On a recent flight, I met a lady who works in the charitable giving area for a major institution. We talked for a bit and I asked if she was familiar with the idea of asking business owners to consider making gifts to her charity of appreciated shares in closely held businesses. She was familiar with the idea, but had not seen it used much before. The idea is simple in concept:
- Owner makes gift of appreciated closely held shares to qualifying charity.
- The value of the shares for gifts exceeding $10,000 in value must be supported by an appraisal and a Form 8283 signed by the qualified independent appraiser. This form is filed together with the donor’s income tax return for the relevant taxable year.
- The appraisal must be dated within a reasonable period of the date of the actual gift, so year-end appraisals are ideal for such gifts. In fact, if an appraisal is obtained as of, say, December 31, 2012, gifts could likely be made in 2012 and in early 2013 based on the same appraisal (but consult your tax adviser on this!).
- The donor obtains a charitable gift tax deduction equivalent to the fair market value of the gift.
- As I understand the law, the gift of shares cannot be made with any specific agreement that it be repurchased by the donor’s company, however, that is the likely market. If the charity sells the shares within two years of the gift, the charity must also report the sale to the Internal Revenue Service.
For business owners with donative intent, the gifting of closely held shares can be a useful tool. A series of gifts over several years, followed by serial redemptions, can provide substantial financing for owners of valuable businesses. The actual gifts (and subsequent repurchases) can be a part of a donor’s estate tax planning, since the act will, in effect, redistribute percentage ownership to the other shareholders. For example:
- Consider an owner who holds 53% of the shares (53 shares) of a successful closely held business and his children own the remaining 47% (47 shares).
- If the owner gifts 10 shares of the stock of the company to qualifying charities and the company subsequently repurchases the shares (at their then fair market values) from the charities, his ownership will be reduced from 53%, which reflects a controlling interest, to less than 48%, which would reflect a large minority interest in the company.
- The act of giving the shares, then, could accomplish several objectives, including funding for charities, obtaining significant charitable deductions to shelter other taxable income, and estate planning to reduce his ownership to below a level reflecting control of the business.
It would, of course, be appropriate for the charitable institution(s) to become subject to the company’s buy-sell agreement in order to assure that they remained within the ownership control of the business, subject, of course, to reasonable redemption. If a company already obtains a regular appraisal with respect to its buy-sell agreement, its owners can discuss the appropriateness of using it (or if adjustments need to be made) for charitable gifting purposes with their business appraiser.
In the short discussion thus far, we have only touched on the topic of gifting of closely held shares. As with many things related to income and estate taxation, the actual rules can be more complex. There are differences, for example, in the regulations as they relate to gifts of shares of C corporations versus S corporations and other tax pass-through entities.
Sam Warwar, a tax partner (and chair of the Tax Department) with Coolidge Wall in Dayton, wrote an informative piece entitled “Thinking Differently about Charitable Giving: Using Closely Held Stock to Make a Charitable Gift” for the Dayton Foundation. For anyone interested in the topic, this article is a good place to start. Of course, no one should consider making significant gifts of appreciated closely held stock without first obtaining appropriate tax and other planning advice.