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Why More Business Owners Should Consider a Donor Advised Fund
By: Tim Bresnahan, Senior Director of Gift Planning,
The Chicago Community Trust
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| Much of the wealth created and held in the United States is in the form of closely held business interests, including limited liability companies, limited partnerships, and private corporations. While many of the founders and owners of these businesses are philanthropic and want to give back, understanding the rules that apply to making gifts of closely held business interests can be challenging.
For donors who have created wealth through private companies, partnerships and other closely held businesses, funding a donor advised fund may be the ideal way to leverage an illiquid, highly appreciated asset for charitable giving.
What is a donor advised fund?
A donor advised fund, or “DAF”, is a charitable account established by the donor at a sponsoring public charity, such as a community foundation. When the donor funds the account, he or she makes an irrevocable transfer to the DAF sponsoring charity, and in return is eligible to receive the maximum tax deduction allowed under IRS rules. The donor can use a variety of assets – including cash, marketable securities and even closely held business interests – to fund a DAF.
The donor chooses a name for the fund and selects advisors to the fund, such as family members, who can recommend grants out of the account to other charitable organizations across the country.
Why should a business owner consider establishing a DAF?
First and foremost, a donor advised fund is a low-cost and convenient vehicle for charitable giving. The sponsoring charity is responsible for all of the administration, including vetting grant recommendations to charities and filing tax returns. Unlike private foundations, donor advised funds do not have a minimum annual distribution requirement, meaning donors who set up DAFs have more flexibility around their grantmaking. Further, donor advised funds allow donors the option of recommending grants anonymously.
Contributions to donor advised funds also generate a better income tax deduction for donors compared to private foundations. This is particularly true for business owners who wish to contribute business interests to fund their charitable giving. When a living donor makes a gift of closely held business interests to a donor advised fund, including shares of private companies and interests in limited partnerships or LLCs, the donation is eligible for an income tax deduction equal to the fair market value of the shares. The same donation of closely held business interests to a private foundation would only qualify for a deduction equal to the donor’s basis in the stock.
DAFs established at a community foundation, such as The Chicago Community Trust, also offer the donor the benefit of having access to philanthropic expertise. For donors who are new to using a charitable giving vehicle like a DAF, the option to work with and access the expertise of a community foundation staff is a significant benefit. The staff can help identify organizations to support, organize site visits and even brainstorm ways to involve the next generation.
Special considerations for DAFs funded with business interests
Business owners who wish to fund a donor advised fund with closely held business interests should know that the process is more complicated than funding a DAF with cash or publicly traded stock. Most DAF sponsoring charities will have a due diligence process that includes a review of the pertinent governing documents (such as the shareholders agreement and operating agreement). Most DAF sponsoring charities will want to understand if there are any tax consequences to the charity holding business interests prior to a sale or redemption.
The donor will also need to provide a valuation to substantiate the value of the gift. The valuation will need to be done by a firm or professional who is qualified to perform valuations, and it cannot be a person or entity connected to the transaction (such as the donor or the DAF charity).
While there is additional due diligence required for DAFs funded with closely held business interests, there is often tremendous value to charitable planning with those interests, especially in anticipation of a sale or IPO.
How to start the process
If you are a business owner who is considering setting up a donor advised fund, the best place to start is with your trusted team of advisors. Whether it is an estate planning attorney, CPA or your team at DiMeo Schneider, it is best to get advice and counsel on how much to fund your DAF, and what assets make the most sense.
After meeting with your team of advisors, it is best to compare donor advised fund providers, as well. Not all DAF sponsoring charities will consider gifts of business interests, and the services provided to DAF holders will vary, depending on the sponsoring charity. Potential donors should consider what is most important to them when examining a DAF provider to work with.
As the end of the year approaches, now is the time for potential donors, and the advisors to those donors, to be starting the conversation about philanthropy.
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| For more information, please contact any of the professionals at DiMeo Schneider & Associates, L.L.C.
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| About the Author
Tim Bresnahan is the senior director of gift planning for The Chicago Community Trust. He is responsible for a broad range of matters including charitable contributions, donor advised funds, supporting organizations, agency endowments and other legal, tax and investment aspects of tax-exempt organizations.
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| While this article addresses generally held investment philosophies of DiMeo Schneider & Associates, L.L.C., it does not represent a specific investment recommendation for any individual client or prospective client. Please consult with your advisor, attorney and accountant, as appropriate, regarding specific advice. Information has been obtained from a variety of sources believed to be reliable but not independently verified. Past performance does not indicate future performance.
This report is intended for the exclusive use of clients or prospective clients of DiMeo Schneider & Associates, L.L.C. Content is privileged and confidential. Any dissemination or distribution is strictly prohibited.
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