How business owner donors can help build your endowment

If you've not reviewed your donor lists recently to identify which donors own their own businesses, now may be a good time to do just that. Business owners make great donors, not only because they understand how hard it is to build and grow an organization, but also because they have the ability in some situations to make endowment gifts of ownership shares in the business itself. 

Many business owners are already thinking about an exit strategy, even if they are years away from retirement or a sale. Well before your business owner donors start putting out feelers to potential acquirers, you and your team, with the help of the community foundation, may wish to talk with the donor about the benefits of contributing an ownership interest in their business to your organization's endowment or reserve fund at the community foundation. 

Indeed, if a donor has owned a business for several years – or decades – the donor could be sitting on substantial unrealized capital gains thanks to the increasing value of the business over time. Upon a sale, capital gains tax will be triggered, reducing the proceeds the donor gets to keep. No capital gains tax will apply; however, to the sale of any portion of the business held by your organization's endowment or reserve fund at the community foundation. Because of the favorable rules governing the taxation of charitable organizations, your organization's fund is likely to net 100 cents on the dollar for the portion it owns. 

What's more, you may be surprised by some donors' desire and willingness to get creative with business succession planning that wraps a charitable component into a traditionally private business venture to preserve a public benefit. 

If you talk with a donor who owns a business and the donor likes the idea of potentially giving a portion of the business to your endowment, please reach out to the team at the community foundation. We can help you, the donor, and the donor's advisors evaluate options and ultimately prepare for the transaction, including reminding advisors to secure a proper valuation for the charitable deduction at the time a portion of the business interest is contributed to the endowment or reserve fund. 

Next, caution your donor to be careful not to start negotiating for the company's sale before they've talked with you and with their tax advisors. Otherwise, the well-meaning donor might get caught in the IRS' step-transaction trap that is a risk with any pre-sale gift to charity of real estate, closely held stock, or other alternative asset.    

Finally, keep in mind that gifting shares of a business could become an especially important strategy for more of your donors as the anticipated reduction (by half!) of the estate tax exemption scheduled for 2026 draws closer. 

Giving shares of a closely held business to your organization's endowment may initially sound complex to your donor. The team at the community foundation is here to help you, your donor, and the donor's advisors navigate the charitable components of what could turn out to be a significant boost to your organization's endowment and long-term financial stability.

This content is provided for informational purposes only. It is not intended as legal, accounting, or financial planning advice.