WEBVTT
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Before we get into the exit today, I want to talk about the certified MA advisors that are on Flippa.
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If you are an operator right now running a business and you're thinking about exiting, you are going to want to get a free online business valuation on the exit landing page.
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Without a doubt, it is the smartest thing you can do to start a process and get yourself organized.
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So you're going to go to the URL Flippa.com slash exit to check out more.
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And let's jump into the interview.
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Hello and welcome to the Exit presented by Flippa, the number one platform to buy and sell online businesses.
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Flippa manages over a billion in deal value annually and combines expert buy and sell side advisory with its market leading valuation tool, deal room, off-market offering, market insights, and AI-based deal-by-deal matching engine.
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Now for the Exit.
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The Exit is a 30-minute podcast featuring awesome entrepreneurs who have been there and they have done it.
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The Exit talks to operators who have bought and sold businesses of all different sizes.
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You learn how they did it, why they did it, and get exposure to the world of Exit.
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It's a world occupied by a small few, but accessible to many.
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On this episode of The Exit, I sit down with Phoenix Hafen.
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And this is a really unique episode.
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For everybody listening to this that is currently operating a business looking to exit, this is a really unique way of approaching charitable contributions.
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And a way to minimize the tax liability of exits is really the focus of what Phoenix does at Ui Charitable.
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And this is such a cool concept.
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I'd never heard about this.
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I'd never really understood how this worked.
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So you can hear me kind of learning in real time when Phoenix and I are going through how UiCharitable operates with advisors and helps kind of give advisors what they need as a back office to help their clients, like high networks and individuals going through an exit, really do the right charitable donations, going to the right charities that they're interested in as a charitable interest.
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You'll hear Phoenix talking about regularly, and having that charitable interest when you're going through the exit process, getting ready, and then doing the donation of all different types of assets.
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We talk about some really interesting ones outside of cash.
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And that's something that really bubbles to the top as the most important takeaway for me from this episode is that Phoenix makes it very crystal clear up front that cash is the least ideal thing to donate to a charity, not because you don't want to support them, but because it is the least tax efficient for the person who is donating.
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And I think there's so many really great knowledge nuggets in this episode for everybody listening.
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This isn't the normal episode that we do, but it is a very cool tactical episode that is something that is unique.
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And I haven't heard of many people talking about this.
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Maybe I haven't looked around as much as others, but this is a great strategy episode for anybody out there, if you're an advisor or an entrepreneur or anybody that's involved in MA.
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So without further ado, let's sit down here on the exit with Phoenix.
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All right.
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And he is currently the director of Advisor Solutions at UI Charitable.
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How's it going, Phoenix?
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Good.
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Thanks for having me, Steve.
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Yeah.
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Yeah, this is a really unique episode for the podcast because we've covered a lot of tactical aspects of selling a business, buying a business, preparing a business.
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And often what comes up is when we talk to advisors and bring them on the show is preparing yourself personally and your personal finances for an exit.
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And I really wanted to talk through how what you're doing can help people and how it generally helps people with charitable contributions.
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And before we get to that, let's talk about you.
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Let's talk about your background and how did you get started in this?
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Yeah, yeah, sure.
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Just briefly.
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Um, so out coming out of college, I thought I wanted to be a financial advisor.
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And so I thought I'd go out and you know get some tangential experience in the industry.
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Um, and I found this group, uh UI Charitable, who really focuses on philanthropy and helping individuals achieve the the charitable outcomes that they care about.
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Um, and it now it's been almost four years and and I've loved it.
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So I've done a few different roles here and um yeah, I found that uh it's really fulfilling work.
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So nice.
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Very nice.
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So let's dig into it a little bit.
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What are some kind of initial pieces of advice that you would give for people that are, let's say they're operating a business, they're getting ready to exit, which is a substantial amount of our listeners are operating day to day and they're listening for tips.
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So what are some things that they should think through when it comes to how to start with uh you know making a charitable contribution when they're ready?
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Yeah.
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Yeah.
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So I I would start by just um introducing us.
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So at UI Charitable, we're a philanthropic back office, and so we work with high net worth individuals and uh institutions to help them with their charitable planning.
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And we really focus on two things, and that is are our clients achieving the charitable outcomes that they care about, um, and are they structuring their giving in the most tax-sufficient way possible?
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And so sometimes people hear that and they kind of scratch their heads at that a little bit and they say, well, philanthropy is really straightforward.
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I just give cash to a charity, right?
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And we say, No, you should never do that.
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You should never give cash to charity, and not because you shouldn't be generous, and not because um not because you shouldn't be supporting charities, but because cash is the least tax-efficient asset you can be donating.
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And so, really what you want to be donating is any appreciated asset.
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So whether that's public securities, um, you know, privately held business interest, real estate, um, really any other asset other than cash.
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And so um, to unpack that a little bit, when you donate cash to charity, you're getting one tax benefit, which is um, you know, if you donate$10,000 to the Red Cross, you get$10,000 off your adjusted gross income, right?
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And that's that's your tax benefit.
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Whereas if you donate any appreciated asset, so for example, a public security, you know, if you bought uh a stock for$10, it appreciated to$15, you now have$5 worth of capital gains liability, right?
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If you donate that stock, you get a tax deduction for the full$15, and that$5 of capital gains appreciation, because it's now being received by a charity that's tax exempt, the charity doesn't have to pay that capital gains liability.
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So instead of, you know, you shouldn't sell the stock, pay the tax, then donate it, you should really donate it in kind.
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And so um, so that's kind of the central insight that uh that guides a lot of what we do.
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And so we spend a lot of time helping individuals who, you know, they might have uh a business that they've owned for 10 years, 15 years, and they have a sale coming up.
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Um, if they have a charitable interest, we'll help a lot of those donors donate, you know, 2% or 5%, however much of their business in kind before uh the sale actually happens.
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Um and so in doing that, they're just getting the maximum tax benefit possible.
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They're offsetting their, you know, they're helping to offset their income in that that year where they're having they have a big uh business exit.
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Um, and then the charity receives more dollars as well because that uh that tax benefit uh or sorry, that capital gains liability um is wiped out with the charitable donation.
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Got it.
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Very cool.
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I like the side-by-side comparison of cash versus that.
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So walk us through like a a quick example because when it comes to like the the let's say shares of a company that you're that you're donating, how does that work on like a cost basis when you're exiting?
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I guess wrapping my head around that would help when it comes to you said doing the donation before the actual exit takes place.
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How is it valued and and the the charity itself, are they are they the ones that are getting uh receiving cash from the buyer?
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Or walk me through that.
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Yeah, yeah.
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And so I should I should back up maybe a little bit and say typically when we're doing these donations, the um the business interest is actually not being given directly to a charity.
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It's actually being given to a charitable vehicle called a donor advice fund.
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And so um a donor advice fund, we're we're a DAF administrator at UI Charitable, and so that's probably 75% of what we do is administer these donor advice funds.
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And so uh essentially a donor advice fund is a charitable giving account, right?
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So you you set this vehicle up and then you put an asset into it, could be cash, could be public securities, could be um a private business, could be real estate, really any asset into the donor advice fund.
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You take an immediate charitable tax deduction, and then over time, those assets in the account can grow tax-free.
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Um you can grow your charitable dollars, and then over time you can recommend grants out to nonprofits to support the causes you care about.
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And so um, yeah, so when we're handling a business donation for a client, that's typically where where that business interest is actually going into is a donor advice fund opened on behalf of that client, right?
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And so um, yeah, so essentially how what that looks like is um, you know, we might have a client come to us who says, Hey, I've been growing this plumbing business for 20 years.
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Um, you know, I'm going to sell it.
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I want to put 5% of the business into my donor advice fund so that I can do all my charitable giving from there in the most tax-sufficient way.
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And so, you know, for some donors, that might be that they just pay their tithing to their church every year, or they um have one or two charities that they support um every year.
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And so they'll just front load, you know, five years or 10 years worth of giving into the donor advice fund in that year when they have a huge liquidity event, right?
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Where they have the most income that they're trying to offset.
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And so um, so yeah, so what a client will do is they'll say, you know, hey, I want to donate 5%.
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We'll say, okay, great.
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We all we do is we understand the gift.
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So we understand, you know, what's the entity type?
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Is it an LLC, an S-corp, C Corp, um, you know, how is it held?
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Uh once we understand that, we draft what's called a gift agreement, which is just the legal document that transfers ownership from the donor into their donor advice fund.
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And then once that's done, um their actual tax deduction is based on the appraised value when they donate it.
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And so to answer your question of, you know, how do they how do they know exactly what their tax benefit is?
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That's going to come from a qualified third-party appraiser who says, hey, this 5% of your business that you donated on this day, on this date that you donated it, it was worth X number of dollars.
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So that's your your tax benefit now that you you receive.
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Um, and then from there, that business interest goes into the donor advice fund.
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When a sale does happen, those cash proceeds come into the DAF, and and now you have the that philanthropic capital set aside where you can either invest it and grow it or you can give it out to to a charity spot.
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Got it.
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Okay.
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Yeah, and part of the reason that I asked around timing is just because when when you're going through an exit process, let's say multiple offers come in, bidding starts, the value of that company goes up.
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It could go up dramatically, it could go down.
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So that was why I was curious about the timing.
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So there's like an kind of an audit that takes place the moment that you donate it.
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And even if the company gets you know bidded up to a higher valuation when you're going through the exit, it's still in that vehicle at that valuation that happened when you did the Yeah.
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So the um the appraisal can happen anytime from 60 days before the date of the gift or up until when you file taxes uh in the year that it was donated.
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And so you kind of have that window to get it appraised.
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And so um, you know, a lot of people will actually make the donation because they know roughly what the business is worth.
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And so they'll make the donation and then get the appraisal done just for um, you know, the IRS purposes of they need that appraisal done to satisfy their requirement.
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Um, and so you know, some donors are comfortable saying, yep, I'm ready to make the gift before I know exactly what the appraised value is.
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Um, and then some donors want to have that appraisal done first before they um before they officially make the gift.
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Um but yeah, to kind of answer your question um between the you know what their tax benefit is versus what actually goes into the donor advice fund.
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Yeah, whatever the appraised value is, that's their tax benefit.
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If the business actually sells for more, then that's great.
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They have more dollars that go into their donor advice fund.
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If the business sells for less, their tax benefit is still still locked in.
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So those are just two separate events.
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You have the donation, and then you have the actual sale and the sale proceeds coming in.
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Very cool.
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Very cool.
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What is up, builders?
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A quick break from the show.
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I want to talk about valuations.
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Now, if you want a quick estimate on how much your business is worth today at this very moment, there is a free tool out there.
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So with Flippa's free valuation calculator, you just answer a few easy questions about your business and you'll literally get an immediate estimate of the value of your entire business.
00:15:14.879 --> 00:15:15.360
That's right.
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Just a couple clicks, you put in some data and some information privately on Flippa, and you get an immediate estimate.
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That is a huge free gift from Flippa.
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And if you're listening to this show, you are probably operating a business or you're looking to buy one.
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So it is a very helpful tool to learn valuations.
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You might be surprised how much you can get for your business today.
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So check it out at Flippa.com slash valuation.
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That is flippa.com slash valuation.
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And when it comes to preparing for this, this is always a topic that we like to talk about of preparing the business in general.
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You said that what most people will say, you gave the plumbing example, which is a good one of like, I want to do 5% of my business.
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What are some other things that they need to do to prepare their business to go through this type of donation?
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You mentioned like I get a percentage that I'm thinking about doing to offset some of the gains here.
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Is there another entity that they're setting up outside of that vehicle that you guys set up for themselves personally?
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How do you sort of traditionally structure this?
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Yeah, so the um the donor advise fund, we we set up that vehicle, and that's actually really quick.
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That's a very easy part of the process.
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And so the um, you know, what's important for the donor to know going into it is okay, do I have a charitable interest, right?
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Am I actually interested in in giving charitably?
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Because a donor advice fund is it's the most tax-efficient way to accomplish your giving if you have a charitable interest, right?
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If you don't have a charitable interest, this isn't uh, you know, a scheme where you make more money by by using it.
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Um, and so so that is really important for the donor is basically you have to have established, okay, yep, I have a charitable interest, you know, there are groups that I want to support, or there is there's charitable work that I want to do down the line.
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And now that I know that I've you know I've made that decision, now it's just a question of, okay, what's the most tax efficient way to do my giving?
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Right.
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So, you know, if you if you already know, okay, I'm gonna be giving$20,000,$30,000 to my church or to my favorite charity every year, um, it's going to be the most tax efficient to bundle probably five years or so worth of charitable giving up front in the year that your business sells, so that you're getting as much of a uh a charitable dection as you can in that year when you have a high income.
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And so that's those are kind of some of the planning things that you're thinking about is okay, do I have charitable interest?
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You know, how much do I think I'm willing to give away over the next five years or, you know, a similar timeline?
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Um, and then once you have that rough number in your head, then you're backing into um, you know, okay, my business is worth this amount, so I need to donate, you know, 2,000 shares or 5% or whatever it is.
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And so um, you know, and that's gonna give me roughly the dollar amount I want in my donor advice fund to achieve what I want to do philanthropically.
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Got it.
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Okay, cool.
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And when it comes to mistakes, it's my favorite topic.
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Uh, a lot of people listen to the show just about for mistakes.
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And what have you seen?
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You've been doing this for you know a little over four years.
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What mistakes have you seen people make when it comes to getting this set up?
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Maybe, maybe their interest doesn't long term their interest or doesn't last.
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What are what mistakes have you have you witnessed?
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I would say um the one that we see most often is just people don't know about the strategy or you know aren't aren't familiar enough with it to kick it off at the right time.
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So we engage most donors one to two months, usually before they're um, you know, or even even further ahead of when when that sale's happening.
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And so um, you know, some donors come to us at the last second and you know, the closing is the next day, and they say, Hey, can I put uh you know some of my business into a donor advice fund now?
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I'm realizing it's gonna save me, you know,$100,000 in taxes, or, you know, and it's it's just uh too late in the process, right?
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That that sale is already definitive, it's happening.
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And so um, so that's that's the biggest mistake we see is just um not not enough cushion where you can can be thoughtful about actually making your your charitable giving tax efficient.
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That makes sense.
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The kind of fumbling over everything with timing uh tracks.
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That's how that's how uh somebody would suggest it on a call late after diligence had been done and everybody was ready to close.
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And somebody says, like, oh, you should have done you should have done this.
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And I I can see how that would trigger like people to just run run in your direction to try and get that uh get that solved.
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I guess when we we talked about cash not being the most efficient, you gave a good example of like the the stock that went up from$10 to$15.
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What are other types of assets?
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Because a lot of people that I've talked to um refer to what is it, qualified uh business stock?
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I think something like that.
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What are some other assets that people would do in a transaction like this, other than just cash?
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Yeah, so um so we have a really flexible donor advice fund in terms of we have said, okay, what will the IRS allow you to donate?
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And let's just make sure we can accommodate for that.
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And so we've done a ton of interesting things.
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Um, you know, the most commonly what we see is public securities, you know, C corps, uh, S Corps, LLCs.
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Sometimes we do real estate direct.
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Um, a lot of the time, people who are donating real estate will actually own it in an LLC.
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So it's technically an LLC donation.
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Um so you know, those are those are the most common things that we see.
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Um, but on the more unique side, uh, for example, we had a few individuals who had a bunch of crypto mining equipment that was now um, you know, passed the new technologies come out.
00:21:53.680 --> 00:22:02.960
This old equipment was was not viable anymore for their business, um, but they got it appraised at a Valuation and they were able to donate that equipment.
00:22:03.119 --> 00:22:12.720
So they donated some um you know crypto mining server equipment into the DAF, got their charitable deduction, and then we actually sold that equipment within the DAF.
00:22:12.960 --> 00:22:17.200
The cash proceeds came in, and then they were able to do their charitable giving out of that.
00:22:17.359 --> 00:22:20.720
So crypto mining equipment is a unique one.
00:22:21.039 --> 00:22:27.039
Um we had an individual donate some some greenhouses on some rural land.
00:22:27.119 --> 00:22:28.480
So that was an interesting one.
00:22:29.440 --> 00:22:35.920
Um we've had silver bar donations uh recently.
00:22:36.160 --> 00:22:38.960
So yeah, so those are those are some interesting ones.
00:22:39.119 --> 00:22:44.640
I mean, really any asset you can get appraised, you can put into a donor advice fund.
00:22:44.799 --> 00:22:53.279
And so um, you know, on one side, it's going to be um assets that are just very obvious, they're highly appreciated, right?
00:22:53.359 --> 00:22:55.440
They have a lot of capital gains liability.
00:22:55.599 --> 00:22:58.640
And so that's kind of the strategy that's most commonly known.
00:22:58.720 --> 00:23:01.839
Like most financial advisors are familiar with that.
00:23:02.160 --> 00:23:16.640
Um, but another interesting way to use a donor advice fund is with your problem assets or with anything that is, you know, you're just looking for the best way to get some value out of it and get it off your balance sheet.
00:23:16.880 --> 00:23:26.480
So, for example, we have one uh donor who's very involved in uh the venture scene in in Silicon Valley.
00:23:26.559 --> 00:23:32.000
So he's a big venture investor, has all these different placements in all these different funds.
00:23:32.240 --> 00:23:42.960
And he came to us and said, Hey, there was a couple investments that I made in 2021, 2022, 2023 into these venture funds.
00:23:43.279 --> 00:23:48.799
And they had these really frothy valuations in 2022, and so they're valued very highly.
00:23:48.960 --> 00:23:51.279
And they haven't raised money since then.
00:23:51.440 --> 00:23:54.079
Um, but you know, they're kind of trending down.
00:23:54.240 --> 00:24:01.119
Like I, you know, I think if I wanted to sell these fund interests in a secondary sale, I would only get pennies on the dollar.
00:24:01.279 --> 00:24:06.720
But if I get them appraised, they're going to be appraised close to that 2022 valuation.
00:24:06.960 --> 00:24:23.839
And so the best way, you know, he's like, I want out of these investments, the best way for me to get value is I can either do, yeah, secondary sale where I get pennies on the dollar, or I can donate them to my donor advice fund and take a charitable tax deduction for the full fair market value.
00:24:24.079 --> 00:24:27.200
And so that was a really unique example, right?
00:24:27.359 --> 00:24:31.119
Where he came to us and said, hey, this asset is kind of an issue for me.
00:24:31.200 --> 00:24:32.640
It's difficult to sell.
00:24:32.960 --> 00:24:44.880
Um, what's going to be simpler for me and I still get good benefit out of it, is I'm going to just put it into a donor advice fund, take the charitable tax deduction, you know, much less work for me.
00:24:45.039 --> 00:24:54.400
And now, if that asset ever does um have a liquidity event, those cash proceeds will go into his donor advice fund and he can use that for his charitable giving.
00:24:54.799 --> 00:24:55.279
Got it.
00:24:55.440 --> 00:24:55.680
Okay.
00:24:55.920 --> 00:24:57.039
That was what I was going to ask.
00:24:57.119 --> 00:25:08.640
Is illiquid assets like that, where, you know, uh a startup funding round that never amounts to a large exit that just is illiquid.
00:25:08.880 --> 00:25:11.440
It seems like you would get that valuation.
00:25:11.599 --> 00:25:20.880
And then if and when you know something happened down the line, uh, you would it would just be funded, like the the charitable uh account would be funded.
00:25:21.039 --> 00:25:23.279
So that that's a really unique one.
00:25:23.440 --> 00:25:33.680
Uh I like the creativity that's involved here with uh the different types of assets um that people can uh can put into these funds.
00:25:34.079 --> 00:25:40.720
And once once they're in there, are people holding these for very, very long periods of time?
00:25:40.880 --> 00:25:41.680
Is it shorter?
00:25:41.759 --> 00:25:49.599
Like the crypto mining example was a really unique one where that sounds like it probably happened pretty quick where you were able to liquidate the the assets.
00:25:49.759 --> 00:25:51.599
But what are you seeing in terms of timeline?
00:25:51.680 --> 00:25:53.839
Do people or is it all over the place?
00:25:54.240 --> 00:25:57.839
Yeah, so it kind of depends on what the the donor wants to do.
00:25:58.079 --> 00:26:07.279
So um, you know, with some assets, they say um, you know, either they have a buyer lined up or they say, I want you to arrange a buyer as fast as possible.
00:26:07.440 --> 00:26:25.680
And so, you know, on the crypto mining equipment, it was, you know, they're they're like, you don't need to get you know maximum value out of this, just you know, get what you can, have your liquidators handle it, and um, and you know, whatever you can get for it, put that into the DAF and so that I can get it invested quickly, right?
00:26:25.839 --> 00:26:29.519
So sometimes their their timeline is short, they just want to get it sold.
00:26:29.680 --> 00:26:34.400
Um, other times people want to continue to hold what they what they donate.
00:26:34.640 --> 00:26:45.200
So um, you know, another interesting example is um when Bitcoin was ripping probably a a year and a half ago, we had several donors who um funded their accounts with Bitcoin.
00:26:45.359 --> 00:26:54.079
And so, you know, they said, I want to put um, you know, I'm gonna put X amount of Bitcoin into the account, um, but I want to hold it.
00:26:54.160 --> 00:26:57.119
I want to continue to leave it invested.
00:26:57.200 --> 00:27:01.599
Um, and there's some other DAF providers that won't um accommodate that.
00:27:01.680 --> 00:27:04.720
Um, you know, they're gonna they're gonna force you out of that position.
00:27:04.880 --> 00:27:20.640
Um, and so that that's another place where we we helped those individuals as they said, you know, I want to take the tax benefit of this now, but I do want to have the keep the upside potential in my donor advice fund and I want to leave it, leave it invested in this asset.
00:27:20.799 --> 00:27:23.119
So that's a long answer to your question.
00:27:23.359 --> 00:27:31.119
But uh but essentially it's up to the donor to you know make recommendations as to what they want to do with what's what's in their account.
00:27:31.200 --> 00:27:42.000
And so whether that's you know, they just want it invested in public securities, they want to do alternative investments, you know, whatever they want to do on the investing side to grow their charitable capital.
00:27:42.240 --> 00:27:49.200
And then whenever they want to distribute it out to nonprofits, that's also um up to them as well.
00:27:49.359 --> 00:27:51.599
There's no required annual payout.
00:27:51.759 --> 00:27:55.359
So all those dollars are charitably earmarked, right?
00:27:55.440 --> 00:28:05.359
They do eventually need to go to charitable causes, uh, but it's up to you, it's on your timeline, you know, how long you want to leave the assets invested versus when you want to distribute them out.
00:28:05.759 --> 00:28:06.319
Got it.
00:28:06.480 --> 00:28:06.960
Very cool.
00:28:07.119 --> 00:28:07.599
I like that.
00:28:07.680 --> 00:28:16.400
The Bitcoin example is a great one where let's say it goes in there, it's appraised at 100,000, and it runs up to a million.
00:28:17.279 --> 00:28:22.319
The deduction that you get is on that hundred thousand on that day.
00:28:22.640 --> 00:28:29.839
But then the remaining nine hundred thousand, that's then you then choose where that gets distributed later.
00:28:30.559 --> 00:28:41.359
Do you don't gain anything from that uh in the future though, other than just distributing it out to the charities and giving the maximum amount that you can, you don't get any further deductions, right?
00:28:41.440 --> 00:28:42.960
Because you took that one initially.
00:28:43.759 --> 00:28:44.480
Yep, correct.
00:28:44.559 --> 00:28:44.720
Yeah.
00:28:44.799 --> 00:28:53.920
So there's yeah, there's those two separate events of there's the gift and whatever the asset is valued on as of the date you gift it, you take that personal tax benefit.
00:28:54.079 --> 00:29:01.279
And then from there, you know, if the asset appreciates in value, you have more money to to give to charities.
00:29:01.440 --> 00:29:05.920
Um, and there's no there's no capital gains liability on that appreciation.
00:29:06.160 --> 00:29:14.160
Um, if the asset goes to zero, then you no longer have any money to distribute to charities, but you did already take the tax benefit.
00:29:14.319 --> 00:29:26.319
So yeah, so it's you know, it's kind of on on either side, there's just two separate events of you take your tax benefit with the donation, and then from there, wherever it goes, there's no personal tax consequences for you.
00:29:26.480 --> 00:29:34.000
It just affects um, you know, how much you have to invest and how much you have to uh distribute to nonprofits.
00:29:34.319 --> 00:29:35.279
Cool, very cool.
00:29:35.440 --> 00:29:37.200
So that takes us to the finale question.
00:29:37.359 --> 00:29:40.880
Knowing what you know now, what would you tell Phoenix 10 years ago?
00:29:41.680 --> 00:29:45.599
Well, I haven't had a big uh a big business exit yet.
00:29:45.759 --> 00:29:48.880
Um, but uh it's uh it's good to know.
00:29:48.960 --> 00:29:51.440
Now I've now I'm all familiar with this.
00:29:51.599 --> 00:29:56.160
Um and so you know I'll be informed when when that that day comes.
00:29:56.480 --> 00:29:56.880
Got it.
00:29:56.960 --> 00:29:59.759
And where can people learn more about what you're doing?
00:30:00.000 --> 00:30:04.079
Yeah, so um we have uh our site is uicharitable.org.
00:30:04.160 --> 00:30:07.599
So that's just the letters uiharitable.org.
00:30:07.759 --> 00:30:11.920
Um and so you can go to uiharitable.org forward slash learnmore.
00:30:12.160 --> 00:30:21.759
Um and yeah, I would just say we talked a lot about um you know complex asset donations, so you know, or a private business donation into a DAF.
00:30:22.160 --> 00:30:30.799
Um, but you know, at UI Charitable, we really view ourselves as are a full, you know, fully staffed philanthropic back office for individuals.
00:30:31.039 --> 00:30:36.160
And so, you know, if they're looking at, okay, do I want to set up a private foundation?
00:30:36.319 --> 00:30:38.319
Do I want to set up a donor advice fund?
00:30:38.480 --> 00:30:42.319
You know, how do I want to accomplish my philanthropy moving forward?
00:30:42.480 --> 00:30:44.960
Um, we're we're happy to be a resource there.
00:30:45.119 --> 00:30:53.119
And um, you know, we can really figure out based on what the client wants to do, okay, what's going to be actually the right vehicle for you?
00:30:53.359 --> 00:31:06.480
And um, and you know, what's gonna be the best way to accomplish that, where you keep costs low, you keep your tax efficiency up, um, and you, you know, you you affect the philanthropic change that you're you're hoping to affect.
00:31:06.799 --> 00:31:07.440
Right on.
00:31:07.599 --> 00:31:08.079
Very cool.
00:31:08.240 --> 00:31:14.960
Well, wherever you guys are listening or watching, uh, the links that uh Phoenix mentioned will be in the show notes as well.
00:31:15.119 --> 00:31:19.200
Thank you so much for coming on and sharing all your tactical advice, Phoenix.
00:31:19.440 --> 00:31:20.480
Yeah, thanks, Steve.
00:00:00.239 --> 00:00:06.160
Before we get into the exit today, I want to talk about the certified MA advisors that are on Flippa.
00:00:06.240 --> 00:00:16.640
If you are an operator right now running a business and you're thinking about exiting, you are going to want to get a free online business valuation on the exit landing page.
00:00:16.800 --> 00:00:22.559
Without a doubt, it is the smartest thing you can do to start a process and get yourself organized.
00:00:22.960 --> 00:00:27.199
So you're going to go to the URL Flippa.com slash exit to check out more.
00:00:27.280 --> 00:00:28.960
And let's jump into the interview.
00:00:29.199 --> 00:00:34.799
Hello and welcome to the Exit presented by Flippa, the number one platform to buy and sell online businesses.
00:00:34.960 --> 00:00:49.359
Flippa manages over a billion in deal value annually and combines expert buy and sell side advisory with its market leading valuation tool, deal room, off-market offering, market insights, and AI-based deal-by-deal matching engine.
00:00:49.520 --> 00:00:50.560
Now for the Exit.
00:00:50.719 --> 00:00:55.520
The Exit is a 30-minute podcast featuring awesome entrepreneurs who have been there and they have done it.
00:00:55.679 --> 00:01:00.079
The Exit talks to operators who have bought and sold businesses of all different sizes.
00:01:00.240 --> 00:01:04.400
You learn how they did it, why they did it, and get exposure to the world of Exit.
00:01:04.640 --> 00:01:08.480
It's a world occupied by a small few, but accessible to many.
00:01:08.719 --> 00:01:12.159
On this episode of The Exit, I sit down with Phoenix Hafen.
00:01:12.319 --> 00:01:14.400
And this is a really unique episode.
00:01:14.560 --> 00:01:25.359
For everybody listening to this that is currently operating a business looking to exit, this is a really unique way of approaching charitable contributions.
00:01:25.680 --> 00:01:34.640
And a way to minimize the tax liability of exits is really the focus of what Phoenix does at Ui Charitable.
00:01:34.719 --> 00:01:36.959
And this is such a cool concept.
00:01:37.120 --> 00:01:38.159
I'd never heard about this.
00:01:38.319 --> 00:01:40.319
I'd never really understood how this worked.
00:01:40.480 --> 00:02:07.280
So you can hear me kind of learning in real time when Phoenix and I are going through how UiCharitable operates with advisors and helps kind of give advisors what they need as a back office to help their clients, like high networks and individuals going through an exit, really do the right charitable donations, going to the right charities that they're interested in as a charitable interest.
00:02:07.439 --> 00:02:19.840
You'll hear Phoenix talking about regularly, and having that charitable interest when you're going through the exit process, getting ready, and then doing the donation of all different types of assets.
00:02:20.000 --> 00:02:24.240
We talk about some really interesting ones outside of cash.
00:02:24.400 --> 00:02:48.800
And that's something that really bubbles to the top as the most important takeaway for me from this episode is that Phoenix makes it very crystal clear up front that cash is the least ideal thing to donate to a charity, not because you don't want to support them, but because it is the least tax efficient for the person who is donating.
00:02:48.960 --> 00:02:54.960
And I think there's so many really great knowledge nuggets in this episode for everybody listening.
00:02:55.280 --> 00:03:04.080
This isn't the normal episode that we do, but it is a very cool tactical episode that is something that is unique.
00:03:04.400 --> 00:03:07.120
And I haven't heard of many people talking about this.
00:03:07.280 --> 00:03:18.560
Maybe I haven't looked around as much as others, but this is a great strategy episode for anybody out there, if you're an advisor or an entrepreneur or anybody that's involved in MA.
00:03:18.639 --> 00:03:22.960
So without further ado, let's sit down here on the exit with Phoenix.
00:03:36.400 --> 00:03:37.039
All right.
00:03:40.159 --> 00:03:46.240
And he is currently the director of Advisor Solutions at UI Charitable.
00:03:46.319 --> 00:03:47.759
How's it going, Phoenix?
00:03:48.159 --> 00:03:48.479
Good.
00:03:48.560 --> 00:03:49.759
Thanks for having me, Steve.
00:03:50.000 --> 00:03:50.400
Yeah.
00:03:50.639 --> 00:04:02.400
Yeah, this is a really unique episode for the podcast because we've covered a lot of tactical aspects of selling a business, buying a business, preparing a business.
00:04:02.560 --> 00:04:12.479
And often what comes up is when we talk to advisors and bring them on the show is preparing yourself personally and your personal finances for an exit.
00:04:12.560 --> 00:04:22.879
And I really wanted to talk through how what you're doing can help people and how it generally helps people with charitable contributions.
00:04:23.199 --> 00:04:25.519
And before we get to that, let's talk about you.
00:04:25.680 --> 00:04:29.120
Let's talk about your background and how did you get started in this?
00:04:29.600 --> 00:04:30.480
Yeah, yeah, sure.
00:04:30.560 --> 00:04:31.680
Just briefly.
00:04:31.839 --> 00:04:35.920
Um, so out coming out of college, I thought I wanted to be a financial advisor.
00:04:36.000 --> 00:04:41.120
And so I thought I'd go out and you know get some tangential experience in the industry.
00:04:41.439 --> 00:04:52.480
Um, and I found this group, uh UI Charitable, who really focuses on philanthropy and helping individuals achieve the the charitable outcomes that they care about.
00:04:52.720 --> 00:04:56.720
Um, and it now it's been almost four years and and I've loved it.
00:04:56.959 --> 00:05:04.560
So I've done a few different roles here and um yeah, I found that uh it's really fulfilling work.
00:05:04.720 --> 00:05:05.839
So nice.
00:05:06.079 --> 00:05:06.879
Very nice.
00:05:07.120 --> 00:05:09.120
So let's dig into it a little bit.
00:05:09.439 --> 00:05:26.319
What are some kind of initial pieces of advice that you would give for people that are, let's say they're operating a business, they're getting ready to exit, which is a substantial amount of our listeners are operating day to day and they're listening for tips.
00:05:26.560 --> 00:05:37.120
So what are some things that they should think through when it comes to how to start with uh you know making a charitable contribution when they're ready?
00:05:37.439 --> 00:05:37.759
Yeah.
00:05:38.000 --> 00:05:38.240
Yeah.
00:05:38.399 --> 00:05:41.199
So I I would start by just um introducing us.
00:05:41.279 --> 00:05:52.160
So at UI Charitable, we're a philanthropic back office, and so we work with high net worth individuals and uh institutions to help them with their charitable planning.
00:05:52.319 --> 00:06:04.879
And we really focus on two things, and that is are our clients achieving the charitable outcomes that they care about, um, and are they structuring their giving in the most tax-sufficient way possible?
00:06:05.279 --> 00:06:11.360
And so sometimes people hear that and they kind of scratch their heads at that a little bit and they say, well, philanthropy is really straightforward.
00:06:11.519 --> 00:06:14.079
I just give cash to a charity, right?
00:06:14.319 --> 00:06:16.560
And we say, No, you should never do that.
00:06:16.720 --> 00:06:30.800
You should never give cash to charity, and not because you shouldn't be generous, and not because um not because you shouldn't be supporting charities, but because cash is the least tax-efficient asset you can be donating.
00:06:31.040 --> 00:06:36.000
And so, really what you want to be donating is any appreciated asset.
00:06:36.079 --> 00:06:45.360
So whether that's public securities, um, you know, privately held business interest, real estate, um, really any other asset other than cash.
00:06:45.519 --> 00:07:00.720
And so um, to unpack that a little bit, when you donate cash to charity, you're getting one tax benefit, which is um, you know, if you donate$10,000 to the Red Cross, you get$10,000 off your adjusted gross income, right?
00:07:00.800 --> 00:07:02.879
And that's that's your tax benefit.
00:07:03.199 --> 00:07:19.279
Whereas if you donate any appreciated asset, so for example, a public security, you know, if you bought uh a stock for$10, it appreciated to$15, you now have$5 worth of capital gains liability, right?
00:07:19.759 --> 00:07:36.639
If you donate that stock, you get a tax deduction for the full$15, and that$5 of capital gains appreciation, because it's now being received by a charity that's tax exempt, the charity doesn't have to pay that capital gains liability.
00:07:36.879 --> 00:07:43.519
So instead of, you know, you shouldn't sell the stock, pay the tax, then donate it, you should really donate it in kind.
00:07:44.000 --> 00:07:50.480
And so um, so that's kind of the central insight that uh that guides a lot of what we do.
00:07:50.639 --> 00:08:01.759
And so we spend a lot of time helping individuals who, you know, they might have uh a business that they've owned for 10 years, 15 years, and they have a sale coming up.
00:08:01.920 --> 00:08:14.480
Um, if they have a charitable interest, we'll help a lot of those donors donate, you know, 2% or 5%, however much of their business in kind before uh the sale actually happens.
00:08:14.639 --> 00:08:19.040
Um and so in doing that, they're just getting the maximum tax benefit possible.
00:08:19.199 --> 00:08:27.040
They're offsetting their, you know, they're helping to offset their income in that that year where they're having they have a big uh business exit.
00:08:27.279 --> 00:08:40.159
Um, and then the charity receives more dollars as well because that uh that tax benefit uh or sorry, that capital gains liability um is wiped out with the charitable donation.
00:08:40.559 --> 00:08:41.200
Got it.
00:08:41.360 --> 00:08:41.919
Very cool.
00:08:42.080 --> 00:08:44.720
I like the side-by-side comparison of cash versus that.
00:08:44.879 --> 00:09:00.559
So walk us through like a a quick example because when it comes to like the the let's say shares of a company that you're that you're donating, how does that work on like a cost basis when you're exiting?
00:09:00.799 --> 00:09:08.799
I guess wrapping my head around that would help when it comes to you said doing the donation before the actual exit takes place.
00:09:09.759 --> 00:09:20.320
How is it valued and and the the charity itself, are they are they the ones that are getting uh receiving cash from the buyer?
00:09:20.480 --> 00:09:22.240
Or walk me through that.
00:09:22.639 --> 00:09:23.600
Yeah, yeah.
00:09:23.759 --> 00:09:36.320
And so I should I should back up maybe a little bit and say typically when we're doing these donations, the um the business interest is actually not being given directly to a charity.
00:09:36.480 --> 00:09:40.799
It's actually being given to a charitable vehicle called a donor advice fund.
00:09:41.279 --> 00:09:51.759
And so um a donor advice fund, we're we're a DAF administrator at UI Charitable, and so that's probably 75% of what we do is administer these donor advice funds.
00:09:51.919 --> 00:09:56.000
And so uh essentially a donor advice fund is a charitable giving account, right?
00:09:56.159 --> 00:10:08.720
So you you set this vehicle up and then you put an asset into it, could be cash, could be public securities, could be um a private business, could be real estate, really any asset into the donor advice fund.
00:10:08.960 --> 00:10:15.759
You take an immediate charitable tax deduction, and then over time, those assets in the account can grow tax-free.
00:10:15.840 --> 00:10:24.559
Um you can grow your charitable dollars, and then over time you can recommend grants out to nonprofits to support the causes you care about.
00:10:24.799 --> 00:10:39.360
And so um, yeah, so when we're handling a business donation for a client, that's typically where where that business interest is actually going into is a donor advice fund opened on behalf of that client, right?
00:10:40.320 --> 00:10:51.919
And so um, yeah, so essentially how what that looks like is um, you know, we might have a client come to us who says, Hey, I've been growing this plumbing business for 20 years.
00:10:52.080 --> 00:10:54.000
Um, you know, I'm going to sell it.
00:10:54.240 --> 00:11:03.600
I want to put 5% of the business into my donor advice fund so that I can do all my charitable giving from there in the most tax-sufficient way.
00:11:03.759 --> 00:11:14.559
And so, you know, for some donors, that might be that they just pay their tithing to their church every year, or they um have one or two charities that they support um every year.
00:11:14.799 --> 00:11:25.360
And so they'll just front load, you know, five years or 10 years worth of giving into the donor advice fund in that year when they have a huge liquidity event, right?
00:11:25.440 --> 00:11:28.639
Where they have the most income that they're trying to offset.
00:11:29.679 --> 00:11:34.879
And so um, so yeah, so what a client will do is they'll say, you know, hey, I want to donate 5%.
00:11:35.360 --> 00:11:36.720
We'll say, okay, great.
00:11:36.960 --> 00:11:39.600
We all we do is we understand the gift.
00:11:39.679 --> 00:11:42.080
So we understand, you know, what's the entity type?
00:11:42.240 --> 00:11:47.039
Is it an LLC, an S-corp, C Corp, um, you know, how is it held?
00:11:47.600 --> 00:11:58.159
Uh once we understand that, we draft what's called a gift agreement, which is just the legal document that transfers ownership from the donor into their donor advice fund.
00:11:58.639 --> 00:12:08.000
And then once that's done, um their actual tax deduction is based on the appraised value when they donate it.
00:12:08.159 --> 00:12:13.039
And so to answer your question of, you know, how do they how do they know exactly what their tax benefit is?
00:12:13.200 --> 00:12:25.440
That's going to come from a qualified third-party appraiser who says, hey, this 5% of your business that you donated on this day, on this date that you donated it, it was worth X number of dollars.
00:12:25.600 --> 00:12:29.440
So that's your your tax benefit now that you you receive.
00:12:30.000 --> 00:12:33.840
Um, and then from there, that business interest goes into the donor advice fund.
00:12:34.159 --> 00:12:47.840
When a sale does happen, those cash proceeds come into the DAF, and and now you have the that philanthropic capital set aside where you can either invest it and grow it or you can give it out to to a charity spot.
00:12:48.559 --> 00:12:48.960
Got it.
00:12:49.039 --> 00:12:49.279
Okay.
00:12:49.440 --> 00:13:03.360
Yeah, and part of the reason that I asked around timing is just because when when you're going through an exit process, let's say multiple offers come in, bidding starts, the value of that company goes up.
00:13:03.519 --> 00:13:05.679
It could go up dramatically, it could go down.
00:13:05.840 --> 00:13:08.240
So that was why I was curious about the timing.
00:13:08.480 --> 00:13:13.679
So there's like an kind of an audit that takes place the moment that you donate it.
00:13:13.919 --> 00:13:25.840
And even if the company gets you know bidded up to a higher valuation when you're going through the exit, it's still in that vehicle at that valuation that happened when you did the Yeah.
00:13:26.000 --> 00:13:36.399
So the um the appraisal can happen anytime from 60 days before the date of the gift or up until when you file taxes uh in the year that it was donated.
00:13:36.559 --> 00:13:39.440
And so you kind of have that window to get it appraised.
00:13:39.600 --> 00:13:46.000
And so um, you know, a lot of people will actually make the donation because they know roughly what the business is worth.
00:13:46.159 --> 00:13:56.480
And so they'll make the donation and then get the appraisal done just for um, you know, the IRS purposes of they need that appraisal done to satisfy their requirement.
00:13:56.799 --> 00:14:04.639
Um, and so you know, some donors are comfortable saying, yep, I'm ready to make the gift before I know exactly what the appraised value is.
00:14:04.799 --> 00:14:12.399
Um, and then some donors want to have that appraisal done first before they um before they officially make the gift.
00:14:13.120 --> 00:14:24.320
Um but yeah, to kind of answer your question um between the you know what their tax benefit is versus what actually goes into the donor advice fund.
00:14:24.639 --> 00:14:28.080
Yeah, whatever the appraised value is, that's their tax benefit.
00:14:28.480 --> 00:14:32.720
If the business actually sells for more, then that's great.
00:14:32.799 --> 00:14:35.600
They have more dollars that go into their donor advice fund.
00:14:35.840 --> 00:14:40.480
If the business sells for less, their tax benefit is still still locked in.
00:14:40.639 --> 00:14:42.240
So those are just two separate events.
00:14:42.320 --> 00:14:47.360
You have the donation, and then you have the actual sale and the sale proceeds coming in.
00:14:47.679 --> 00:14:48.399
Very cool.
00:14:48.639 --> 00:14:49.759
Very cool.
00:14:50.639 --> 00:14:52.080
What is up, builders?
00:14:52.240 --> 00:14:53.600
A quick break from the show.
00:14:53.759 --> 00:14:55.600
I want to talk about valuations.
00:14:55.759 --> 00:15:03.600
Now, if you want a quick estimate on how much your business is worth today at this very moment, there is a free tool out there.
00:15:03.759 --> 00:15:14.720
So with Flippa's free valuation calculator, you just answer a few easy questions about your business and you'll literally get an immediate estimate of the value of your entire business.
00:15:14.879 --> 00:15:15.360
That's right.
00:15:15.600 --> 00:15:23.279
Just a couple clicks, you put in some data and some information privately on Flippa, and you get an immediate estimate.
00:15:23.440 --> 00:15:26.720
That is a huge free gift from Flippa.
00:15:26.960 --> 00:15:32.639
And if you're listening to this show, you are probably operating a business or you're looking to buy one.
00:15:32.799 --> 00:15:36.240
So it is a very helpful tool to learn valuations.
00:15:36.480 --> 00:15:40.320
You might be surprised how much you can get for your business today.
00:15:40.480 --> 00:15:43.759
So check it out at Flippa.com slash valuation.
00:15:43.840 --> 00:15:47.440
That is flippa.com slash valuation.
00:15:51.200 --> 00:15:57.840
And when it comes to preparing for this, this is always a topic that we like to talk about of preparing the business in general.
00:15:58.159 --> 00:16:05.919
You said that what most people will say, you gave the plumbing example, which is a good one of like, I want to do 5% of my business.
00:16:06.080 --> 00:16:13.440
What are some other things that they need to do to prepare their business to go through this type of donation?
00:16:13.759 --> 00:16:19.600
You mentioned like I get a percentage that I'm thinking about doing to offset some of the gains here.
00:16:19.840 --> 00:16:26.559
Is there another entity that they're setting up outside of that vehicle that you guys set up for themselves personally?
00:16:26.720 --> 00:16:29.679
How do you sort of traditionally structure this?
00:16:30.080 --> 00:16:36.480
Yeah, so the um the donor advise fund, we we set up that vehicle, and that's actually really quick.
00:16:36.639 --> 00:16:39.919
That's a very easy part of the process.
00:16:40.240 --> 00:16:48.320
And so the um, you know, what's important for the donor to know going into it is okay, do I have a charitable interest, right?
00:16:49.279 --> 00:16:52.399
Am I actually interested in in giving charitably?
00:16:52.559 --> 00:17:01.279
Because a donor advice fund is it's the most tax-efficient way to accomplish your giving if you have a charitable interest, right?
00:17:01.519 --> 00:17:07.599
If you don't have a charitable interest, this isn't uh, you know, a scheme where you make more money by by using it.
00:17:07.759 --> 00:17:20.240
Um, and so so that is really important for the donor is basically you have to have established, okay, yep, I have a charitable interest, you know, there are groups that I want to support, or there is there's charitable work that I want to do down the line.
00:17:20.480 --> 00:17:28.559
And now that I know that I've you know I've made that decision, now it's just a question of, okay, what's the most tax efficient way to do my giving?
00:17:28.720 --> 00:17:28.960
Right.
00:17:29.200 --> 00:17:56.799
So, you know, if you if you already know, okay, I'm gonna be giving$20,000,$30,000 to my church or to my favorite charity every year, um, it's going to be the most tax efficient to bundle probably five years or so worth of charitable giving up front in the year that your business sells, so that you're getting as much of a uh a charitable dection as you can in that year when you have a high income.
00:17:57.039 --> 00:18:02.799
And so that's those are kind of some of the planning things that you're thinking about is okay, do I have charitable interest?
00:18:03.039 --> 00:18:09.519
You know, how much do I think I'm willing to give away over the next five years or, you know, a similar timeline?
00:18:09.680 --> 00:18:23.119
Um, and then once you have that rough number in your head, then you're backing into um, you know, okay, my business is worth this amount, so I need to donate, you know, 2,000 shares or 5% or whatever it is.
00:18:23.279 --> 00:18:32.240
And so um, you know, and that's gonna give me roughly the dollar amount I want in my donor advice fund to achieve what I want to do philanthropically.
00:18:32.559 --> 00:18:32.960
Got it.
00:18:33.119 --> 00:18:33.759
Okay, cool.
00:18:34.000 --> 00:18:38.079
And when it comes to mistakes, it's my favorite topic.
00:18:38.160 --> 00:18:41.200
Uh, a lot of people listen to the show just about for mistakes.
00:18:42.079 --> 00:18:43.680
And what have you seen?
00:18:43.839 --> 00:18:46.960
You've been doing this for you know a little over four years.
00:18:47.279 --> 00:18:51.839
What mistakes have you seen people make when it comes to getting this set up?
00:18:52.079 --> 00:18:57.839
Maybe, maybe their interest doesn't long term their interest or doesn't last.
00:18:58.319 --> 00:19:01.119
What are what mistakes have you have you witnessed?
00:19:01.680 --> 00:19:14.559
I would say um the one that we see most often is just people don't know about the strategy or you know aren't aren't familiar enough with it to kick it off at the right time.
00:19:14.799 --> 00:19:24.319
So we engage most donors one to two months, usually before they're um, you know, or even even further ahead of when when that sale's happening.
00:19:24.559 --> 00:19:35.839
And so um, you know, some donors come to us at the last second and you know, the closing is the next day, and they say, Hey, can I put uh you know some of my business into a donor advice fund now?
00:19:35.920 --> 00:19:45.359
I'm realizing it's gonna save me, you know,$100,000 in taxes, or, you know, and it's it's just uh too late in the process, right?
00:19:45.440 --> 00:19:49.680
That that sale is already definitive, it's happening.
00:19:49.920 --> 00:20:03.680
And so um, so that's that's the biggest mistake we see is just um not not enough cushion where you can can be thoughtful about actually making your your charitable giving tax efficient.
00:20:04.640 --> 00:20:05.440
That makes sense.
00:20:05.680 --> 00:20:09.839
The kind of fumbling over everything with timing uh tracks.
00:20:10.559 --> 00:20:18.960
That's how that's how uh somebody would suggest it on a call late after diligence had been done and everybody was ready to close.
00:20:19.039 --> 00:20:23.279
And somebody says, like, oh, you should have done you should have done this.
00:20:23.519 --> 00:20:32.079
And I I can see how that would trigger like people to just run run in your direction to try and get that uh get that solved.
00:20:32.319 --> 00:20:42.640
I guess when we we talked about cash not being the most efficient, you gave a good example of like the the stock that went up from$10 to$15.
00:20:43.359 --> 00:20:44.960
What are other types of assets?
00:20:45.119 --> 00:20:54.480
Because a lot of people that I've talked to um refer to what is it, qualified uh business stock?
00:20:54.559 --> 00:20:55.680
I think something like that.
00:20:55.839 --> 00:21:02.480
What are some other assets that people would do in a transaction like this, other than just cash?
00:21:02.880 --> 00:21:11.920
Yeah, so um so we have a really flexible donor advice fund in terms of we have said, okay, what will the IRS allow you to donate?
00:21:12.000 --> 00:21:14.400
And let's just make sure we can accommodate for that.
00:21:14.480 --> 00:21:16.960
And so we've done a ton of interesting things.
00:21:17.200 --> 00:21:26.720
Um, you know, the most commonly what we see is public securities, you know, C corps, uh, S Corps, LLCs.
00:21:26.880 --> 00:21:28.720
Sometimes we do real estate direct.
00:21:28.960 --> 00:21:33.119
Um, a lot of the time, people who are donating real estate will actually own it in an LLC.
00:21:33.200 --> 00:21:35.680
So it's technically an LLC donation.
00:21:36.160 --> 00:21:41.279
Um so you know, those are those are the most common things that we see.
00:21:41.440 --> 00:21:53.519
Um, but on the more unique side, uh, for example, we had a few individuals who had a bunch of crypto mining equipment that was now um, you know, passed the new technologies come out.
00:21:53.680 --> 00:22:02.960
This old equipment was was not viable anymore for their business, um, but they got it appraised at a Valuation and they were able to donate that equipment.
00:22:03.119 --> 00:22:12.720
So they donated some um you know crypto mining server equipment into the DAF, got their charitable deduction, and then we actually sold that equipment within the DAF.
00:22:12.960 --> 00:22:17.200
The cash proceeds came in, and then they were able to do their charitable giving out of that.
00:22:17.359 --> 00:22:20.720
So crypto mining equipment is a unique one.
00:22:21.039 --> 00:22:27.039
Um we had an individual donate some some greenhouses on some rural land.
00:22:27.119 --> 00:22:28.480
So that was an interesting one.
00:22:29.440 --> 00:22:35.920
Um we've had silver bar donations uh recently.
00:22:36.160 --> 00:22:38.960
So yeah, so those are those are some interesting ones.
00:22:39.119 --> 00:22:44.640
I mean, really any asset you can get appraised, you can put into a donor advice fund.
00:22:44.799 --> 00:22:53.279
And so um, you know, on one side, it's going to be um assets that are just very obvious, they're highly appreciated, right?
00:22:53.359 --> 00:22:55.440
They have a lot of capital gains liability.
00:22:55.599 --> 00:22:58.640
And so that's kind of the strategy that's most commonly known.
00:22:58.720 --> 00:23:01.839
Like most financial advisors are familiar with that.
00:23:02.160 --> 00:23:16.640
Um, but another interesting way to use a donor advice fund is with your problem assets or with anything that is, you know, you're just looking for the best way to get some value out of it and get it off your balance sheet.
00:23:16.880 --> 00:23:26.480
So, for example, we have one uh donor who's very involved in uh the venture scene in in Silicon Valley.
00:23:26.559 --> 00:23:32.000
So he's a big venture investor, has all these different placements in all these different funds.
00:23:32.240 --> 00:23:42.960
And he came to us and said, Hey, there was a couple investments that I made in 2021, 2022, 2023 into these venture funds.
00:23:43.279 --> 00:23:48.799
And they had these really frothy valuations in 2022, and so they're valued very highly.
00:23:48.960 --> 00:23:51.279
And they haven't raised money since then.
00:23:51.440 --> 00:23:54.079
Um, but you know, they're kind of trending down.
00:23:54.240 --> 00:24:01.119
Like I, you know, I think if I wanted to sell these fund interests in a secondary sale, I would only get pennies on the dollar.
00:24:01.279 --> 00:24:06.720
But if I get them appraised, they're going to be appraised close to that 2022 valuation.
00:24:06.960 --> 00:24:23.839
And so the best way, you know, he's like, I want out of these investments, the best way for me to get value is I can either do, yeah, secondary sale where I get pennies on the dollar, or I can donate them to my donor advice fund and take a charitable tax deduction for the full fair market value.
00:24:24.079 --> 00:24:27.200
And so that was a really unique example, right?
00:24:27.359 --> 00:24:31.119
Where he came to us and said, hey, this asset is kind of an issue for me.
00:24:31.200 --> 00:24:32.640
It's difficult to sell.
00:24:32.960 --> 00:24:44.880
Um, what's going to be simpler for me and I still get good benefit out of it, is I'm going to just put it into a donor advice fund, take the charitable tax deduction, you know, much less work for me.
00:24:45.039 --> 00:24:54.400
And now, if that asset ever does um have a liquidity event, those cash proceeds will go into his donor advice fund and he can use that for his charitable giving.
00:24:54.799 --> 00:24:55.279
Got it.
00:24:55.440 --> 00:24:55.680
Okay.
00:24:55.920 --> 00:24:57.039
That was what I was going to ask.
00:24:57.119 --> 00:25:08.640
Is illiquid assets like that, where, you know, uh a startup funding round that never amounts to a large exit that just is illiquid.
00:25:08.880 --> 00:25:11.440
It seems like you would get that valuation.
00:25:11.599 --> 00:25:20.880
And then if and when you know something happened down the line, uh, you would it would just be funded, like the the charitable uh account would be funded.
00:25:21.039 --> 00:25:23.279
So that that's a really unique one.
00:25:23.440 --> 00:25:33.680
Uh I like the creativity that's involved here with uh the different types of assets um that people can uh can put into these funds.
00:25:34.079 --> 00:25:40.720
And once once they're in there, are people holding these for very, very long periods of time?
00:25:40.880 --> 00:25:41.680
Is it shorter?
00:25:41.759 --> 00:25:49.599
Like the crypto mining example was a really unique one where that sounds like it probably happened pretty quick where you were able to liquidate the the assets.
00:25:49.759 --> 00:25:51.599
But what are you seeing in terms of timeline?
00:25:51.680 --> 00:25:53.839
Do people or is it all over the place?
00:25:54.240 --> 00:25:57.839
Yeah, so it kind of depends on what the the donor wants to do.
00:25:58.079 --> 00:26:07.279
So um, you know, with some assets, they say um, you know, either they have a buyer lined up or they say, I want you to arrange a buyer as fast as possible.
00:26:07.440 --> 00:26:25.680
And so, you know, on the crypto mining equipment, it was, you know, they're they're like, you don't need to get you know maximum value out of this, just you know, get what you can, have your liquidators handle it, and um, and you know, whatever you can get for it, put that into the DAF and so that I can get it invested quickly, right?
00:26:25.839 --> 00:26:29.519
So sometimes their their timeline is short, they just want to get it sold.
00:26:29.680 --> 00:26:34.400
Um, other times people want to continue to hold what they what they donate.
00:26:34.640 --> 00:26:45.200
So um, you know, another interesting example is um when Bitcoin was ripping probably a a year and a half ago, we had several donors who um funded their accounts with Bitcoin.
00:26:45.359 --> 00:26:54.079
And so, you know, they said, I want to put um, you know, I'm gonna put X amount of Bitcoin into the account, um, but I want to hold it.
00:26:54.160 --> 00:26:57.119
I want to continue to leave it invested.
00:26:57.200 --> 00:27:01.599
Um, and there's some other DAF providers that won't um accommodate that.
00:27:01.680 --> 00:27:04.720
Um, you know, they're gonna they're gonna force you out of that position.
00:27:04.880 --> 00:27:20.640
Um, and so that that's another place where we we helped those individuals as they said, you know, I want to take the tax benefit of this now, but I do want to have the keep the upside potential in my donor advice fund and I want to leave it, leave it invested in this asset.
00:27:20.799 --> 00:27:23.119
So that's a long answer to your question.
00:27:23.359 --> 00:27:31.119
But uh but essentially it's up to the donor to you know make recommendations as to what they want to do with what's what's in their account.
00:27:31.200 --> 00:27:42.000
And so whether that's you know, they just want it invested in public securities, they want to do alternative investments, you know, whatever they want to do on the investing side to grow their charitable capital.
00:27:42.240 --> 00:27:49.200
And then whenever they want to distribute it out to nonprofits, that's also um up to them as well.
00:27:49.359 --> 00:27:51.599
There's no required annual payout.
00:27:51.759 --> 00:27:55.359
So all those dollars are charitably earmarked, right?
00:27:55.440 --> 00:28:05.359
They do eventually need to go to charitable causes, uh, but it's up to you, it's on your timeline, you know, how long you want to leave the assets invested versus when you want to distribute them out.
00:28:05.759 --> 00:28:06.319
Got it.
00:28:06.480 --> 00:28:06.960
Very cool.
00:28:07.119 --> 00:28:07.599
I like that.
00:28:07.680 --> 00:28:16.400
The Bitcoin example is a great one where let's say it goes in there, it's appraised at 100,000, and it runs up to a million.
00:28:17.279 --> 00:28:22.319
The deduction that you get is on that hundred thousand on that day.
00:28:22.640 --> 00:28:29.839
But then the remaining nine hundred thousand, that's then you then choose where that gets distributed later.
00:28:30.559 --> 00:28:41.359
Do you don't gain anything from that uh in the future though, other than just distributing it out to the charities and giving the maximum amount that you can, you don't get any further deductions, right?
00:28:41.440 --> 00:28:42.960
Because you took that one initially.
00:28:43.759 --> 00:28:44.480
Yep, correct.
00:28:44.559 --> 00:28:44.720
Yeah.
00:28:44.799 --> 00:28:53.920
So there's yeah, there's those two separate events of there's the gift and whatever the asset is valued on as of the date you gift it, you take that personal tax benefit.
00:28:54.079 --> 00:29:01.279
And then from there, you know, if the asset appreciates in value, you have more money to to give to charities.
00:29:01.440 --> 00:29:05.920
Um, and there's no there's no capital gains liability on that appreciation.
00:29:06.160 --> 00:29:14.160
Um, if the asset goes to zero, then you no longer have any money to distribute to charities, but you did already take the tax benefit.
00:29:14.319 --> 00:29:26.319
So yeah, so it's you know, it's kind of on on either side, there's just two separate events of you take your tax benefit with the donation, and then from there, wherever it goes, there's no personal tax consequences for you.
00:29:26.480 --> 00:29:34.000
It just affects um, you know, how much you have to invest and how much you have to uh distribute to nonprofits.
00:29:34.319 --> 00:29:35.279
Cool, very cool.
00:29:35.440 --> 00:29:37.200
So that takes us to the finale question.
00:29:37.359 --> 00:29:40.880
Knowing what you know now, what would you tell Phoenix 10 years ago?
00:29:41.680 --> 00:29:45.599
Well, I haven't had a big uh a big business exit yet.
00:29:45.759 --> 00:29:48.880
Um, but uh it's uh it's good to know.
00:29:48.960 --> 00:29:51.440
Now I've now I'm all familiar with this.
00:29:51.599 --> 00:29:56.160
Um and so you know I'll be informed when when that that day comes.
00:29:56.480 --> 00:29:56.880
Got it.
00:29:56.960 --> 00:29:59.759
And where can people learn more about what you're doing?
00:30:00.000 --> 00:30:04.079
Yeah, so um we have uh our site is uicharitable.org.
00:30:04.160 --> 00:30:07.599
So that's just the letters uiharitable.org.
00:30:07.759 --> 00:30:11.920
Um and so you can go to uiharitable.org forward slash learnmore.
00:30:12.160 --> 00:30:21.759
Um and yeah, I would just say we talked a lot about um you know complex asset donations, so you know, or a private business donation into a DAF.
00:30:22.160 --> 00:30:30.799
Um, but you know, at UI Charitable, we really view ourselves as are a full, you know, fully staffed philanthropic back office for individuals.
00:30:31.039 --> 00:30:36.160
And so, you know, if they're looking at, okay, do I want to set up a private foundation?
00:30:36.319 --> 00:30:38.319
Do I want to set up a donor advice fund?
00:30:38.480 --> 00:30:42.319
You know, how do I want to accomplish my philanthropy moving forward?
00:30:42.480 --> 00:30:44.960
Um, we're we're happy to be a resource there.
00:30:45.119 --> 00:30:53.119
And um, you know, we can really figure out based on what the client wants to do, okay, what's going to be actually the right vehicle for you?
00:30:53.359 --> 00:31:06.480
And um, and you know, what's gonna be the best way to accomplish that, where you keep costs low, you keep your tax efficiency up, um, and you, you know, you you affect the philanthropic change that you're you're hoping to affect.
00:31:06.799 --> 00:31:07.440
Right on.
00:31:07.599 --> 00:31:08.079
Very cool.
00:31:08.240 --> 00:31:14.960
Well, wherever you guys are listening or watching, uh, the links that uh Phoenix mentioned will be in the show notes as well.
00:31:15.119 --> 00:31:19.200
Thank you so much for coming on and sharing all your tactical advice, Phoenix.
00:31:19.440 --> 00:31:20.480
Yeah, thanks, Steve.
