Charitable Business Exit Strategies May Not Just Be for Your ClientSubmitted by American Endowment Foundation on September 30th, 2019
By Laura Malone
At American Endowment Foundation (AEF), we receive numerous calls from financial advisors who are looking to help their clients create charitable exit strategies out of their businesses. Many of the advisors recognize the opportunity it creates for them to reduce their client’s taxable impact of the sale, while increasing the assets the advisor can manage in the donor advised fund. However, what about the advisors themselves and their own businesses? What about their own exit plans?
A study conducted by the Financial Planning Association, “The Succession Challenge 2018: Why Financial Advisors are Failing to Plan for the Inevitable,”1 found that only 13 percent of firms with less than $50 million in assets under management have a succession plan, compared with 60 percent of those with more than $500 million in assets under management. Those who may be considering a charitable component to their succession are probably only a fraction of those numbers.
Whether a financial advisor is grooming a successor, planning on selling to another partner or selling to another outside organization, they can often benefit from the same leverage they suggest to their business owner clients:
- Income tax savings by deducting up to 30% of AGI (with a 5 year carry forward)
- Capital gains avoidance on the appreciated value of the business stock
- Removal of the gift of ownership interests from the financial advisor’s estate
- Potential reduction of, if subject to, alternative minimum tax (AMT)
If there is more than one owner leaving the financial planning practice at the same time, all of them can benefit from the same strategy. Furthermore, AEF can offer flexibility around a financial advisor’s succession strategy. For instance, if the advisor is transitioning ownership to another partner or other successor who is planning on financing the sale through a promissory note, AEF can become a part of that financing arrangement.
Like any other exit, the gift to AEF needs to be made before the financial advisor enters into any legally binding commitment to sell the business. Also, an independent valuation is required by the IRS to substantiate the value of the gift – regardless of how the sale finalizes. This valuation must be reported on the financial advisor’s personal tax forms in the tax year of the sale.
We have often seen financial advisors experience the power and satisfaction their clients feel when they create and use their personal donor advised funds (DAFs). As a result, many advisors have created their own DAFs to experience that same power and satisfaction. Why should it be any different when that financial advisor is looking to create something more significant as they exit their practices?
At American Endowment Foundation, we look forward to assisting you. Please contact us or call at 1-888-966-8170 to discuss your specific circumstances.