Charitable Planning Before You Sell Your Practice

Advisor Perspectives welcomes guest contributions. The views presented here do not necessarily represent those of Advisor Perspectives.

With so many life-changing liquidity events on the horizon, charitably minded advisors would be well served to follow the same tax guidance they provide their clients and set up a donor advised fund (DAF) prior to the sale of their firm.

M&A activity in the wealth management space is at record levels. The latest Deal Book, published by Devoe & Company, concluded, “M&A activity is on pace to finish 2021 well above last year’s record volume of 159 transactions.” Not surprisingly, InvestmentNews recently reported that “valuations have skyrocketed at registered investment adviser firms, recently hitting never-before-seen levels.” The continued consolidation trend, along with upcoming changes to capital gains tax rates, are expected to further increase deal volumes.

Should an advisor have charitable ambitions following the sale of their business, it would make sense to donate privately held shares of the wealth management firm into a DAF prior to a sale, and thus avoid the capital gains tax on that portion of the sales proceeds.

For example, if the advisor were to sell their business for $10 million and they want $2 million go to charity, they could donate 20% of their shares to a DAF ahead of the sale, rather than making the donation with after-tax dollars once the transaction closes, which would leave less money available for philanthropy. The advisor would receive an immediate tax deduction when making the contribution and could grant the money to their favorite charities over time.