If you keep an eye on initial public offerings, it’s been an exciting few weeks, especially if your clients are involved.
For example, CNBC’s article on SpaceX millionaires and wealth management, The Wall Street Journal’s “Tech’s Next IPO Wave Promises a Charitable Windfall,” and Business Insider’s coverage of newly wealthy SpaceX employees all point to the same theme: Liquidity events can quickly turn founders, executives, early employees, and investors into high-net-worth charitable clients.
Meanwhile, a recent Wall Street Journal article highlighted the growing ranks of wealthy Americans whose fortunes were built through private business ownership and equity growth. For many business owners, a succession event may be the largest liquidity event of a lifetime.
As you work with clients involved in IPOs or thinking about business succession, be sure to look at all angles of the client’s financial and estate plan that may be impacted—including charitable giving.
For attorneys, CPAs, and financial advisors, the key is to bring up the topic of charitable planning as early as possible—ideally before shares are sold or business succession plans take shape—and before clients make irrevocable tax, investment, or estate planning decisions. Consider these four scenarios:
Scenario 1: Founder or executive with highly appreciated stock
A founder or executive approaching an IPO may be holding shares with very low basis and significant expected appreciation. Depending on timing, restrictions, and tax rules, contributing a portion of appreciated shares to a fund at The Community Foundation may help your client support charitable goals while potentially reducing exposure to capital gains tax. A donor-advised fund, field-of-interest fund, or designated fund, for example, can allow the client to create a long-term charitable strategy while maintaining flexibility after the IPO dust settles.
Learn more about fund types on our website.
Scenario 2: Employee with a sudden wealth event
As recent SpaceX coverage illustrates, IPOs can create thousands of newly wealthy employees who may never have needed sophisticated charitable planning before. These clients may be juggling concentrated stock positions, tax liabilities, estate planning needs, and family conversations about wealth. A donor-advised fund at The Community Foundation can provide a simple, organized way to set aside charitable dollars in a high-income year and then recommend grants over time as the client becomes more intentional about giving. This strategy is called “bunching.”
Download a one-pager about donor-advised funds.
Scenario 3: Investor or family seeking legacy and multigenerational community impact
Some clients who benefit from IPO activity may already have significant wealth and want to use the liquidity event to formalize a philanthropic legacy. These clients may be good candidates for multiple charitable funds, such as a donor-advised fund for flexible family grantmaking, a scholarship fund to support education, and an unrestricted or field-of-interest fund to address changing community needs over time. The Community Foundation can work alongside you and your client’s full advisory team to align tax planning, family goals, and charitable impact.
Scenario 4: Sale or transfer of a closely held business
Charitable planning deserves a seat at the table early in the process, whether a client is preparing to sell a closely held business, transfer ownership to family members, explore an employee stock ownership plan (ESOP), or simply begin thinking about life after the company. Many business owners have most of their wealth tied up in their companies. When a sale or ownership transition occurs, the resulting tax consequences can be significant. In some situations, contributing a portion of closely held business interests to charity before a transaction may allow a client to support charitable goals while reducing capital gains tax exposure. Again, timing is key. Once letters of intent are signed or a transaction becomes binding, certain charitable planning opportunities may no longer be available. Remember that charitable planning is not limited to third-party sales. Clients considering ESOPs, family transfers, recapitalizations, redemptions, or other succession strategies may also benefit from exploring charitable opportunities. That’s why advisors should raise charitable planning discussions long before the deal reaches the finish line.
The common thread across all four scenarios is timing. Once an IPO, sale, or lock-up expiration is underway, some planning options may be limited.
Advisors can turn a major financial event into meaningful support for the causes their clients care about. Start by asking this key question: “Have you thought about including charitable giving in your financial plans?” If the answer is yes, the next step is suggesting a conversation with The Community Foundation. We’ll help your clients explore their philanthropic goals through questions such as these:
- Are there causes or organizations that helped shape your business, your employees, or your family’s values?
- Would you like your children or grandchildren to be involved in charitable decisions after the transition?
- Are you interested in creating a charitable fund now that can support your philanthropy for years to come?
A word of caution about private foundations
Some clients may initially assume that a private foundation is the best vehicle for implementing their charitable goals alongside a business exit or succession plan. However, private foundations can be subject to complex rules governing self-dealing, excess business holdings, required distributions, investments, and other activities, not to mention the unfavorable tax implications compared to a donor advised fund. The difference can be significant: Gifts of closely held stock to a donor advised fund are deductible at fair market value; gifts to private foundations are limited to cost basis. For many business owners, a donor-advised fund can provide a simpler alternative to a private foundation with significantly less administrative burden and, in many cases, more favorable tax treatment.
Please reach out to our team to discuss clients’ charitable opportunities related to IPOs, appreciated stock, business interests, other complex assets—and anything else related to philanthropy. The Community Foundation is here for you! It is our honor to be your first call on matters of charitable giving.
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