• Stein Strategies LLC

Technical tip: Helping business owners transfer the business through a CRT stock redemption.

I’m fascinated with the CRT stock redemption as a tax and charitable giving technique for business owners. Why is the this tool so intriguing to me? First the data: there are 5.5 million family businesses in the US and 80%-90% of all North American business enterprises are family firms.[1] Family firms generate 64% of GDP and 35% of Fortune 500 companies are family-owned or controlled.[2] Generational transition is a significant concern for business owners (particularly with the transition statistics being so grim) as are the tax implications of exiting the business.

Moreover, statistically entrepreneurs are the most charitable giving demographic, with one study concluding that 53% of entrepreneurs named charitable giving as a key part of the estate plan.

Charitable giving tools for exiting and/or transitioning a family business should be on any wealth advisor and fundraiser’s radar given the charitable nature of the demographic and the significant tax implications of an exit. One tool that should be in the toolbox – the charitable remainder trust stock redemption. Here's how it could work:

Example: An entrepreneur has 60% majority in the business and her two children own the remaining 40% equally split. The children received these shares over time through annual gift tax exemptions. The business is worth $3 million with a cost basis of $0.

Entrepreneur would like to transition her shares to the children, have another source of retirement income, and is charitably inclined. Entrepreneur decides to donate her entire 60% ($1.8m) to a 6% charitable remainder unitrust, giving a $108,000 payout the first year and providing a significant charitable deduction.

Within a few months, the corporation redeems the stock with retained earnings and retires them. Because the CRT is tax exempt, the trust is fully funded at $1.8m. Now that the CRT is fully funded, the entrepreneur gets 6% of the CRT’s value annually for the rest of her life, capital gains were bypassed on the donated stock, the corporation has redeemed the stock meaning the children now have complete control, and the asset was removed from her estate. The charity gets the remainder of the CRT upon the entrepreneur’s passing. _________________________________________________________________________


This is the layman’s version of the charitable stock redemption and admittedly I’m neglecting to explore the prearranged sale and self-dealing prohibitions, the 4-tier accounting system of charitable remainder trusts, AGI limitations on charitable deductions, or the necessity of a qualified appraiser.

It’s also unlikely a business owner would contribute all of the stock to the CRT and instead would consider a combination of gifting stock to heirs, selling stock, donating stock to the CRT (using the charitable deduction to offset taxes paid), and perhaps adding a life insurance trust as a wealth replacement vehicle for heirs.

However, I do think the example demonstrates there are powerful ways for advisors and fundraisers to help their clients and donors make an impact and avoid significant tax implications through charitable giving tools.

Next time you have a client or donor across the table from you and they are considering an exit from the family business, I hope a CRT rings a bell.

[1] J.H. Astrachan and M.C. Shanker, “Family Businesses’ Contribution to the U.S. Economy: A Closer Look,” Family Business Review, September 2003 [2] Family Enterprise USA.

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