Armando (0:00 – 1:07)
Hello, founder. You’ve built a successful business. Now it’s time to think about that once-in-a-lifetime exit from your business.
You’ve come to the right place. Here, you will hear business exit professionals involved in the buying and selling of companies talk about what you should know before you exit. If you’ve never sold a business before, this podcast can be super helpful to you.
I’m Armando, host of the Founder’s Guidepost. Enjoy. But first, a quick disclosure.
Opinions expressed are those of individual professionals. The Founder’s Guidepost is provided by Axiom Founder’s Family Office Inc., a registered investment advisor licensed or exempt from state registration in all states in which it operates. The Scottsdale Founder’s Forum is a biannual live event for the founder considering exiting in the next five years.
More information available at ScottsdaleFoundersForum.com. If you like this information, please subscribe and share. Great.
Armando Roman here with Axiom talking today with Kimberly Kur of the Arizona Community Foundation. Kimberly, how are you?
Kim (1:08 – 1:10)
I’m doing great. Thank you so much. How are you?
Armando (1:11 – 2:11)
Doing great. Great, thanks. Kimberly, you do fantastic work at the Arizona Community Foundation and love to have a conversation with you for those people who have businesses where they’re going to have an exit.
They’re going to sell the company and suddenly have a lot of money in their bank account that was never there before. And the people who will really be interested in hearing this conversation are people who already have really big hearts. They already are very generous with their family, with their community.
They feel blessed. They feel that they are stewards with the monies that they have. And they already want to be philanthropic and charitable.
They, for the large part, don’t know what you do and they don’t know how you can help them. So I’ll give you a second if you can introduce yourself at ACF and talk in the big picture about what you do. And then let’s just have a conversation to help them understand how you can be helpful as they enter that stage where they begin to liquidate and sell that business.
Kim (2:13 – 4:14)
Fantastic. Thank you. So my name is Kimberly Kur.
I’m the Chief Development Officer at the Arizona Community Foundation. We are a 501c3 public charity. We have a community-based board and we are here to help individuals, families, and businesses carry out their charitable goals while supporting the community.
We’ve been in existence since 1978, so well over 40 years. And we’re currently made up of about 2,000 different funds that individuals, families, businesses, nonprofit organizations have created either during lifetime and or through their estate plans. Of those 2,000 funds, we are now sitting at about $1.4 billion in assets. And we are here to grant out on behalf of our donors and support our donors in whatever their charitable goals are. So we get really excited to meet with new people. We always say we meet one donor, we meet one donor.
And everything we do is customized to support what they’re interested in. So lots of different services that we can talk about to support the clients that you sort of described here. One of the things that sets us apart is that we can take all kinds of assets.
So I’ll just have a lead-in as well about the timing when a business owner is planning for exit. It’s really great to include the community foundation early in that conversation along with all their professional advisors so we can all work together to create the best result for your client.
Armando (4:16 – 4:20)
Fantastic. So earlier, meeting them sooner is better is what you’re saying, right?
Kim (4:22 – 5:02)
Yes, absolutely. We do, as you can imagine, our growth over our history has occurred in large part because of business owners who have succeeded and have liquidated and then need a tax deduction. So it works that way as well.
But to really maximize the tax benefits, it’s ideal to start early and think about making a gift of business interest to a fund before an agreement to sell is in place.
Armando (5:02 – 5:37)
So when let’s say someone’s going to sell their business on June 1st, for example, they know that’s coming. You’re saying, I think what you said is that they could transfer part of that ownership to the 501c3 organization and that will help them accomplish their goals. Can you walk through that a little bit, not getting too detailed about tax code and that kind of thing, but just how does that work?
And at the end, how does that benefit the family that’s giving part of this business away before the sale date? Absolutely.
Kim (5:39 – 7:29)
So at first I just want to share a disclaimer that while I did go to law school, I’m not practicing. We don’t give legal and tax advice. But with that said, as a 501c3 public charity, we can take gifts and a donor then receives an income tax benefit.
They’re eligible for income tax benefits when they make a donation. And because we’re able to take complex assets, certainly we have a gift acceptance policy and a gift acceptance committee of our board. And we have to go through a legitimate process to vet an organization, make sure there are no risks to us by accepting the asset.
But we obviously want to help make it work. And we’re really a willing party to accepting complex assets. And then of course, being a party to the sale of that asset.
So when donors have a business that’s appreciated in value and they make gift of a portion, it’s just like with appreciated public securities, that’s a very common gift to the community foundation. The donor then is eligible for the full fair market value deduction of the stock that’s donated the same way they are with the public securities. They can do that with closely held business interests.
And then because we’re tax exempt, there’s no capital gains tax when the gifted asset is then part of the sale of the overall business. So it helps to get the full fair market value deduction and then also not have to pay the there’s no capital gain exposure on that gifted portion.
Armando (7:29 – 8:10)
Yeah. So let’s use some numbers just a little easier for me to go along here. Let’s say they’re going to sell that company just say for $10 million.
They could give 10% ownership of the company to ACF before the sale. And then when they come out on the other end, they would get 90% of those proceeds because that part did not go to the 501c3, but they’d get 90%. They get $9 million after the sale.
And they in effect would have given 10 or given away $1 million to the organization. And they would not have paid any tax on that million dollars themselves. Correct?
Kim (8:11 – 8:29)
That is correct. And on top of not owing tax on the million dollar, the gain on that million dollar gift, the million dollar fair market value deduction will help offset the capital gains tax due on the $9 million.
Armando (8:29 – 9:00)
Yeah. On their own personal tax returns. Yeah.
Yeah. That’s pretty powerful. That’s very powerful.
And I’ve seen also, you get a lot of tools there and different strategies that you can use that are all within, of course, the IRS code and that. And I’ve heard you say many times that you like to have all of the advisors of that business owner involved. So everyone can look at it from their perspective and make sure that everyone’s on the same page, seeing the same end result for that business owner.
Right?
Kim (9:01 – 9:42)
Absolutely. That is truly the ideal situation. And it makes the most sense.
And I do find that all the professional advisors around a client, that that’s their preference as well, that they’re collaborating to bring about the best result. It’s all about setting goals and understanding what’s motivating the client and then developing a solution that meets those goals so that that goal setting up front is really important. And then you can craft the solution and have the results match the goals.
Armando (9:42 – 10:15)
Yeah. Yeah. Fantastic.
You also started talking about about special assets and unique assets. So things that maybe a family owns, maybe they’ve been in the family for a long, long time, maybe big chunks of raw land or maybe some rental property that being that you are a 501c3 organization, you can also accept those types of gifts. And the person that gives them also gets the similar or same tax benefits as well.
Kim (10:15 – 12:14)
That’s right. We’re seeing, you know, that the majority of the wealth that I’m sure you’re seeing with your clients is in either closely held business interests or real estate, and very little sitting in cash. And of course, most of our nonprofit organizations, they’re asking for cash gifts.
And it’s really, you know, it’s just it just makes so much sense to work with a community foundation. And we can talk in a moment about specifically the Donor Advice Fund as an amazing vehicle for donors to be able to support all the causes that they care about. That is the most popular type of fund that we offer.
We offer a lot of different fund types that we can also chat about. But the Donor Advice Fund is a component fund of the community foundation. And so when we’re talking about accepting these complex assets, cash also works, you know, appreciated public securities, they would go inside the Donor Advice Fund that the donor would name, you can name it after a loved one after themselves, it can be anonymous, whatever, whatever they choose to name their fund, and really that that is a public charity alternative to a private foundation.
So they can feel like the Donor Advice Fund is their foundation, they can call it the foundation, and then have all the public charity tax benefits of giving to the Donor Advice Fund. And then once it’s liquidated, then they have the ability to make grants over their lifetime, and also create a charitable legacy that can live on. And, you know, we can talk also about the all the different ways that we support our donors, especially if they’re interested in engaging children and grandchildren in the foundation.
Armando (12:16 – 12:48)
Yeah, and I want to talk about that as well. You mentioned a couple of things that you know, the Donor Advice Fund, you are a 501 c three, so the monies can get to you and they can get the tax benefit, of course. But one thing I like about what what, what can happen within your organization is, you can receive those monies and act as a as a distributor, meaning you get the money and the person who’s given those funds, of course gets the tax benefit.
But then once it’s there, it can get distributed to any number of other 501 c threes. Can you talk about that?
Kim (12:49 – 13:56)
Yes, absolutely. So a community foundation is often it’s often the best kept secret. We don’t mean for it to be a secret.
But it’s hard to describe because it’s more of an umbrella organization for the community. And we we talk about our donors giving through us rather than to us. And certainly we’re, we’re out there doing great work in the community.
When we do have discretionary dollars, we are here to partner with our community and, and help to address really important issues that we’re facing. Examples include, you know, affordable housing and education and health care. And we’re able to do a lot in those areas with discretionary dollars.
But the vast majority of our funds are restricted, you know, by our donors. And, and that is what we’re here to do. So I think you were so that’s just to kind of answer, I’m sorry, the question.
Our donors give through us not to us. So go ahead.
Armando (13:56 – 14:58)
So one thing that I hear from, you know, from, from our clients, sometimes is they might want to get their estate documents done, they might want to name a charity, right? Like, but you know, things change that charity might be run by somebody new, a new executive director comes in, and the charity no longer, the charity has strayed from its maybe original path. And so I’ve had clients had to go back to the attorney and redo those documents, because now they no longer want those monies to go to that particular organization.
And on the front end, what they could have done in this estate documents is given those monies to ACF. And then within ACF, like as you said, giving the money through ACF, if those monies are going through ACF to the charity, you know, charity organization number A, and A is no longer in favor, they could then through ACF change to organization B, and never have to go back to the attorney to update any documents.
Kim (14:58 – 18:18)
Right. That’s a really great point. Thank you for pointing that out.
Community Foundations, actually the first one started in Cleveland in 1914. And one of the main reasons for it to come about was that, for what you just described, people used to create charitable trust that would live on forever. And they would be for very specific purposes.
And sometimes those purposes would no longer exist, if it was to cure polio, or to benefit the widows of whalers, and then there’s no more whaling industry, or whatever it might be. And then the trust companies would have to go to court to try to change the purpose that it was set out by the donor. And it was, it’s a complicated thing.
And so business leaders got together and, you know, philanthropists and professional advisors in the community created the Community Foundation to be able to create funds for donors that would live on, but understand that the board of the Community Foundation would be able to exert variance power. So that’s a particular power that’s unique to the Community Foundation. But basically, it says that we can alter the purpose to make sure that the gift can be effectuated.
But it is incumbent upon us, and we absolutely are guided in every way by honoring donor intent. So the staff, if that should happen, where a donor created a fund to benefit specific named organizations, or specific causes that no longer were, you know, existed, then our staff would do the research guided by what, whatever we had to think about what was going to best effectuate the donors intent, then we bring it to the board to actually approve and exert the variance authority. So that’s a great comfort to our donors.
And it’s a couple of things, like you said about the attorney situation, but I just also wanted to share that donors can know that they can put these things in and know that if it ever ceases to exist, we can still honor their wishes. But what you described about doing the estate planning, we have sample language that helps the attorney or whoever the professional advisor is that’s working on a planned gift instrument, it could be a beneficiary designation form for life insurance, or IRA assets, or bank account assets, or whatever it is where there’s going to be a gift that comes to the foundation upon a donor’s passing, we have sample language that says it goes to the community foundation to be administered in accordance with the terms of the legacy gift agreement. So then we complete that with the donor, and they can spell out their specific wishes. And then next year, if they want to add a new organization, change percentages, you know, just give us new instructions, we can do that, and they don’t have to go update their will, trust, or beneficiary designation form.
Armando (18:19 – 19:12)
Yeah, that’ll save them some legal costs and some hassle, because you’re helping them on the front end, keeping on top of it, it sounds like, right. So I guess as an example, you mentioned, you know, affordable housing, if somebody wanted to leave a chunk of money for specifically for affordable housing, and that’s what they left a chunk of money for you to help have happen. And then let’s say that that was solved.
We no longer needed affordable housing, because the need is often met. I know that’s far fetched, but it’s possible, right. But if that did happen, then they could use those monies who could then be redirected by the by what the what, by the directives already given by the donor and by the board to be rediverted or redirected to something else that might be similar or within the mission or goals that the donor was trying to accomplish, right?
Kim (19:13 – 21:23)
Absolutely, yes. And, you know, so some donors, especially those who have been with us a long time, and they see what we’re doing, they may be more inclined to give with complete discretion, knowing that we’re going to give to the ever-changing needs of the community, you know, where they’re needed most. Some donors want to give, you know, in sort of broad interest areas like healthcare or education.
Some may want to give to something that’s a little more specific, but still, you know, a pretty broad need like affordable housing. And, you know, if they think that it’s possible that, you know, a specific area that they select might be solved someday, they can give us more direction. Well, if this is solved, then do this.
Or if they’re giving to named organizations, they might give some examples of alternatives. Or maybe they’ll share the programs at that or those organizations that they care particularly about. So to give us more of a guide for honoring their intent in the future.
And that’s what my team is here to do, to help a donor craft the legacy that is going to be the most meaningful to them. And other options for them, of course, would be to have their children and grandchildren can be successor advisors, you know, either on all or a part of their legacy. We also have a lot of donors that care about scholarships and may want to set up a scholarship fund that benefits students that go to their alma mater, or they might want set it up specifically to benefit, you know, Arizona students, it follows it’s all over the map of what people care about, but our scholarship team is here to guide the donor and develop that criteria for scholarship funds.
So there’s, we basically, like I said, at the outset, customize everything we do both for donors who are setting up funds for their lifetime giving, and also for their legacy planning.
Armando (21:23 – 22:23)
Yeah. Thinking of exiting your business? This may be your once in a lifetime opportunity to preserve your American success story.
I invite you to come to the Scottsdale Founders Forum, a biannual live event for the founder considering exiting in the next five years. More information at ScottsdaleFoundersForum.com. They use the word meaningful a few times they’re meaningful, you know, to the donor, what what’s important to them, what has meaning to them, what I will often hear from people as I’m having this conversation with them, they care about the family, they care about the community, and they really would like to have the the adult children, and maybe even the grandkids or the family members really engaged in this, in this giving back to the community. How do you help the, how do you help a couple have that conversation and help them come to a place where it really can have the most impact for them?
Kim (22:26 – 25:20)
Well, there’s initial questions. I mean, sometimes we’ll set up a meeting and the clients are just really happy to just share and be an open book and tell us everything they have in mind. And sometimes, you know, we guide the conversation with discovery questions that pull that out of them.
What’s actually motivating our donors, like I said, it is, is kind of all over the map, but many today, and this has been an evolution, and it’s quite a trend in philanthropy, they are really looking to engage that next generation and, and the grandchildren as well, you know, with families scattered, you know, many of them in other states and even countries coming together around, you know, shared values and in giving back to the community is a great way to keep the family together.
And we, we facilitate that. So, and we have examples of families who have used our resources and, and we, we bring them together, multi-generational, usually three generations for annual retreats. And it really is guided by what the, the founders, usually the grandparents are looking to achieve.
We do have donors that, you know, whose children are younger and they’re looking for resources for younger children, or they’re just asking for that, when that day will come, you know, we have all kinds of resources through our membership with the National Center for Family Philanthropy. And so it’s kind of limitless. We’ve helped many of our donors develop strategic charitable plans that we can update because it often is evolving.
They might be in a place initially, and then they start their grant making. And at some point, they might want to define certain focus areas and even maybe have kind of some guidelines for how they give. Some might want to give, you know, larger, fewer, larger grants that make more of an impact potentially to smaller grassroots organizations where, you know, one, one grant might make a bigger difference than it would to a large institution.
There’s, there’s really, I mean, it’s really just a matter of what is appealing to each donor. We facilitate site visits. We can do soft, like requests for proposals to organizations around a donor’s interest area, and then give them some summary information, and then request more significant proposals from those nonprofits.
We can also do, if it’s a really large fund, we can do an online competitive grant cycle for a foundation.
Armando (25:20 – 25:48)
So are you saying that, that if somebody wants to help a certain something, but they don’t really see that organization out there that really does that, but maybe this organization does something close, that you might be able to approach that organization and say, hey, if you were to offer this kind of a program or service, our donor has monies available to help you do that. Is that the kind of thing that can happen?
Kim (25:49 – 26:02)
That, that definitely happens. And it’s a really interesting question because certainly we wouldn’t want to be asking an organization to do something that isn’t in their wheelhouse.
Armando (26:02 – 26:04)
But within the scope and mission of the organization.
Kim (26:04 – 27:16)
Right. We would want to make sure it’s really aligned with their plans and we wouldn’t want to, you know, they may, they just have limited resources and may have a plan for the year. And we wouldn’t want to necessarily say, well, if you do this, you can get this money and then, you know, cause them to, you know, kind of twist themselves into a pretzel.
So it’s interesting because yes, absolutely. Donors have great ideas and it could just be right up an organization’s alley. Maybe it’s something that they have always wanted to do if only they had the funding for it.
So that would be our job to make sure that we would find the right fit. And often, you know, a real best practice would be to learn about what an organization’s doing and maybe ask what they might need funding for to really take their program to scale or really make more of an impact. So it is about connecting what the donor’s passions are, but understanding what the needs are and what could really work at the people that are on their round doing the work.
Armando (27:16 – 28:16)
Yeah. So I’ve been on boards before, Kimberly, where a nonprofit boards before, where, where there were grants out there where our organization would then hire somebody because then with that grant, we had the money to do it. And so we would love to have done, you know, provide that service, but there was no manpower or no, no, no, no people power, I should say, I guess.
But with that money, then there was the ability to hire somebody, pay them a salary. And then we could as an organization do that in the community. So it sounds like what you’re, part of what you’re, part of what you’re doing is as you’re understanding the, the, the donor and what is meaningful to them.
If you don’t see that particular thing in the local marketplace, you can sometimes help create it by connecting the dots and talking with the right organizations who can do that.
Kim (28:17 – 29:23)
Yes, yes, absolutely. And I love the questions so much. The, because sometimes you might imagine we see people wanting to just start a new nonprofit and, and they have an amazing idea.
So I, we’re, then we’ll say to them, well, I know we can find an organization where this will be aligned because this is a really great idea. And again, we’re just careful to, to find the right match because we really want the donor to feel like they are bringing something really important and valuable and making a difference. That’s their goal, right?
So and that they’ll feel that way if the organization is really set up to be successful and it’s very much aligned with the mission. So it’s, it’s a really fun part of what we do. And it definitely, as much as possible, we encourage collaboration and not wanting to just create another nonprofit if, if we don’t need to, right?
Armando (29:23 – 30:03)
Right. And creating a nonprofit can be very expensive, very time consuming. And it kind of makes the think of, of, you know, large wealthy families will at times create their own private foundation.
And if there’s enough money that goes into the foundation that it can make sense, but they’ll create their private, their own private family foundation as a way to get the, the children involved, the grandkids involved and, and part of to help that family cohesiveness. I used, I’m mentioning that because with your donor advised funds, you don’t have to have $20 million in that fund to really accomplish some of those same goals, if not all of them.
Kim (30:04 – 34:28)
That is so true. It’s very, very interesting question, because one of the benefits of a donor advised fund is that almost anyone can be a philanthropist, you know, and create a donor advised fund. We do have a minimum of $25,000.
So it’s not, it’s not insignificant, but it’s a $25,000 minimum to create a fund. And, and it’s a minimum of a $250 grant that has to, so it can’t be less than $250 that goes from the fund. So it is accessible to a lot of our, our community.
And, and I think that’s really important. And then we can help donors who want to be more strategic. Certainly, I think it’s important to share with you, all of these services are options for donors.
But if they know exactly what they want to give to, we have an online donor portal, they can access it, submit their grants, and do all of their giving and have all that record keeping one tax receipt can add to it anytime with appreciated assets. And it’s just a very convenient, flexible tool for giving. And then when they’re ready, if and when they’re ready, they can avail themselves of all of these different services that we’ve talked about and, and more.
But certainly, that’s, it’s just a great benefit to know that there’s a doable entry point for a lot of people. I will say this, however, when you were talking about, you know, the larger numbers, sometimes making sense for a private foundation, I agree with that. But I would say that it really doesn’t matter how many zeros there are.
I mean, we have, you know, foundations under our umbrella that are in the hundreds of 1000s. So we have multiple funds that are in the 10s of I’m sorry, and I said hundreds of millions, actually. And we have multiple in the 10s of millions in donor advised funds.
So it’s really not about how many zeros, I think it’s just really what is motivating the donor when they’re trying to decide between a private foundation or a community foundation alternative. And we have another type of foundation. In addition to the donor advised fund, there’s also the supporting organization, which is a kind of a hybrid, but it’s still a public charity under our umbrella.
So I would just say that if a donor is looking for 100% control, to the point of wanting to pay a family member to run a foundation, then that’s when a private foundation could make sense, as you said, if it’s significant enough in in assets. But otherwise, in most cases, they probably are going to be better served working with the community foundation, in large part because of the public charity tax benefits, which are, you know, a big, it’s a big deal, because we talked about those closely held business interests and real estate gifts, and again, not giving tax advice. But if those were gifted to a private foundation, they wouldn’t, they would have a basis deduction, not fair market value, my understanding, you can confirm.
And there’s also limitations on how much can be deducted, you know, against their AGI, more limitations on the private foundation. So there’s public charity tax benefits, there’s also lower administration, ongoing fees, and the community foundation, you know, services, as well as they’re not as much at risk of jeopardizing themselves, like the community foundation protects our donors. When you’re setting up a private foundation, there’s a lot more regulations and rules that you have to follow with an oversight.
So there’s different reasons for why it might make more sense to be in the public charity alternative, in addition to the 100% control.
Armando (34:29 – 35:09)
Right. And I’m glad you made that distinction, because that was that was point I was trying to get to that a private foundation has more restrictions, it’s more costly, there’s a lot more admin on the back of the family that gets that set up to run it and maintain it. Whereas they can take a lot of that, and get rid of it by choosing to work with a community foundation, and have some type of a maybe a donor advised fund or something otherwise, under your umbrella, where a lot of that admin then is done by you, instead of by them.
And they’re not having to pay somebody full time to run it for the family, and do the filings for the IRS and all that kind of thing.
Kim (35:11 – 37:43)
Yeah, very well said. We also do see, you know, sometimes private foundation is what, what a donor wants to do at the time, you know, advice, they are given and the situation they’re in, it’s what they want, for whatever reason, we often see, eventually, maybe they get to a point where they, they don’t want to run it any longer. And they are, they can convert it to a donor advised fund or supporting organization, or some other fund at the community foundation, like a scholarship fund, or field of interest fund.
They also might create it thinking that their kids are going to run it, and the kids have other ideas about what they want to so have ideas, that’s that same idea with their dad, mom and dad’s business sometimes too. Right, exactly. So we, and then, you know, these kids could still be involved in the fund at the community foundation, but just with a less pressure to run it.
So we do, we see the private foundations ending up transferring later on, which is, which is totally great. And we also do see a lot of private foundation donors that, where that makes sense for them. And then they may also create a donor advised fund and or supporting organization and or scholarship.
They, where there’s a combination, if that makes sense for a donor, they may have multiple philanthropic entities, and we’re happy to support them. We have a private foundation donor that has a donor advised fund where we facilitate their international grants, because it’s complicated, and we can do that. They may still keep their private foundation, but they have us do their scholarship program, because it’s complicated.
They may have a specific mission for their private foundation, and they want to support organizations that fall outside that mission. So maybe they’ll set up a designated fund to endow annual gifts to certain organizations now during lifetime, and know they’re taken care of, and they carried on. They might want to, this is an interesting irony as well, they might want to make some anonymous grants, which they cannot do from a private foundation, but they can set up a fund at the community foundation and make anonymous grants from that fund.
Armando (37:44 – 38:23)
Yeah, yeah, it sounds like it’d be, it’s, it’s really ideal. You know, you don’t give tax advice, of course, but they typically, business owners, of course, have someone who that is his or her role, or a team of people who that’s their role. And it sounds like it would be beneficial to that business owner to maybe have a conversation with them, and maybe with you even at the table, as they begin to think about what it’s going to look like once that sale is done.
But before it’s actually written up, and a contract is written, or a letter of intent, so that some of the planning before the sale that could be really to their, to their most meaningful advantage, can be done.
Kim (38:25 – 41:28)
I think that’s true. I think it’s usually really comforting for the donor to know that the specifics, you know, the strategic charitable planning, you know, involving the family, you know, knowing that their philanthropic interests, you know, can evolve over time. It’s a real comfort to know that that can happen later.
Because usually, as you know, from your experience, there’s so much going on when they’re trying to plan for exit, that they really are truly, truly charitable, they want to plan, we sometimes use the term from success to significance, you know, and they’re thinking about what they’re going to do after the sale, if they’re planning for retirement, and they know that they, why not maximize the tax benefits, and know that then the pot of money will be there for charitable giving later.
So I think it’s just with all that, it’s just really important to include us, because the professional advisors all need to understand, you know, our role, and, and, you know, everyone needs to come together and an agreement in terms of what the goals are for the client, you know, and then what the, you know, recommended solution is. So and then, as you sort of also alluded to, I don’t know if you want to, I know, we don’t want to get too in the weeds on the logistics, but sometimes they’ll come to us after a deal is in place, and then say, okay, we’re gonna gift you this percent interest in the company. And then that that’s going to be too late.
Unfortunately, the IRS would call that like an assignment of income, and they wouldn’t get the benefit of the gift before sale, if there’s a completely done deal. And, you know, and that’s an interesting situation, because it’s, it’s like sort of a facts and circumstances. And then, you know, if it’s not completely done deal, it’s really close, like, you know, there could be some risk involved.
But the, the ideal would be to, we’ve done it, you know, all kinds of ways, because sometimes the donor doesn’t want to gift it if, if it could still be a long time before a sale happens, right? So what if it falls through? But from the IRS standpoint, it’s better if it could fall through.
So that, you know, that it’s more likely that there won’t be any question about the tax deduction. So I guess all that is to maybe say that we’re okay, you know, we can hold it in the asset in their fund, knowing there is a plan to exit. And if it takes a couple years, or more, you know, that’s okay.
We can do that.
Armando (41:29 – 41:48)
Yeah. So for that person, or for that family, that’s philanthropic, they’re charitable, they know they’re going to do this, maybe doesn’t happen in six months, maybe that deal falls through, but there’ll be another one after that. And at some point, in a short timeframe, that deal will come through, and they can help, they can achieve their goals with your help.
Kim (41:49 – 42:30)
Yes, yes. And in the meantime, too, we, we often accept illiquid assets, ideally with some cash, especially, you know, and I’ll, you know, we would work through the details of how the gift acceptance process is. But it’s okay if, if it’s primarily illiquid assets in a fund.
But if a donor is also wanting to start to test the waters, and start grant making, you know, they can give appreciated publicly traded securities or, you know, cash as well, to start that process while we’re waiting for sale as well.
Armando (42:30 – 43:18)
Yeah, no, that’s a good point. People do like to test the waters and get a little more confidence before they, they jump in, you know, fee first. So that’s, I’m glad you brought that up, because that can be very, very important.
And I want to clarify a point you said that, that if, if, if, if, if they’re already under contract to sell the company, and then they come talk with you, maybe some of the options have already gone off the table, because it’s too late to be there ahead of the game. But not to say that you still couldn’t be involved, and still help them reach their goals and still get some charitable deductions and meet their charitable goals. Even if those options are off the table, there are some other options that still exist, that can help them reach that meaningful gifting that they’re looking for.
Kim (43:19 – 44:26)
Yes, and that happens, you can imagine that happens. If they have partners that like, you know, there’s just reasons why there isn’t going to be, it’s just not the right situation to make the gift to the Community Foundation before sale, even, even if it’s not too late, necessarily, but they just, it’s just not, not the right situation, then, then the downside is they don’t maximize the tax benefits. And, you know, they have that capital gain exposure.
But certainly, as you said, and, and as I shared earlier on, many of our donors will come after liquidity event. And they can still give, like I said, a couple of times, appreciated publicly traded securities. So there’s, you know, a capital gains benefit there.
But have that tax deduction that can offset that liquidity event in that year, or future years. And we absolutely, they can still do all the things they want to do everything we’ve talked about.
Armando (44:26 – 45:16)
Yeah. So let’s, let’s shift gears a little bit, you know, when a business owner has been doing well, created a business that worth millions, and now it’s time to sell. Part of the conversation I’m having with them is, what’s going to happen when that business is gone, you’re not going to work every day?
What’s the rest of your life going to look like from now until your time comes? So we have that conversation. Often, it’s with a couple.
And we have to, of course, look at income beyond the business and how much monthly income they want to get, you know, what’s comfortable, what’s the lifestyle, what’s gonna take to support it. There are also some charitable strategies that can help them with that, that I’d like you to touch on, where, by getting some charitable benefit as well, they can also get some monthly income after the sale of the business. Can you touch on some of those thoughts and ideas?
Kim (45:17 – 48:46)
Yes, I will. And you know, it’s really interesting that you said that, because they could do it before as well. So putting it so there’s a vehicle called the charitable remainder trust, where a donor creates a trust, you need an attorney to draft the trust agreement.
And it’s a split interest vehicle where they assign non charitable beneficiaries to get the income. So usually be, you know, a husband and wife, or they can also have children receive income, but usually, the donors are doing this as a sort of a retirement planning, like like you described, and they can get income for a set number of years up to 20 years or for life. And then a remainder goes to charity.
So this trust is an is an irrevocable trust. And it’s defined in an internal revenue code so that they actually will get an income tax charitable deduction for the present value of the remainder that will go to charity. And that’s all done up front.
So they would get a current income tax deduction for that. And then, and they can take a minimum of 5% as their income stream. And we can do calculations to help with that.
But, but they can put business interests or real estate into a charitable remainder trust. There’s all kinds of different ways of setting it up so that the income starts after sale. And it could be just a portion of it as well.
So there’s some, something to think about as an as an option for that advanced planning. But also, if it’s just not with the complex assets, then they can start the, the income stream right away. And it’s a really great opportunity.
I mean, sometimes people are told they need a charitable remainder trust, and then they come and they’re like, I don’t need income. But in this situation, if the goal is to generate, you know, a steady income stream, then then it absolutely can make sense. And if they set it up to be a term of years, then then the remainder can flow into an existing fund at the end of the term, and they can use it for their grant making.
They if it’s a if it’s for their lifetime, then it can we can work with them to craft their, their legacy wishes. Yeah, we also there’s a thing called a charitable gift annuity, which is sometimes referred to as the the poor man’s CRT. So a charitable remainder trust is the CRT.
But a charitable gift annuity is actually a simple contract with the charity, where the charity, again, you get the income tax deduction, when you make when you set it up. And based on, you know, the calculations we do for the value that the charity will receive. But then they you can have one or two annuitants get a guaranteed income stream for their lifetimes.
And that’s a great option as well, if they’re looking for the security of that that income stream.
Armando (48:46 – 49:28)
Yeah, so a lot of times what I see is business owners, the biggest asset is the company. And that company might be worth, you know, 20 million or more, who knows. And it’s, you know, 80 90% 95% of their overall net worth.
And they don’t have any kind of a pension, they’ve got they’ve got no stream of income after this business. So a vehicle like what you described, an annuity or their charitable remainder trust can actually help them establish that annuity for themselves as part of this exit of the business. And in doing that can help them get some tax benefits and accomplish some of the charitable goals all at the same time.
Kim (49:29 – 50:39)
It’s really interesting point. And thank you for sharing that. Good to keep in mind for sure.
You know, I want to mention one other thing related to the charitable remainder trust, because for those who do have those retirement plans, in light of the secure act, where the stretch IRA was was kind of taken away. So if they were counting counting on the retirement assets being left to, you know, children, grandchildren and being able to be stretched over the lifetime of their heirs, you know, that’s now limited. So one thing that I think is really going to take off, and is a great planning tool for for that situation is the testamentary charitable remainder trust using IRA assets or, or retirement assets.
It can go right into a testamentary CRT, where they can name their, their heirs that will get income for their lifetime over the life of the trust, and then remainder to charity.
Armando (50:40 – 51:29)
So the secure act, let me just talk about that for a moment, since you brought that up. In 2020, when that came out, it took away the ability where, you know, you mentioned, you know, grandparents. So let’s say the grandpa died and gave a son who’s now 50 years old, his IRA, son at age 50, could take that IRA over the duration of his life, which could be 50 more years.
But with the secure act, that law changed. And now that 50 year old would have to take that, take the all of the money out sometime over the next 10 years. Same with the testamentary charitable remainder trust, that 10 year window, you can really kind of put that aside and take the monies and allocate them over, over 20 years or more.
Kim (51:29 – 52:31)
Well, right, it could be, you know, like, it’s all up to the donor, the trustor, right? So the donor can set it up where it’s 20 years for the son, or for the son’s lifetime. So it’s a term of years up to 20, or the lifetime of the income beneficiary.
So yes, absolutely. That’s, that’s how it works. And, and as you know, the issue with limiting the stretch to 10 years, it’s not, it’s about the income taxes that is going to be owed to the son, IRA assets are always best to leave to charity if you’re trying to decide because it’s taxed to the heirs.
So when you, when you shrink that period, it’s, you know, that’s could be a hardship for the kids. And now with the CRT, again, there still would be some income taxes, but it could be stretched over their lifetime. Again, disclaimer, I’m not giving tax advice.
Armando (52:31 – 52:41)
No, that that’s why you want to have the advisors at the table to have the tax expert there, have the attorney there who does this day in day out, right, whole team approach, everybody wins.
Kim (52:42 – 52:51)
Right. So yeah, so thank you for mentioning the charitable remainder trust. It could be a lifetime thing or potentially a state planning tool.
Armando (52:52 – 53:30)
And let’s talk now, Kimberly, about the family a little bit more. Let’s say again, going back to the grandparents who built this company, now they sold it and they wanted to engage their adult children and the grandchildren in philanthropy. And some people look at it as a way to, to pass on their moral values to the next generation and beyond.
How can your team help the grandparents determine how to really do that? I mean, whether it is a quarterly meeting or an annual meeting, how that works, how that comes to be, who organizes that, how helpful or how do you help in that process when you’re talking with that set of grandparents?
Kim (53:31 – 57:59)
Yes, thank you. So as I’ve said, it depends because you can imagine the, you know, the whole gamut, right? So some, you might have grandparents that have really clear value.
They’re all philanthropic, right? Everyone we’re talking to, you know, that you really care about giving back, but you also might want to help your kids, you know, just give to what they care about, or you may want the family to come together to create a shared mission and then give within that. And that could be broad or narrow depending, or you could say, these are the things we care about.
And this is what we want our kids to, you know, care about as well, or at least support. And so we see it all. And we work with so many different families, and it’s so much fun.
So I’ll give you an example of one, we have a, a grandparents who created a foundation. They’re very, very philanthropic. They give, you know, large gifts to all kinds of organizations in Arizona and actually throughout the world.
They’re certainly committed to Arizona, but their kids live in other states, and they have grandchildren from their, they have three children actually, and all at varying stages. So one child has four children. So those are their four grandchildren.
They have a married child, and then one who’s getting married this year. So I imagine there’ll be more grandchildren to come. But we’ve just facilitated their fourth annual family retreat.
And this family, all they want is for the kids to be thinking, and evolving, and giving back. So they’ve, they’ve, they’ve said they don’t want it to go to animal welfare organizations, unless it’s like a conservation issue. Because they think, you know, lots of people give to animals, which is true.
And they said, we don’t want it to go to higher education, because, you know, that that was just one thing. And then otherwise, anything you want. So we, we developed a customized grant proposal for this family, so that the children and the grandchildren submit proposals.
They send it to us, and then we’ll do the pre-vetting to make sure they’re qualified. Because some of them, like I said, can be international, all over the country. And we’ll make sure they’re qualified public charities.
And then we have a meeting with the grandparents, to see what they think. And then they, they make a pre-decision, and then we assign at the annual retreat, which, which ones are going to get presented. So anyone who submitted a proposal, then they have to present.
And, and then, and then the grants are awarded. There’s, everyone gets an allocation in the family, different levels of, of grants that they can make, depending on their status, if they’re adult children or grandchildren. And then they get to basically decide, after they hear the presentations, they just can’t give to their own.
They have to give to somebody else’s. And, and this, that, and they have an amount, this family did decide to award at the level of what’s our endowment. So it’s not an endowed fund, but they take the guidance based on our spending policy for endowed funds.
So this one is, is about a million dollar fund. And so they have about, you know, 45,000 or it’s four and a quarter percent right now. So they have that much to grant out as a family each year.
And it’s been amazing to see these grandchildren mature and evolve. And also just to see that, I think the family’s really happy because it’s what they wanted to see. I think it will continue to evolve every year.
We tweak the process a little bit, but that’s what they’ve, they wanted. And their, their kids get into this and get excited about it and they’re giving together as a family.
Armando (58:00 – 58:27)
And it sounds like you’re very engaged. Your team is very engaged in facilitating that and bringing those meetings, maybe even like I said, presenting or vetting some of the proposals. So I can see how from the, you know, from the grandparents perspective, that’s extremely meaningful where the family is completely all in, in that philanthropic activity and you’re facilitating that happening every year.
Kim (58:28 – 1:00:00)
That’s right. That’s right. Another family, and by the way, and we’re, we’re just here to serve.
They’ll, they alternate between Thanksgiving and Christmas. So we, this year we came in, my colleague and I were in with the family the day after Thanksgiving and, and it was, it was a joy. I mean, it was, you know, a holiday for us, it’s okay.
And then we’ve come like the day after Christmas, it’s all good. It’s what we’re here for, if that’s what the family needs. And we’re actually just earlier today planning for a summer retreat for a very robust family foundation that is multi-generational and they have a junior board and we’re bringing in an expert family dynamic facilitator to help grow the junior board.
So we’re really excited about that. Another family has specific pillars and we’ve, we’ve developed a strategic plan for them. And each year their retreat, they ask us to bring in nonprofits to come present also on a weekend.
And they, the family does, does give the nonprofits a grant no matter what, but then each kid and grandkid gets an allocation to give above and for the nonprofit. But there’s our, they get to hear from the nonprofit directly and ask questions. And then we also can arrange like site visits for the family after that.
It’s really fun.
Armando (1:00:00 – 1:00:37)
It sounds really fun. I can see how that could be a big annual event for the family and how that could be very rewarding for you and your team to be part of that, to see that happen, happening. So Kimberly, anything we haven’t touched on that comes up as you’re talking with, you know, you, I’m sure you have one or two or three conversations with someone who’s brand new to you, someone who has a business, they know this big payday is coming.
They don’t know what you do. They don’t know even what questions to ask you. Anything that comes up during those conversations that, that has not come up in this conversation today?
Kim (1:00:38 – 1:03:15)
You know, it’s a really great, thank you for asking. I feel like we covered a lot. I think one, one thing that may be obvious, but we did not touch on is that, you know, often people are coming to us because they want to honor someone else who has passed on.
And so we, we do see a lot of that. And they, they might be motivated by honoring a loved one. So that, that, that does occur.
I think, you know, we talked about many of the, the different ways, because it’s not, the donor advice fund certainly is the most flexible vehicle, but there are a lot of other fund types that people can, can use. So it’s really, you know, we mentioned about the organization and record keeping some people feel like this is, this helps them, you know, again, like with the one tax receipt and, and knowing we have all the records of it. Many of our donors use us because they’re of the solicitation fatigue.
So that’s another thing to keep in mind. They, it’s a way for them to say, you know what I give through the, my fund, the community foundation and, you know, send your mail to them. They can take our business cards and hand them out.
And they, you know, they, they can, and like that can go along with doing anonymous grant making too. But also availing themselves of, you know, our just knowledge and expertise of the community. We’ve touched on certainly I think, I think we covered a lot.
There’s also, I think another thing that maybe, and we can, can share, of course, the whole list of different services, but one thing that some of our donors really enjoy is the opportunity to collaborate with other like-minded donors. So we can make those connections and that does happen. And we, we also will do educational events, you know, when it’s safe, we can do it in person, but we’ve done a lot virtually as well.
We had a four part series on the work we’ve been doing in affordable housing and on education, on social justice issues. So there’s just been, you know, all different kinds of topics that we can cover. So those are some additional thoughts.
Armando (1:03:15 – 1:03:35)
Wow. So you mentioned some other, other vehicles or tools or strategies, not to get into them very deeply, but could just mention some of those so that if someone is talking to say their attorney or their tax CPA, and they hear that, so that they can make that connection that, that, that is something that you can help them with there at ACF.
Kim (1:03:36 – 1:05:36)
Yeah. I think one of the things that is really important, you know, your clients might have heard of donor advised funds that there are other sponsors of, of them. And, you know, they’re just a great vehicle, but we’ve touched on a lot of the reasons why there’s a value add in working with the community foundation.
But I think a big part of that is that we’re not just donor advice funds, right? So a lot of our donors also want to set up a scholarship fund. And so that’s just really common to have, you know, that as well.
And we have that specialized expertise in running scholarship funds. The legacy planning, you know, those we’ve talked about is a really big differentiator as well. Another thing that comes up and I bet has come up, I know we’ve talked about is the, the, the lifetime opportunity to give IRA assets.
Once you hit 70 and a half, that’s the qualified charitable distribution. And one of the limitations is that that cannot go into a donor advice fund or a private foundation for that matter, but it can go into a different community foundation fund type. So like a scholarship fund, I mentioned the designated fund earlier, that’s a way of designating one or more specific organizations to receive grants from a fund.
So the donor is not going to change the beneficiaries. So that’s not a donor advice fund. And then a field of interest fund is where they can say, this is for affordable housing or youth at risk or animal welfare, a lot of those, you know, and it can be, if that’s not a donor advice fund.
So those are some of the other fund types that someone can contribute a qualified charitable distribution from other IRA.
Armando (1:05:39 – 1:05:46)
And people will sometimes write you into their, their, as the beneficiary of their life insurance policy as well.
Kim (1:05:47 – 1:06:19)
Yes, that’s an asset that we can, we can accept. It’s another complex asset. If they want to actually gift a policy to a fund where we’re the beneficiary and the owner, it’s one option.
We can also simply be a beneficiary of a policy or a percent beneficiary of a life insurance policy. So that’s absolutely a really great, easy way to create a charitable legacy.
Armando (1:06:20 – 1:06:46)
Okay, good. And the special assets could be a valuable art collection, could be a piece of raw real estate, could be a rental property, could be a business interest, could be all kinds of things of value that your committee would then evaluate to see if you can accept it. And, but it sounds like it’s worth at least having the conversation with you or a member of your team for them to understand if it, if it makes sense or not.
Kim (1:06:48 – 1:07:38)
Yes, that is a hundred percent correct. And, and it usually in partnership with a professional advisor to help guide, because we can share our understanding of the tax implications, but you know, we’re not here for tax advice. With that said, we have received art in the last couple of years, but, but never really before that, because as tangible personal property, you don’t get the fair market value deduction.
And so often that would be better to sell and then gift the proceeds from that. But, but we had a donor that gave, they actually gave very high basis art and it worked out for them.
Armando (1:07:40 – 1:07:56)
Well, it’s again, it just gets to the point that if they’re not sure, they should have a conversation with you and, and see where that dialogue goes. Anything else that we didn’t touch on in this conversation, Kimberly, that, that, that’s important or that should have maybe come out?
Kim (1:07:58 – 1:09:30)
You know, I guess I’ll share one other fun thing, because you know, I mentioned like how multi-generational philanthropy is certainly a trend. And we do really try to stay on that cutting edge and, you know, always evolving and sharing opportunities with donors. I think that one other exciting part of our work is our community impact loans that we do, both in the affordable housing space, as well as more broadly, so that we are, in addition to making grants to nonprofits, we also can make low interest loans to them for, you know, big things that they’re looking to do.
And it, you know, those loans get repaid and they go out again. And so a lot of donors love that leveraging opportunity. And we also do innovation prizes.
So we’ll put out, and it’s, you know, it’s a big process, lots involved. So if you’re interested, let me know, I can get you more information. But to solve big problems in the community, their public private come together, create teams to come up with big ideas.
And then there’s a prize competition for that. So, which is really fun too. And if anyone’s interested in maybe ever serving on a grant panel, or serving as a scholarship reviewer, we’re happy to take volunteers to in that way.
Armando (1:09:30 – 1:10:04)
Right. Well, thank you. I just, I guess just one more point from me, you know, full disclosure, I am on the ACF board.
I’m a big believer in what you do. I love seeing the impact that ACF has in our Arizona community. So thank you for your work and for your team’s work in helping people understand what you do, because you have such a big impact.
And it’s fun to be part of ACF and just see the, see and really reap the benefits locally of all your effort in our communities. Thank you, Kimberly, for all that. Kimberly, if people wanted to reach you and had questions for you, what’s the best way for them to get in touch with you?
Kim (1:10:05 – 1:10:46)
Thank you. And thank you so much for joining our board and for your leadership and your passion. And we’re so lucky to have you.
So my email address is probably the best way to get me, but I’ll share my phone number as well. But the email is KKUR at azfoundation.org. That’s KKUR at azfoundation.org.
And my direct dial 602-682-2030. That’s 602-682-2030.
Armando (1:10:47 – 1:11:49)
Fantastic. Well, Kimberly, thank you so much for this time. Again, I’m a big believer in what you do.
Thank you for all of that. I hope that some of those business owners out there who are thinking of selling their company now will realize and understand more about what ACF does, how you and your team can help them have some of those conversations, have some of those dialogue, some of that dialogue. And if they’re just too busy right now, maybe they’re in that sale process right now and just don’t have time to reach out to you, they should still know that even after the sale, they can still contact you.
And I’ll just add this one point. If it’s in the same calendar year, they can still get some tax offsets by having conversation and doing some things with you as a 501c3 organization in the same calendar year. But it’s got to be by December 31 if they sell the company this year, of course.
Good. All right, Kimberly, thank you so much. Really appreciate it.
And we will be talking again, I’m sure soon. Have a great afternoon.
Kim (1:11:50 – 1:11:53)
Thank you. You too. Thank you so much.
Armando (1:11:53 – 1:12:24)
Thank you. Thinking of exiting your business, you may have only one chance to get the sale right. Your family depends on it.
Come hear experts who plan and negotiate successful business exits for a living. Bring your questions, live panel discussion followed by Q&A. Join us Thursday, April 27, 2023 at the next Scottsdale Founders Forum, a biannual live event for the founder exiting in the next five years.
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