Exploring Legacy Planning Through Donor-Advised Funds (DAFs) Before Selling a Family-Owned Business

Contributed Article by Patrick A. Klingborg

pklingborg@swsslaw.com | www.swsslaw.com

When preparing to sell a family-owned business, business owners should consider legacy planning strategies that align with their long-term goals. One powerful approach is utilizing a Donor-Advised Fund (DAF) to make charitable contributions in a tax-efficient manner. This strategy not only supports philanthropic goals but can also provide significant tax benefits.

Case Study: Implementing a DAF Strategy

As a business attorney, I recently worked with a client who successfully incorporated a DAF into their business sale strategy. While my firm focused on the legal aspects of the sale, separate tax, accounting, and financial advisors guided my client through the DAF process. Here’s how it unfolded:



1. Determining the Charitable Gift: The first step was for my client to decide how much they wanted to donate to charity.
2. Valuing the Business: Next, a third-party valuation of the business was obtained, establishing the value of the company’s shares.
3. Gifting Shares to the DAF: Based on the desired donation amount, my client transferred the appropriate number of shares to the DAF. Importantly, this was done prior to the sale of the business.

Example:

Consider a business owner with 100 shares, representing 100% ownership of a corporation valued at $5 million. If they wish to donate $50,000 to charity, they would donate 1 share (worth $50,000) to the DAF.

After the Sale

Upon the sale of the business, the DAF converts its shares into cash. The final cash value realized by the DAF may slightly differ from the initial valuation, but in most instances it is close. The DAF then uses the cash to support charitable causes, guided by the business owner's preferences.

Tax Benefits

This strategy offers a dual tax advantage:

• Immediate Deduction: The business owner receives a tax deduction when the shares are donated to the DAF.
• Tax-Free Proceeds: When the business is sold, the portion of the proceeds corresponding to the shares owned by the DAF’s are not recognized as income by the business owner, potentially reducing business owners’ overall tax burden.

Conclusion

In summary, integrating a DAF into your business sale plan can help lower taxes while supporting your charitable goals. This strategy is complex, and I strongly recommend working with experienced tax, accounting, and financial advisors to ensure compliance and maximize benefits.

If you’re considering selling your business and want to explore how a DAF could work for you, or if you need referrals to qualified advisors, feel free to reach out.

#donoradvisedfunds #charitablegiving #estateplanning

Patrick A. Klingborg

pklingborg@swsslaw.com | www.swsslaw.com