Business Interests, Closely Held Stock, Partnerships: Questions Donors Ask

The governing documents (for example, articles of incorporation and bylaws) of their closely held company may include provisions dictating to whom they may transfer your shares. Often, but not always, charitable entities are permissible shareholders, but donors want to be sure. In addition, other shareholders may be given a “right of first refusal,” which means that the donor won’t be able to give their shares to your organization until all other shareholders have declined to purchase those shares. Advise donors to review the governing documents for any requirements they need to meet before initiating the transfer.

Yes. Because you are a charitable entity, you must perform “due diligence” to ensure that accepting the shares won’t jeopardize your charitable status or expose your organization to unexpected liability. You’ll need to review the company’s governing documents and talk with the donor and the company about any liabilities that may accrue prior to initiating the transfer.

Donors should be careful about this. If they are already far along in the process of negotiating a sale of their shares, the IRS may view their contribution of the shares as a “step transaction” by treating the contribution as if the donors had already sold the shares and contributed cash to your organization. If the IRS recharacterizes the transaction that way, the donors will have to pay capital gains tax on the transfer. They’ll still get a tax deduction for their contribution of cash, though, and your organization will benefit greatly from the gift. Note also that your organization cannot accept shares that it’s required to hold or sell.

Because of the technicalities involved, some precautionary steps must be taken. The donor should first determine if the partnership allows shares to be transferred. Because gifts of partnership interests involve your organization in issues of marketability, taxation, liability, and the potential of later assessments by the partnership, the transfer must be reviewed and approved.

In many cases, yes, and considerable tax benefits can result. However, giving closely held stock is more complicated than giving common stock. Be prepared to assist donors with their gift intention. Giving closely held stock will require that the business or the shares have had a recent qualified appraisal.

In some cases, donors may be able to use the shares to fund a gift plan that pays them income for life, like a charitable gift annuity (CGA) or charitable remainder unitrust (CRUT). In this case the income-tax charitable deduction will be limited to the value of the charitable portion of the interest contributed. Donors might also consider creating a charitable lead trust (CLT) that can lower the gift-/estate-tax cost of passing a family business to the next generation. In some cases, donors will be able to claim an income-tax charitable deduction based on the charitable portion of the charitable lead trust interest contributed.

Donors will receive a charitable income tax deduction for the full fair market value of the donated interests, with no capital gains tax liability for the transfer to your organization. However, unlike contributions of publicly traded stock, for which value is easily determined, closely held stock and other non-publicly traded interests are not freely marketable. Donors will report the value of their gift on IRS Form 8283 (Noncash Charitable Contributions). If the value of their contributed non-publicly traded stock exceeds $5,000, the client must obtain an independent, written, qualified appraisal of the value to substantiate their claimed deduction. Gifts of business interests are deductible up to 30% of the donor’s adjusted gross income in the year the donor makes their gift. Any excess deduction amount can be carried forward for up to an additional five years.

To preserve their charitable deduction, donors cannot enter into a prior written agreement with their company or a third-party purchaser regarding a post-contribution sale or redemption of the shares, nor may they control the selection of a third party to whom your organization sells the shares. Similarly, donors may not place conditions on the transfer of the stock by trying to control the timing of your organization’s resale or redemption.

Donors may donate closely held stock to your organization only if the company’s governing documents (articles of incorporation, bylaws, stock sale and redemption agreements) permit the transfer of the shares to a charity. If the current provisions do not permit a transfer, donors can request an amendment to the company’s documents to permit such a transfer. In some cases, the company simply did not contemplate charitable transfers when the company was created.