Takeaways
SITUATION: Craig, facing a substantial tax bill from selling his $95 million farm-to-table business with nearly zero cost basis, was determined to transform his financial success into meaningful, private charitable contributions.
SOLUTION: By donating 10% of his business interest to a donor-advised fund, Craig avoided $2,926,000 in capital gains tax and secured a $9,500,000 charitable deduction, strategically offsetting his tax liabilities while ensuring his philanthropic goals were met discreetly.
IMPACT: Craig’s strategic use of a DAF resulted in $9,500,000 directly benefiting his chosen charities, allowing him to create a lasting legacy of generosity and positive community impact while maintaining his privacy.
Situation
Craig was preparing to sell his beloved farm-to-table business, which he had painstakingly grown from scratch since 2005. The impending sale to a private equity company was set to bring in $95 million, a testament to his hard work and dedication. However, the cost basis of his business was nearly zero, translating into significant capital gains and an enormous tax bill looming on the horizon.
Despite the financial windfall, Craig was determined to channel the fruits of his labor into meaningful charitable contributions, all while safeguarding his privacy as a philanthropist. The prospect of the substantial capital gains tax, combined with his passion for helping others, led Craig to seek advice from his trusted attorney and tax advisor.
Solution
Understanding Craig’s passion for philanthropy and the significant tax implications of his business sale, his advisors recommended a donor-advised fund (DAF). By contributing a portion of his business interest to a DAF, Craig could strategically manage his tax liabilities while ensuring his charitable intentions were fulfilled discreetly.
Craig decided to gift 10% of his business interest, valued at $9.5 million, to the DAF before the sale. This move allowed him to obtain a substantial charitable deduction and reduce the capital gains tax on the sale of his business. The transaction unfolded as follows:
- Donation of 10% Interest: Craig donated $9.5 million worth of his business interest to the DAF.
- Cost Basis: $0, reflecting the organic growth of his business.
- Taxable Gain on Donation: $9.5 million.
- Capital Gains Tax Avoided (30.8%): $2,926,000.
- Charitable Deduction: $9,500,000.
By utilizing the charitable deduction from the DAF, Craig could offset some of the capital gains tax from the portion of the business sold outright. This strategic donation allowed him to reap significant tax benefits while maintaining his philanthropic privacy.
Impact
Craig’s thoughtful approach to his business sale and charitable giving had a profound impact. By leveraging a donor-advised fund, he not only minimized his tax liabilities but also created a lasting legacy of generosity. The financial maneuvers led to substantial benefits:
- Capital Gains Tax Avoided: $2,926,000.
- Charitable Deduction: $9,500,000.
- Net Proceeds to Charity: $9,500,000.
Craig’s strategic donation resulted in a remarkable $9.5 million directly benefiting his chosen charities, all while staying under the radar. His decision to contribute to a DAF ensured that his philanthropic endeavors would continue to touch countless lives in his local community, fostering positive change and supporting causes close to his heart. Through his thoughtful planning and commitment to giving back, Craig transformed his hard-earned success into a powerful force for good, demonstrating the profound impact of strategic charitable giving.
Disclaimer: This hypothetical example, based on a real scenario with altered identifying information, is for educational use only. The situations, tax rates, and returns mentioned are not reflective of actual clients or investments. There is no guarantee the depicted rates can or will be achieved. Results will vary. Consult legal and tax advisors for suitability. RCF reviewed all due diligence documents, including governing documents, audited financials, and tax returns.
