News for Professional Advisors

Most local business owners are not only entrepreneurial but also deeply philanthropic. For those considering the sale of their business, donating S corporation (S corp) stock can be a strategic way to align their financial goals with their charitable values. Donating S corp stock to a Donor Advised Fund (DAF) incorporated in trust form allows donors to save significant tax dollars while maximizing the impact of their generosity.

The Situation

A donor approached the Community Foundation to explore donating S corp stock before the sale of their business. The Community Foundation partnered with a DAF organization, incorporated in trust form, to accept the gift and maximize tax efficiency for the donor.

Challenges with Corporate Form

If the Community Foundation, incorporated in corporate form, had accepted the S corp stock directly, it would have faced tax liabilities on the income and appreciation from the stock. Under IRS rules, S corp income is treated as unrelated business taxable income (UBTI) for a nonprofit corporate entity, which would have triggered federal income tax on the allocated income and post-donation appreciation. Even at the corporate tax rate of 21%, this liability would have significantly reduced the value of the gift, leaving fewer dollars for charitable purposes.

Advantages of Trust Form

By partnering with the DAF organization incorporated in trust form – located in a state without income tax – the donor and the Community Foundation achieved a far more tax-efficient outcome. The trust was subject to UBTI but could offset up to 60% of its adjusted gross income (AGI) through a charitable contribution back to a DAF at the Community Foundation. This deduction reduced the effective tax rate on the trust’s income to approximately 8%.

As a result, roughly 90 cents of every dollar of the S corp stock’s value flowed into the donor’s DAF at the Community Foundation. The donor avoided personal capital gains tax, received a charitable income tax deduction, and ensured the proceeds were available to support their philanthropic goals.

Key Takeaways

This case demonstrates the importance of strategic partnerships when facilitating complex gifts. By working with a DAF in trust form, the Community Foundation helped the donor preserve the value of their gift, save significantly on taxes and maximize their charitable impact.

If you have clients considering the sale of their business, let us help you explore this powerful strategy. Contact the Community Foundation to learn how we can help in navigating the complexities of donating S corporation stock while ensuring your clients achieve their philanthropic and financial goals.