How to Time a Donor-Advised Fund Before Selling a Business

The deduction is the same either way, so it doesn't matter when I give

It does matter, because the deduction is identical but the tax cost around it is not. A $500,000 gift of shares and a $500,000 gift of cash both produce a $500,000 charitable deduction. The difference is the capital gain. Shares given before the sale never put a gain on your return, while cash given afterward comes from proceeds you already paid gain on.

Here are the limits in plain words. Under IRS rules, appreciated stock held more than 1 year and given to a public charity, which includes a donor-advised fund sponsor, is deductible at fair market value up to 30% of AGI. Cash is deductible up to 60% of AGI. Any unused amount carries forward for up to 5 years.

Shares held 1 year or less are deductible only at basis, so a founder who just received new shares loses most of the benefit. Check the issue date on every certificate or ledger entry before planning the gift.

We start from the tax cost. A gift of shares doesn't earn you anything; it keeps a capital gain off your return. How much that is worth depends on how the gain would otherwise have been taxed, and Kavya's numbers below show it: $117,810 in one version, $0 in the other.

I can give the shares any time before closing

You can't, and the line is earlier than most owners think. Under the assignment-of-income doctrine, once a sale is practically certain, the IRS can treat you as having sold the shares yourself and tax the gain to you, even though the fund received the proceeds. Courts have applied this when the deal was effectively done before the gift.

Rev. Rul. 78-197 describes the safe side. If the charity is not legally bound to sell and cannot be forced to, the IRS generally respects the gift. A non-binding letter of intent is a gray zone. A signed purchase agreement is usually too late. Corient Wealth Management treats the LOI signing date as the practical deadline.

Paperwork has its own dates. Gifts of non-publicly traded stock claimed above $10,000 need a qualified appraisal. The appraisal may be dated no earlier than 60 days before the gift and must be received by the return's filing deadline. Form 8283 Section B goes with the return, along with the sponsor's written acknowledgment.

Picture an HVAC owner who gives a $300,000 block of his company shares after he has already signed the purchase agreement. His basis is near zero, so about $71,400 of tax (23.8% of $300,000) lands back on him anyway. Catching this takes ten minutes: before any shares move, write the gift date next to the LOI date and the purchase agreement date.

The gray zone of a non-binding LOI

Appraisal and Form 8283 dates

$117,810 rides on the week before the letter of intent

Kavya's numbers show how wide the gap can get. She is 46, a divorced founder and sole owner of a medical billing C corporation formed 9 years ago, with one child in high school. Her shares have a total basis of $40,000, and she holds an unsigned $4,000,000 LOI, with 70% paid at closing and 30% ($1,200,000) as an earn-out over 3 years. Her Section 1202 status is unknown.

In Version A she gives 12.5% of her shares, appraised at $500,000 with basis $5,000, to a donor-advised fund before signing. In Version B she sells 100% and gives $500,000 cash after closing. Both produce a $500,000 deduction.

Version B adds $500,000 minus $5,000, or $495,000, of gain. At 23.8% (20% plus the 3.8% net investment income tax, for illustration), that is $495,000 × 0.238 = $117,810 more federal tax, plus any state tax. In Version A the fund sells its 12.5% alongside her and receives $350,000 at closing (12.5% of $2,800,000) and up to $150,000 of earn-out (12.5% of $1,200,000).

Her closing-year gain on the shares she keeps is roughly $2,400,000, so 30% of AGI (about $720,000) covers the $500,000 deduction in 1 year. Two cautions follow. The appraisal can come in below the offer price: a 10% discount cuts the deduction to $450,000 while the fund still collects whatever the buyer pays. And the deduction is fixed at the gift date even if the earn-out later pays less.

Then the branch that flips the answer. If her shares qualify under Section 1202, the $495,000 gain would be excluded on sale anyway, and the $117,810 advantage drops to $0. Cash after closing then wins: it uses the 60% limit and avoids the appraisal and earn-out complications.

After the gift in Version A, the fund holds about $500,000, enough to grant $25,000 each year for 20 years before any growth. The site's calculator can rerun this with your own basis and rate. Investment growth inside the fund is not guaranteed, and values can fall as well as rise.

Version A and Version B

When Section 1202 changes the result

Any donor-advised fund will take my company stock

Sponsors decide what they accept, and many don't take private stock easily. Many take private C corporation stock only after their own review, some refuse earn-out rights or S corporation shares (which can create unrelated business taxable income), and none can be obligated in advance to sell to your buyer. Get the sponsor's written acceptance before you order the appraisal, or you may pay for a valuation of a gift that never happens.

When should the shares move to the fund? The order from offer to closing

The shares should move after the appraisal and before the LOI is signed, and the sequence below keeps each step inside its window. The deal attorney handles steps 4 and 5, the appraiser step 3, and the CPA steps 1 and 7.

Before Corient Wealth Management suggests the gift, it compares the capital gain avoided against appraisal cost, sponsor fees and the QSBS outcome. If the gain avoided is small, the paperwork can cost more than it saves.

Buyers' counsel often asks why a charity is on the cap table. A one-paragraph explanation from your attorney before the LOI keeps it from stalling diligence. Related reading on the site covers installment sales and charitable remainder trusts, which shift tax over time rather than remove it.

Steps 1 to 7

Who does what

• 1. CPA confirms holding period and Section 1202 status
• 2. Sponsor confirms in writing it accepts private C corporation stock and earn-out rights
• 3. Qualified appraiser values the block, no earlier than 60 days before the gift
• 4. Transfer recorded on the stock ledger, assignment signed, before the LOI
• 5. LOI names the fund as a selling shareholder with no obligation to sell
• 6. At closing and through the earn-out, the fund receives its share directly
• 7. You file Form 8283 Section B with the sponsor's acknowledgment in hand

What happens if you skip the questions and the account check?

Skipping them can cost you the whole benefit. The cousin's $71,400 from the earlier example is one version; another is an appraisal paid for a gift the sponsor then declines. The gift is also irrevocable, and the deduction only helps if you itemize, so check current limits on what a deduction is worth at the top bracket.

If you don't plan to give at least several years' worth of donations, or if your shares qualify under Section 1202, the appraisal and sponsor paperwork usually cost more than the strategy saves. Put these to your CPA, deal attorney and fund sponsor, then run the checklist against your own records.

Questions for your professionals

Checklist for your accounts

• Has the holding period passed 1 year
• Do my shares meet Section 1202
• Is the LOI binding on any point
• Will the sponsor hold earn-out rights
• What does the sponsor charge on a $500,000 account
• Who signs the stock assignment
• Checklist: share issue dates and basis by certificate
• Checklist: last 2 years of AGI
• Checklist: LOI draft and its binding clauses
• Checklist: sponsor acceptance letter
• Checklist: appraiser engagement date
• Checklist: charities you'd fund over 10 years

Planning the gift with Corient Wealth Management

Corient Wealth Management advisors can lay out both versions of the gift side by side with your CPA, using your actual basis, AGI and deal terms, before the LOI is signed. You'll get the firm's compensation in writing before you open or move any account. The request form on this page starts the conversation. Estate planning for owners and tax on a business sale are covered on their own pages.