Don’t Waste Your Money Being Generous
Written By: Greg Ring
Last year, Americans gave more than $557 billion to U.S. nonprofits. We enjoy the most generous tax system in the world in terms of encouraging gifts to charity. It is simply part of our DNA. However, the dark underbelly of American generosity is the lack of awareness, particularly among business owners and ultra-high-net-worth families, regarding the tax advantages available within philanthropy. Cash made up the vast majority of the $557 billion given to charity in 2024. For the middle American donor, this might be the best option. However, people of wealth, who often face various liquidity events such as selling a rental or investment property or a family business, can often enjoy dramatically enhanced tax savings if they take advantage of the rules and strategies Congress has made available.
Let’s focus for a moment on family business facts:
Family businesses make up 64% of the U.S. gross domestic product (GDP), generate 62% of the country's employment, and account for 78% of all new job creation.
The 32.4 million family businesses in the United States generate $12.9 trillion in GDP.
Family-owned businesses are the backbone of the American economy.
Studies have shown that about 35% of Fortune 500 companies are family-controlled and represent the full spectrum of American companies, from small businesses to major corporations.
A recent study conducted by Conway estimated that 81% of family businesses will be sold at the time of retirement rather than passed to the next generation. There are a few reasons for this, including the desire of the second generation to launch their own enterprise, pursue a different track in life, or simply enjoy the fruit of mom and dad’s entrepreneurship. Whatever the reason, when a business is sold, the founders will often face the largest single tax bill of their life. The long-term gain taxes that apply, often to a company with a zero-cost basis, can be staggering. However, proper pre-liquidity planning can significantly benefit the founders, the families, and the charities they care about.
For example, we worked with a family business launched 35 years ago and then immediately given to the four adult children when it had a very low valuation. To their credit, the four children grew the business, which ultimately sold for $192 million. Each of the four children owned an equal 25% of the business. In their state, the combined federal and state long-term capital gain tax rate is 37%. Therefore, on a $48 million sale, which is 25% of $192 million, they were each facing a tax bill just north of $18 million.
We worked with two of the owners and reduced their taxes by just over $13 million each. They were able to fulfill their inheritance goals for their adult children and create massive gifts, both current and future, to charities they care about while at the same time enjoying retirement.
Before the sale, the salary of these two owners ranged from $650,000 to $800,000 annually, depending on the year. Their post-sale income, enhanced by our planning, bumped up to $1,400,000 per year. Meanwhile, we set aside almost $10 million in a Donor Advised Fund that will allow them to give generously during their lifetime to charities they care about. In addition, we allowed for more gifts going to charity in their estate.
For another example, we are currently working with a family whose wealth is primarily in inducing real estate. The father is 81 years old and feels that his sons, who all have a multi-million-dollar balance sheet, are in pretty good shape. He would like to do some things for his grandchildren, but he plans to give the bulk of his $74 million balance sheet to charity.
Our planning will allow him to begin that process while he is living, and he can enjoy seeing charities receive his large gifts. In addition, he wants to experience the joy of giving with his grandchildren. He wants to begin to transfer not simply wealth but also values to them.
The bottom line is that we anticipate being able to eliminate all of his federal estate taxes, increase his retirement cash flow, and allow him to harness some of the wealth he has created and use it for good rather than simply rolling over and paying taxes.
We call this Balance Sheet Philanthropy.