Planning ahead Featured

8:00pm EDT October 27, 2005
When a business owner or executive has a liquidity event, they may look to charitable giving as a way to disperse the funds. Not only does this generosity help the charitable beneficiary, but also rewards the donor by enabling them to make a difference in the community.

Stephen Kearns, senior vice president and regional manager of wealth and institutional management at Comerica Bank, helps executives set up charitable trusts and believes that philanthropic giving is an important component of a well-rounded businessperson.

“Our belief is that the difference between a successful person and a significant person lies with philanthropy,” he says.

Smart Business spoke with Kearns about the best strategies for executives planning a charitable trust.

Why is being philanthropic important to business owners?
For business owners, there can be many bottom-line benefits to charitable giving strategies, including enhanced reputation and standing in the community, closer relationships with community leaders and officials, greater customer loyalty and an improved sense of common purpose within the company.

When a business owner is considering a liquidity event, they essentially have two choices: taxes or charity. The philanthropic choice can be much more rewarding. With the creation of an irrevocable charitable trust, for example, one can generate a potential income stream, with the remainder going to one or more charitable organizations of their choice.

Highly appreciated assets, such as company stock, are often contributed to charitable trusts in order to eliminate potential capital gains tax that will become due when the asset is sold.

What type of investment considerations should be taken into account when planning charitable trusts?
Accepting the fiduciary responsibility for investment and management of charitable remainder trusts can be challenging for trustees. The trustee must choose an asset allocation that will simultaneously enable the assets of the trust to grow after payouts to income beneficiaries, and preserve a substantial portion of the remainder passing to charity in the future.

Such considerations can often revolve around the structure of the trust and the tax treatment that is given to it. The tax treatment given to each charitable entity, whether it’s a trust or a nonprofit organization or a support organization, is very unique, which can drive the asset management or the asset mix.

It really takes a knowledgeable firm to deliver the appropriate advice and service to structure the investment makeup when doing this type of planning.

How important is timing when planning a charitable trust?
Extremely important. Timing is very critical when planning any charitable trust. Documents establishing a charitable trust must be carefully prepared to satisfy IRS requirements, and the IRS looks very hard at these trusts, making sure that there are no prearranged sales in place prior to implementing any of these strategies.

If, for example, a business owner is selling a business or experiencing some sort of liquidity event, it is important to make sure that the planning is in place prior to any constructive receipt.

What are some of the tax implications that business owners should be aware of when planning trusts?
Income tax, estate tax and capital gains tax are all part of the planning process when considering trusts. One of the most important aspects of any wealth transfer plan is the consideration of the taxes that can result from that transfer.

The sale of a business can be the most heavily taxed transaction in the tax code. It is important to work with an organization that is knowledgeable and can help clients navigate these areas appropriately. It is important to approach the entire planning process from a tax-efficient perspective, which ultimately helps determine the best particular estate-planning vehicle for the situation.

There are many challenges involved with a trust, including proper administration, investment stewardship and tax preparation. Would you recommend that one entity provide all of these services?
I think it can make sense, yes. If you look at the history of this type of arrangement, it actually goes back centuries. For hundreds of years trust companies have performed all of these services and more.

When it comes to proper administration, investment stewardship and so forth, I think there are efficiencies that can be gained from going to one institution where everything is organized and departmentalized. Because every trust relationship is different, it is important that an institution have many specialists within the trust department, [and] that each bring expertise to the table to best collectively manage the situation.

Why is it important to instill the virtue of social capital to business owners?
Historically, studies have shown that business owners typically surpass the general population in their level of involvement in philanthropy, both in money donated and in time volunteered. It can be financially rewarding to be part of a successful business; it can be socially and personally more rewarding to be a philanthropic leader in your community and really make a difference.

Stephen Kearns is senior vice president and regional manager of wealth and institutional management at Comerica Bank. Reach Kearns at (310) 281-2428 or stephen_kearns@comerica.com. A national leader in business banking, Comerica Bank has 50 branches in key California markets. Comerica Bank is a subsidiary of Comerica Inc. (NYSE: CMA), with $54.7 billion in assets at June 30, 2005.