Charitable Planning CSI Style - Goodwill Hunting

Charitable Planning CSI Style - Goodwill Hunting

Article posted in Practice on 18 July 2017| comments


Goodwill Hunting. Or hunting for goodwill. The asset of "personal goodwill" is often overlooked during the sale of a business interest. Since goodwill is a capital asset, overlooking it can cost the seller more in taxes. Helping sellers identify and plan for the sale of their personal goodwill is a great opportunity to elevate the planning process and spot giving opportunities at the same time.

By: Randy A. Fox, Editor-in-Chief and Co-Author Dan Rice, Founder & President of Alliance Community Foundation

We continue our series on helping advisors spot gift opportunities by looking at client data with a new set of eyes – this article takes a less traditional gift planning approach to pre-business sale strategies.

Business owners represent the perfect demographic for planned giving discussions – and those that are contemplating or preparing to sell their business take it to an entirely new level. Experience has taught us that most business owners do everything possible during their ownership to minimize their income taxes. Yet, when the time comes to sell their business, they do precious little to eliminate or reduce the taxes owed on the sale – undoing all the tax minimization they’ve worked so hard on for so many years. Gone in a flash!

The “discovery” process with prospects who are strategizing to sell their business is another fundamental building block – meant for gathering information and documentation to better understand the starting point for their planning journey. For example, when we learn how a prospect intends to use the proceeds following the sale of the business, we may share the capital gains tax opportunities and benefits of a Pooled Income Fund or Charitable Remainder Unitrust.

When the prospect is a suitable candidate for these charitable trusts, it is unlikely that the entire business will be sold through one. Instead, many advisors will suggest a plan where the income tax deduction on the charitable trust will be large enough to substantially offset the taxable income generated by the portion of the business sale that is sold outside of the charitable trust. However, by hunting for and looking at the goodwill assets of the business, you may be able to convert taxable ordinary income assets into capital gains taxed assets. And in the process, helping your prospect enjoy significant tax savings on the sale of business assets – regardless if they’re not all sold through a charitable trust!

Where to Begin:

First, ask your prospect whether there are goodwill assets and whether those assets can be separated between corporate and personal. Goodwill is an accounting term representing the value of intangible assets of a personal service-related business practice (not manufacturing or processing businesses) such as customer/ subscriber lists, patient lists and medical records, business or client relationships and advertiser lists. For federal income tax purposes, goodwill must be accounted for in tax filings and may attach to either the business or to the individual.

Second, if a portion of the business sale price can be allocated to your prospect as a personal goodwill payment, ask if they will continue to work for the business after the sale or quit immediately. If leaving altogether, the amount they receive for personal goodwill, that is personally sold by him/her separately to the buyer, may be subject to favorable capital gains tax treatment and no self-employment tax. The advisor must stress to the prospect that the purchase negotiations, the form and content of the transaction documents, the non-compete agreements between the prospect and the purchaser (not between the prospect and the company he/she works for), and a qualified appraisal of the goodwill value will be critically important to document.

As the advisor, when you guide your prospect to sell their service-related business in a financial and tax-wise way, using charitable trusts and strategic personal goodwill allocations, you truly differentiate yourself from your competitors.

Third, if personal goodwill qualifies as a capital asset in the hands of your prospect who is leaving the business for good, can your prospect contribute all or a portion of that asset to a charitable trust or to his/her children as a family wealth transfer? Based upon recent Tax Court decisions and the facts and circumstances of your prospect’s situation, many attorneys point out the court’s willingness to find personal goodwill as an item of property that may be transferred – rather than simply finding that personal goodwill as future earning potential for the person who creates it and which cannot be transferred. These attorneys refer to Bross Trucking, Inc., T.C. Memo. 2014-107, and Estate of Adell, T.C. Memo. 2014-155. It is certainly an item worth exploring should your client be interested.

Give me a call at (704) 698-4055 or email me at for more information.

Add comment

Login or register to post comments


Group details



This group offers an RSS feed.
7520 Rates:  December 3.6%  November 3.6%  October 3.4%

Already a member?

Learn, Share, Gain Insight, Connect, Advance

Join Today For Free!

Join the PGDC community and…

  • Learn through thousands of pages of content, newsletters and forums
  • Share by commenting on and rating content, answering questions in the forums, and writing
  • Gain insight into other disciplines in the field
  • Connect – Interact – Grow
  • Opt-in to Include your profile in our searchable national directory. By default, your identity is protected

…Market yourself to a growing industry