A gift of closely held stock usually represents a minority block of the total outstanding shares. After obtaining a qualified appraisal of the shares (required if the gift’s value is about $10,000) that takes into account a discount for the minority interest, the desired gift is made. It is deductible at the appraised value and produces income tax savings at a marginal rate of, say 35 percent. For a gift valued at $50,000, the maximum income tax savings is $17,500.
As a charitable organization, the Alliance for the Arts normally does not invest in closely held corporations; we may accept the gift as long as there are not preconditions on what we will or will not do with the stock. The corporation normally does not welcome outside stockholders and is likely to offer to redeem the stock at it appraised per share valuation, and preferring to have cash to invest, we likely would sell.
Has the gift cost the sole stockholder $32,500 ($50,000 worth of stock minus $17,500 in tax savings)? Not if the corporation redeems the stock and retains it as treasury stock. The donor is still the sole stockholder. With the reduction in the number of shares outstanding, all held shares went up in value to maintain the same total ownership of equity in the firm.
The only cost to the donor is the after-tax income realized had the cash come from the company as dividends or salary, minus the tax savings from the deduction. This can net out at about one-fourth of the value of the gift to us.
A caution: There can be no prearranged contract or agreement for the Alliance to sell the stock or for the corporation to buy it if the donor wishes to avoid being taxed on the gain.
A variation of the plan is for the stock to be repurchased from the Alliance by employees or younger family members.
Impact on Ownership Percentage
Your gift of closely held stock will reduce your percentage interest in the corporation if you own less than 100 percent. If you own all of the stock, however, a gift of a portion followed by a redemption will leave you still owning 100 percent of the outstanding stock.
If you own less than 100 percent and the balance is held by family members whom you wish to benefit, the gift and redemption can be a tax-efficient method of increasing their percentage interest in the corporation.
Please contact us at (805) 449-2590 for more information.
The information in this website is not intended as legal advice. For legal advice, please consult an attorney. Figures cited in examples are for hypothetical purposes only and are subject to change. References to income tax apply to federal taxes only. Federal estate tax, state income/estate taxes or state law may impact your results.