Tax planning tips

Last week, I went to a luncheon seminar hosted by Fidelity Charitables, a division of my custodian company Fidelity Investments.

I went there because 30% of my clients are business owners. I know that one-third of them have strong charitable intent, and helping them do well by doing good is part of my responsibility.

Part of the dilemma of successful business owners who have charitable intent is this: They make a lot of money when they are running their business, and especially at the time they sell their business. But they give away their money to the causes they care about usually in retirement when they do not have as much income to write off. Without careful charitable planning, they will end up paying a lot more in taxes and have a lot less to give to charity.

Here comes the rescue plan: Donor Advised Fund (DAF).

A DAF is a vehicle through which a business owner can donate money or, better yet, shares of his own company. He can set it up when he is still running the business and his charitable intent is not yet clear. Doing this has three major benefits:

    1. Elimination of capital gains on the sale of assets donated;

    2. Eligibility for the fair market value tax deduction when his income is still high;

    3. Flexibility in the timing of donations to his preferred charities.

Let’s look at this example: John is about to sell his business for $20 million. In the five years prior to the sale, he drew an income of $1mm from the company, but he donated $1mm worth of company shares to a DAF he setup every year.

All of his income five years prior can be offset for income tax purposes because of his donations. On top of that, $5mm worth of the shares already in the DAF are exempt from capital gains taxation. He is going to save millions of dollars.

Such is the power of charitable planning using DAF. If you want to learn more, schedule a discovery meeting with me.

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