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Why Community Foundations Are Ideal Recipients for Business Gifts

For advisors working with high-net-worth clients, particularly those who own closely-held businesses, philanthropy is often a key component of financial and estate planning. A recent Wall Street Journal article dubbed these clients the “stealthy wealthy,” noting that for many in the top 1%, the primary source of income isn’t a Wall Street paycheck or a tech unicorn—it’s ownership of a successful, medium-sized business.

These business owners aren’t just economically powerful—they’re also charitably inclined, and studies show that over 90% of small business owners support charitable causes every year. That means there’s a significant opportunity for you as their advisor to guide them in making impactful, tax-efficient charitable gifts—especially when it comes to giving closely-held business interests.

One of the most powerful (and underutilized!) strategies is donating non-publicly traded stock to a fund at a community foundation. When structured properly, this allows business owners to find meaningful tax benefits while making a lasting philanthropic impact.

1. Skip the Private Foundation (for This Gift)

Many business owners are drawn to the idea of creating a private foundation as a legacy vehicle. But when it comes to donating closely held stock, a private foundation is typically not the best fit.

The reason? IRS rules impose stricter limits on deductions for gifts to private foundations. If your client donates closely-held stock to a private foundation, their deduction is generally limited to the cost basis of the stock—up to 20% of their adjusted gross income (AGI). That’s a major tax disadvantage.

By contrast, donating the same stock to a donor-advised fund or other fund at a community foundation typically allows the donor to deduct the fair market value of the shares—up to 30% of AGI—and also eliminate capital gains tax on appreciated value. This structure is simpler to manage and far more efficient from a tax planning perspective.

2. Timing Is Everything

One consideration when donating closely held stock is when the gift is made in relation to a pending sale.

If your client is considering selling their business, it’s essential to complete the gift before any sale agreements are in place. This means avoiding any signed letters of intent or formal negotiations that could create the impression that the sale was already underway.

Why does this matter? If the IRS views the donation and the sale as part of a single transaction (under what’s known as the step transaction doctrine), the client could be taxed on the capital gains even though the stock was technically donated. To preserve the charitable deduction and avoid a tax hit, the gift must occur while the client still owns the shares outright and before any definitive steps toward a sale have been taken.

This is where working with the community foundation early in the process becomes essential. Our team can help navigate the timing and documentation to ensure compliance and maximize the benefit to your client and their chosen causes.

3. Valuation Matters More Than Ever

Valuation has always been a key factor in charitable giving involving non-cash assets. For gifts of closely held business interests, your client will need a qualified, independent appraisal at the time the gift is made to substantiate the value for tax purposes.

Recent legal developments make valuation even more critical. The Connelly v. United States Supreme Court decision in 2024 clarified how life insurance proceeds impact a company’s valuation for estate tax purposes. Specifically, the ruling determined that life insurance payouts intended for stock redemption must be included in the company’s value without offsetting the liability, potentially resulting in a larger taxable estate.

While the Connelly case dealt with estate taxes, it highlights the broader importance of precise, well-documented valuation. For charitably inclined business owners, gifting stock to a community foundation before triggering estate tax exposure may help reduce the size of their taxable estate and avoid complications down the line.

Partnering with the Community Foundation

Whether your client is actively planning a business exit or simply exploring ways to deepen their charitable giving, a community foundation fund can be an ideal solution. The foundation handles the complexities of receiving and liquidating non-cash assets, manages the fund according to your client’s goals, and provides a platform for long-term giving—without the administrative burden of a private foundation.

Our team is here to support you and your clients every step of the way, from planning and documentation to valuation and execution. We’re happy to coordinate with legal and tax advisors to ensure a smooth process and favorable outcome.

Let us be your first call when business owners start asking, “How can I use this sale to do more good?” Most of the time, we can help. And if the community foundation isn’t the right home for your client’s gift, we’ll help you find one that is.