Have you experienced a liquidity event this year? Make waves with a Donor Advised Fund

What do the words “liquidity event” mean to you?

If you’re a homeowner, you might think of a flooded basement. If you’re a new parent, we’ll forgive you if you’re reminded of a wet diaper. But if you work in business or finance, chances are you define a “liquidity event” as the merger, purchase, or sale of a business—an event in which the ownership equity of investors becomes liquid, converting to cash.

At The Minneapolis Foundation, a liquidity event is often how we meet new partners. The Minneapolis Foundation administers more than 1,200 charitable funds for individuals, families, and businesses. These generous people come to us for all manner of reasons, at every stage of life. But a fair number of them come to us late in the calendar year, for two reasons: They are charitable, and they have invested in some way with a company that’s experiencing a liquidity event.

This could mean they hold stock in a publicly traded company that’s about to be sold. It could mean they’re shareholders in a company on the brink of a merger. Or they could be business owners who have spent years growing a company before deciding the time is right to sell. All of these events can present complex business challenges and opportunities—and all of them can result in an unusually large tax liability for the year in which they take place.

Philanthropy as a tax-smart strategy
The Minneapolis Foundation is experienced at providing tax-smart philanthropic support for investors and business owners in these situations. Our philanthropic advisors can help your clients make the most of a liquidity event this year by establishing a Donor Advised Fund, one of the most popular and flexible charitable giving vehicles available. For example:

  • Clients who hold appreciated publicly traded stock can gift their stock to a new or existing Donor Advised Fund, receive an immediate tax benefit, and then recommend charitable gifts to their favorite nonprofits over several years, the rest of their lives, or even across generations.
  • Clients who are about to sell a business can reap considerable tax savings by gifting part ownership of the business to a Donor Advised Fund at a community foundation such as The Minneapolis Foundation. In addition to enabling your clients to take a charitable tax deduction for the full fair market value of the gift, this can also reduce their capital gains tax liability at the ultimate sale of the business, while creating charitable resources to benefit the community.
  • Clients who have recently sold a business can take advantage of the IRS’s charitable tax deduction by using a portion of the sale’s proceeds to establish a Donor Advised Fund. The deduction can be taken immediately, offsetting a portion of the capital gains taxes that your clients will incur. (Important—the gift must be made the same year as the sale.)

A proven approach for making the most of liquidity events
The results can be significant. For example, Bob Rinek, a managing director in the merchant banking group at Piper Jaffray, used common stock that he held in Medtronic to establish a Donor Advised Fund at The Minneapolis Foundation in 2014, shortly before the company acquired Covidien in a deal that moved Medtronic’s legal headquarters to Ireland. Investors like Rinek knew that they would face a significant spike in taxes as a result of the corporate inversion. Rather than pay the full amount to the IRS, “I realized that I could use that highly appreciated stock to make charitable contributions,” Rinek said.

The amount in question was large enough that Rinek didn’t want to donate it all at once, partly because some of his charitable giving is in the form of multi-year commitments to various capital campaigns. However, he did want to reduce his tax liability as much as possible that year. He considered setting up his own private foundation, “but that would have been extremely costly and labor intensive, and it would have been a burden to administer,” he said.

The solution was a Donor Advised Fund, which enabled Rinek to receive an immediate tax benefit while retaining the flexibility to spread his charitable giving over many years. He’s already used his Donor Advised Fund to support an array of causes, from his church and his alma mater to organizations such as The Nature Conservancy and Twin Cities PBS.

“By donating his appreciated stock within the time parameters set out by the IRS, Bob was able to avoid the capital gain that he would have had upon the merger of Medtronic and Covidien, and he was also able to receive a tax deduction for the fair market value of those shares,” said his tax advisor, Virginia Harn, a principal at CliftonLarsonAllen in Minneapolis. “It was the best of both worlds.”

Harn recommended that Rinek establish his Donor Advised Fund at The Minneapolis Foundation because of the name recognition and other services the Foundation offers to fund holders like him. “The Minneapolis Foundation also provides opportunities for connectedness and a community of like-minded charitable givers here in the Twin Cities,” said Harn, who has referred clients to the Foundation for many years.

“Donor Advised Funds are a fantastic tool,” Harn added. “To set up a private foundation, you need to have lead time, but for a DAF, you can make the decision basically last-minute, at the end of the year. If you have a year with spiked income, you can match it with a gift to a Donor Advised Fund for the tax deduction, and then have the rest of your life, plus future generations, to make decisions on which charities will receive the money.”

Do you or a client have a liquidity event on the books for 2016? If so, please contact a Philanthropic Advisor today to see how we can help you make the most of it.