Charitable Planning Before a Business Sale

Plan Your Giving Before the Company Sells, Not After

Most owners only sell a business once. By the time sales contracts are signed, the tax outcome is already locked in, and the chance to do something smart with a piece of that value pre-tax is gone.

There are substantial tax savings and benefits to an owner who gives some of their company stock to a charitable vehicle before sales contracts are signed. This simple step can greatly reduce or eliminate the capital gains tax on the donated shares, claim a fair market value deduction in the year of the sale, and put real money behind the charitable causes they care about. Wait too long and the IRS will tax the entire amount as if the gift was made post sale, which defeats the purpose.

Crewe Foundation Services (CFS) helps owners and their advisors get the timing and the structure right, from the first planning conversation through the transfer of stock and the funding event. CFS then provides its suite of services from grantmaking, accounting, tax filing and compliance in the years that follow.

The Math Behind Giving First

Say an owner holds stock with almost no cost basis that is about to be worth several million dollars at closing.Two paths:

Sell first, then give. The sale triggers capital gains tax, state tax and ACA tax on the entire sale amount. Whatever is left after that bill is what the owner has to donate.
Give first, then sell. The charity owns those shares when the deal closes, so the gain on the donated portion never gets taxed. The full donated value goes to work charitably, and the owner receives a full, fair market value charitable deduction for the gift that will help offset the taxable income from the sale portion that is kept personally.Giving before the sale will always produce a larger gift to charity and produce a greater tax benefit. That gap is the entire reason this strategy exists. Combine this strategy in conjunction with a DAF or Foundation and the end result is incredibly flexible and beneficial for the donor.

Why Timing Decides Everything

The benefit hangs on one condition. The charity has to become the real owner of the shares while the sale is still genuinely up in the air. If the deal is effectively done, even without signatures on the final agreement, the IRS can treat the owner as having already earned the proceeds and tax the gain anyway.

The Tax Court made that point hard to ignore in Hoensheid v. Commissioner. The donor there moved the shares two days before closing. Price was set, the buyer was committed, the date was on the calendar. The court held that the charity was never actually at risk as an owner and taxed the donor on the full gain. He lost the benefit he was reaching for.

So the practical rule is simple to state and easy to miss: start early, before a buyer is even circling, and keep a clear record of where negotiations stood when the gift was made. Our guide to the timing rules for gifts of closely held stock walks through where that line sits.

Picking the Right Vehicle

Where the shares go matters as much as when. The options differ in cost, control, and the level of administration an owner is signing up for.

A donor advised fund is usually the easiest place to start. The owner contributes the stock, the sponsor handles the sale, and the owner recommends grants over time. DAF sponsors are set up to accept private company stock and tend to offer a better deduction than a private foundation does providing fair market value deductions.

A private foundation makes sense for owners who want a lasting institution they and their family control. It comes with more paperwork and some rules worth respecting, including limits on how much of a business a foundation can hold and a ban on self-dealing. Closely held stock is exactly the situation where those rules bite, so experienced help pays off. Unfortunately, privately held stock deductions are limited to cost basis.

For owners with a specific goal, like drawing income off the sale proceeds or additional flexibility while still giving generously, a supporting organization or a charitable trust can be a better fit than either of the above.

It Does Not Have to Be C Corp Stock

Stock in a closely held C corporation is the classic asset for a pre-sale gift, but it is far from the only one. S corporation stock, LLC and partnership interests, real estate, and other appreciated property can all work. A few of them carry extra wrinkle, such as Unrelated Business Income Tax that ordinary stock does not, so they need a closer look before the gift is made. The core move is the same in every case. Plan ahead, get a proper valuation, and finish the gift before the deal is a sure thing.

Where Crewe Foundation Services Can Help

A pre-sale gift only works when the owner, their advisors, and the charitable vehicle are pulling in the same direction. That coordination is what we do. We help owners sort out what they want to accomplish, choose a structure that fits, accept and administer the gift of closely held stock, and run the vehicle long after the sale is a memory.

We also work shoulder to shoulder with the attorneys, CPAs, and wealth advisors who are steering the transaction, so the charitable piece fits into the deal timeline rather than fighting it.

If a sale is anywhere on the horizon for you or a client, the single most useful thing you can do is start the conversation early. We would be glad to help.