tax impact at the sale of that business.
“You can still get income from a charitable trust to meet your needs while you’re in retirement and you’ll meet your charitable goals as well,” says MacCulloch. “The decision is how much you need to keep in your pocket versus how much are you willing to eventually gift to a charity.”
MacCulloch has helped numerous clients navigate this charitable planning road before. “A few years ago, I served on a board of a non-profit, and an estate planning attorney also on the board approached me after the meeting, and shared he had a client who was about to sell a business,” he says. “They were not in agreement with anybody yet, but they were getting ideas of how they could net approximately $60 million upon sale.” His client was sophisticated and knew he needed to explore opportunities to effectively deal with this liquidity event in an efficient manner. He wondered if we as an organization could provide help with strategies and ideas to effectuate his priorities to: 1.) plan how to manage this liquidity event, 2.) provide a nice investment roadmap for retirement and 3.) provide him a solid a strategy for future wealth transfer. In particular, this client definitely had a charitable vision; philanthropy was important to them and their children when the business was active, and they wanted to continue that.”
MacCulloch recommended to the client to set up two charitable trusts which provided an income stream that allowed the client to continue living a lifestyle to which they were accustomed. The beneficiary of one of the trusts was a family foundation which they formed, and that foundation supported three areas that were very important to the client: environmental issues, education support, and providing tools and resources to help people in tough situations rebuild their lives.
The end result was the client was financially comfortable, able to reduce their tax impact and was putting their wealth to use in a philanthropic manner of which they were passionate.
If the idea of a charitable trust sounds appealing for your post-business sale liquidity management, MacCulloch has a word of advice. “One should start the financial planning aspect of what to do with this liquidity event well before you make any final decisions on who you are going to sell to,” he says. “That goes back to the tax impact. If you employ strategies before you sell the business, you are taking advantage of opportunities to reduce the impact of income and capital gains taxes. If you wait until after the sale of the business to employ them, you can still employ charitable strategies, but you’re going to pay more in taxes than had you planned beforehand. That’s the one critical timing issue business owners need to think about if minimizing taxes is important for them.”
MacCulloch recommends using the same discipline required to run a business when it comes to planning the sale of it. Washington Trust Bank’s Financial Planning ensures the essential steps of forethought and long-term vision are incorporated in the path to your financial success before and after the sale.
It Starts With Financial Planning
Planning ahead is essential not just for charitable giving, but for any wealth management decision, as financial success is built upon astute planning and goals-based management.
“We want to make sure our clients, holistically, have a good idea of their entire investment picture; not just the investment accounts with us, but assets they have elsewhere, because we’re going to help them with valuable forward planning,” says MacCulloch. “It’s a good tool to lead with, to get a snapshot of where they are now, but also what they want to accomplish down the road. Then, we get an idea of what assets they have, and will those assets accomplish those goals? If not, what strategy should we employ that will help them meet those goals?”
It is essential to work with an advisor who asks the right questions: What are your goals? What do you want to accomplish? Are you still going to work or not? What are your retirement plans? What type of income are you going to need when you retire?
“We take pride in providing clients purely objective advice,” says MacCulloch. Because Washington Trust’s Wealth Management & Advisory Services does not operate on a commission-based system, nor does it offer proprietary funds, clients know they are getting unbiased and highly objective advice when it comes to financial and investment matters. This enables clients to make decisions in which they have confidence.
Washington Trust Bank Wealth Advisors understand the importance of coordinating and working with a client’s other advisors, including legal and tax advisors. Because Washington Trust does not act as an attorney nor tax specialist, bringing advisors into the planning process ensures a complete understanding of a client’s financial picture, as well as helping anticipate the impact of decisions.
“Our client benefits from all of their advisors collaborating and working together in their best interest,” says MacCulloch.
Why Give Back?
Aside from the tax purposes and having a clearly defined financial plan, there are additional reasons business owners are interested in charitable giving.
“Many of the clients we work with at Washington Trust are engaged in the communities where they have established their businesses,” says MacCulloch. When selling their business, it is an opportune time for business owners to thank those communities that played a role in their success. “That is where its fun—helping them achieve their goals and make a charitable impact,” says MacCulloch. “It is having their cake and eating it too.”
As the largest regional bank in the Northwest, Washington Trust has been serving clients since 1902. Deeply rooted in the region it serves, the bank and its employees are proud to give back to the people and the community on a regular basis. Charitable giving is not a foreign concept for Washington Trust Bank’s Wealth Management & Advisory Services team. “It is easy for someone working at Washington Trust to embrace the idea of charitable giving because that’s the nature of our organization,” says MacCulloch, “it is part of our ethos, our Washington Trust DNA.”
“We take pride in our work,” says MacCulloch. “We are with our clients from the beginning when they are just starting their businesses in our commercial and retail divisions. We grow with our clients. Washington Trust is dedicated to bettering the communities we are in through our volunteer services and financial contributions. Because giving is part of our DNA, it is so easy for us to have those conversations with our clients because we practice what we preach.”
“Our clients rely on us to take that first step to work with them in their charitable planning and advising them to what is best for their individual purposes,” says MacCulloch. “When we share charitable giving strategies with a client, especially how they can use charitable trust strategies or family foundations, it gets their attention because they then realize, ‘Wow, we can accomplish what we want to for the future, and yet still minimize the impact of taxes,’ and it gives them even more opportunities to support their communities and charities they want to benefit.”
This is an example of the impact of charitable giving considerations before the sale of a business, but consideration should also be given to other, more advanced charitable gift strategies, as well as to the specifics of your situation. If you are considering a plan of giving please contact your Washington Trust Bank Relationship Manager for advice on the best ways to accomplish your individual goals.
This is not a substitute for tax advice — as always, consult with your personal tax advisor when making decisions about your tax filings and strategies.
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Dave is a Vice President and Senior Relationship Manager for Washington Trust Bank’s Wealth Management & Advisory Services in the Western Washington Region, and also serves as the region’s Fiduciary Team Leader.
Throughout his career as an attorney and in the financial services …