KEY TAKEAWAYS
A Donor Advised Fund helps S-corps donate their shares without triggering large tax liabilities or causing financial issues for their charities of choice. The DAF helps businesses and charities achieve a common goal.
Unlocking the Wealth in S-Corp Shares
With almost 5 million businesses structured as S-corps, a large number of businesses are protected financially while in operation. But what happens when the owners want to exit the business?
With the money tied up in the S-Corp shares, business owners can’t access their wealth, which leaves them in a financial bind. If you access the wealth, you trigger a serious tax liability you may not be ready to handle.
Another option is the Donor Advised Fund. The DAF is a tax-advantaged way to share your funds with charity without triggering tax liabilities.
Here’s how it works.
What is a Donor Advised Fund?
A DAF or Donor Advised Fund is a tax-advantaged way to contribute to a charity and leave behind a legacy. This is something many business owners want and is a great way to unlock the wealth in your S-Corp shares.
The funds you contribute to a DAC are immediately tax-deductible. The money is then invested for any IRS-recognized charity tax-free.
Can you Donate S-Corp Shares Directly?
Most charities can’t accept S-Corp shares directly. It’s too time-consuming and costs too much money to manage the S-Corp shares. Plus, most charities don’t have the money to cover the taxes it would incur under the Unrelated Business Income Tax. This could mean paying as much as 20 percent taxes on the income.
Donating S-Corp hares directly to a charity could cause them more financial harm than good. But there’s another option – the DAF.
How the Donor Advised Fund Helps
Instead of donating the shares directly to a charity, you can set up a DAF. The Donor Advised Fund helps not only the charity but your financial situation too.
You donate the S-Corp shares in a DAF. You receive a tax deduction for the full contribution and the charity receives the shares with a zero dollar tax basis.
The Donor Advised Fund sells the shares you gifted to it and places them in another Donor Advised Fund for the charity. The first DAF receives a deduction for 60 percent of the gift given to the second DAF. This lowers the initial tax liability from the first DAF.
The charity then has the funds in DAF #2 minus taxes and fees to use as you directed or wished with your charitable contributions.
Why Choose the Donor Advised Fund?
There are two main benefits of the Donor Advised Fund:
- You, the donor, get a tax benefit in the year you contribute to the charity
- You have access to what would otherwise be illiquid shares, typing up your funds
- You can help your charity of choice
Is this Right for Every S-Corp?
Every situation is different and we treat it as such. If you’re considering a Donor Advised Fund for your S-Corp shares, let’s talk. This is certainly one way to handle illiquid assets and keep your tax liabilities to a minimum, but there are other ways too.
The point of the DAF is to unlock the wealth of the S-Corp shares while giving to your favorite charity, whether now or upon your passing, leaving behind a legacy. The DAF is a tax-sheltered way to share the wealth from your business.