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family business

Charitable Giving and Donor-Advised Funds

The impulse to help others in need and to share good fortune is universal. It has never been solely the province of the very wealthy; charitable giving at all income levels, whether by donating time, money, or expertise, is a part of many people’s life plan.

When it comes to giving plans that involve donating wealth, the elements of several different dimensions – demographic trends, market performance, advances in financial services, increased need, and potential changes to the tax code – are combining to create unprecedented amounts of giving. And further, the way we give is changing.

We break down the recent data and the reasons behind the changes to philanthropy.

The Need of Last Year Resonated

According to a June 2021 study by Giving USA, American charitable giving hit $471 billion in 2020, a 3.8% increase from 2019. The largest increase in percentage terms was to local giving. Vanguard Charitable reports that homeless shelters and food pantries saw a rise of 147% in donations over 2019. Being able to help and make an impact in your community – the aphorism “charity begins at home” – clearly motivated donors.

But the Trend is Likely to Continue

However, there are many other reasons that played into giving that are likely to continue as we move forward in recovery. This will likely keep charitable dollars flowing. The more than decade-long strong performance of the equity markets means that wealth has increased dramatically. Stimulus programs that helped keep the economy moving also boosted consumer balance sheets as consumers elected to pay down debt. Confidence that the economy will recover and a strong labor market is also likely to result in more giving.

At the same time, a wealthy older generation is acting on their desire to leave a legacy of positively impacting their world. The difference with Boomers is that they are responding to younger generations’ priorities. Boomers see charitable giving as a way to involve their families, share their values, and create stronger bonds.

And finally, the likelihood that tax rates will increase and tax code changes will potentially alter existing tax-advantageous strategies is making it a priority to take advantage of the tax benefits available now by compressing a timeline for giving.

There’s an Efficient Way to Give

For many financial giving strategies, setting up a trust makes sense. Trusts avoid probate and they are very customizable. And they are not just vehicles for the extremely wealthy – there are many situations in which investors at all income levels can benefit from a trust structure. However, they are complicated legal structures with expense involved. Many investors who want who do not want a trust-based giving strategy are now turning to donor-advised funds (DAFs).

DAFs allow for donations of highly appreciated stock or other assets. The donor receives an immediate tax deduction but does not have to apportion the money to different charities right away. The money can stay in the account for years, be invested according to the donor’s wishes, and then ultimately be allocated to charity.

The National Philanthropic Trust cites data from 2015 – 2019 to underscore the increased popularity of these vehicles. Contributions to DAFs totaled $38.31 billion in 2019, up 80% since 2015. And people are increasingly allocating the money in their donor-advised funds to charities they have selected. More than $25 billion in grants to charitable organizations were made from DAFs in 2019, a 93% increase over 2015.

The Bottom Line

Increased need, a strong equity market, and the likelihood of losing tax advantages are propelling charitable giving. As the older generation makes their mark, they are including family – and not just adult family- in the process.

Selling a Family Business: Preparing for a Transformational Event

Portrait of multigenerational winery owner family standing at wine cellar. Senior winemaker and young sommelier standing at background and holding in hands a glass of red wine while middle age businesswoman looking at camera and smiling. Small business.

It’s generally thought that there are several cycles that reflect where a business is in preparedness for a sale. These capture the economy, the market, and the mindset and planning of the business owners.

From an economic standpoint, the liquidity cycle is the one that matters. This cycle gauges the amount of available liquidity and the current appetite of investors to invest in companies.1 With record amounts of cash sloshing around looking for investments and interest rates continuing to be low, the liquidity cycle is currently at an advantageous point, and looks poised to remain so.2  While getting the right price is clearly a big consideration, there are a lot of other things to think through that are just as important.

From setting a realistic timeline to thinking about the implications of the sale on other family members, to planning for a life after the sale, each stage brings its own challenges. Assembling a team of advisors with specialized knowledge in every area will be critical, and since this will have a major impact on your wealth and your legacy, you’ll need a quarterback that can keep your big picture in focus all the way through.

The Timeline

Starting well before you want to complete a sale can allow for a productive series of negotiations. It gives you time to surface – and mitigate – any issues that come up, which can leave you in a stronger position. It also provides time to ensure that all shareholders and stakeholders such as creditors, vendors, and employees have time to adjust to the changes the sale may bring, which can facilitate a successful transition. Finally, a longer timeline means you can keep growing the business while you give thought to where you want to be after the sale.

Selecting Your Team

Selling a privately held business is a very specialized transaction. Depending on the size and complexity of your business and the market you compete in, you may need to hire an investment banker, business broker, or third-party business appraiser. Besides advising on the value and the sale, they should be able to help you structure the transaction. You likely already have trusted legal counsel, but unless they also have experience in purchase and sale agreements, you may want to engage an additional resource. The same is true for your tax accountant. You’ll need specific expertise on minimizing the tax consequences of monetizing a business.

Gauging the Cycles

We’ve already discussed the liquidity cycle. The other externally focused cycle to think about is the business cycle for your company’s sector. You’ll need to determine the potential for growth and whether the business is well-positioned to take advantage of opportunities as they arise, or if there are headwinds that can be mitigated.

The last cycle to think about is whether you are ready to sell. What will your life look like after the transition? If you’ve been very involved in the business, how will your new life be structured? Will you continue to play a role, or will you cut all ties? How do family stakeholders feel about the change? Even if the other cycles are at strong points – if you’re not ready to sell, it’s better to wait. It can make sense to assemble your team and proceed with information gathering even if you aren’t sure about an eventual sale. Once you have a clear idea of what the company is worth, you may be able to make a more informed decision.

Breathe

You’ve decided to sell, the cycles are lined up and the structure is right. Now what? This is where having a solid plan comes into play. Acquiring potentially life-changing wealth can be disorienting, to say the least. Imposing a period of time to create and assess various plans, get used to your new life, and have time to decompress can help you to avoid mistakes and when you are ready, you’ll have a better idea of what is really important to you. Eventually, you’ll need a good investment plan that protects your capital, provides you with what you want, and allows you to create the legacy you’d like. But initially, it’s important to maintain a flexible investment plan that can change as you explore your new life.

The Bottom Line

Selling a family business can be stressful and complicated. Assembling a strong team that works hand-in-hand with your financial advisor can smooth the road and ensure your new life plans get a good start.

  1. What to Consider When Selling the Family Business. Grimes, McGovern & Associates.
  2. 2021 Global Private Equity Outlook. S&P Global. March 2, 2021.

The information contained herein is intended to be used for educational purposes only and is not exhaustive.  Diversification and/or any strategy that may be discussed does not guarantee against investment losses but are intended to help manage risk and return.  If applicable, historical discussions and/or opinions are not predictive of future events.  The content is presented in good faith and has been drawn from sources believed to be reliable.  The content is not intended to be legal, tax or financial advice.  Please consult a legal, tax or financial professional for information specific to your individual situation. This work is powered by Seven Group under the Terms of Service and may be a derivative of the original. More information can be found here.