What Successful Muslim Business Want to do
One of the most overlooked aspects of estate planning, particularly for Muslims, is charitable planning. Yes, it is essential to ensure that whatever you own, passes on based on the Islamic rules of inheritance. However, that is not Muslims’ only goal when organizing their financial and family wealth affairs.
This charitable planning tool is primarily useful for successful business owners who want to do what is known as “business succession planning” or “exit planning .” The idea here is that business owners would like to keep the business within the family while at the same time saving and transferring taxes that may take place. They may also want to sell the business and tranfer much of the wealth for future generations in the most efficient way possible. Currently, the gift and estate tax regime ensnares only the most successful investors, professionals, and business owners. However, for them, the federal estate tax can take away millions of dollars and, worse, prevent a business owner’s goals,
The Charitable Bailout
What if I told you one of the techniques to help transfer wealth so the next generation, while potentially saving millions of dollars in taxes, is strategically giving cash to charities? No fancy charitable trusts (but definiately consider them for other reasons). I’m talking about writing checks. What is even more peculiar about this strategy is that the money the charity gets is not even a charitable contribution per se.
Allow me to introduce the “to charitable bailout.” I realize this is one of those articles that is not going to apply directly to many people reading this. Even so, it may benefit some people, maybe somebody you know (so forward this). More importantly, it may be one of several strategies that organizations, including Masajid and organizations for the benefit of the poor and other beneficial purposes, can use to obtain additional resources.
How a “Charitable Bailout” works
Step One: the business owner gifts some of his shares to a trust for the benefit of his or her children. There are reasons why you may not want to give it to the children directly: parents may be worried about divorce or lawsuits for example. Even so, the business owner is parting with a relatively small portion of the value of the business, maintaining the majority share.
Step Two: the business owner then donates shares of his privately held company (this is typically going to be a C-Corp) to charity. This is a valuable donation of shares in a successful company.
Step Three: the company (not the donor of the shares) in an informal arrangement, redeems the shares that are owned by the charity by paying cash for them.
By using this technique, a larger percentage of the company is now owned by a trust for the benefit of future generations. Gifting shares for the benefit of family members could result in significant transfer taxes (the estate tax, gift tax or generation-skipping tax).
This charitable strategy has been sanctioned by the United States Tax Court in a case called Palmer vs. Commissioner about five decades ago after the IRS challenged it. It still works.
Of course, I would not recommend ever doing this without getting tax and legal advice specific to a family or business’s particular circumstances. The point of this illustration is to show that there are a variety of ways the charity can be used to accomplish a wide range of goals. Many strategies might seem weird or novel sounding, even if they have been established for quite some time.
To discuss estate planning for Muslim families, feel free to schedule a 15-minute mini consultation over zoom.