Enhanced by an Employee Stock Ownership Plan (ESOP)
By using an ESOP, a shareholder can make a stock donation to a charity, create positive cash flow, by receiving a personal tax deduction, and provide a cash gift for charity. The stock is given to charity and the ESOP subsequently purchases the stock from the charity.
Assumptions:
Stockholder in 40% individual bracket. (federal and state combined)
Taxpayer is shareholder of company
Company has or will install an ESOP
WITHOUT ESOP
- Stockholder gives $1,000,000 in cash to charity.
Results:
- Charity has $1,000,000 in cash.
- Stockholder saves $400,000 in taxes.
- Net cash cost to stockholder is $600,000.
WITH ESOP
- Stockholder gives $1,000,000 of stock to charity.
- Company contributes $1,000,000 to the ESOP in place of making the contribution to a different retirement plan.
- Charity sells stock to ESOP for $1,000,000.
- Stock in the ESOP is allocated to all eligible employees, typically full-time.
(Note: The sale to the ESOP is normally spread over several years.)
Results: Corporation uses tax-deductible or tax-free dollars to fund the charitable gift the donor desires to make, and also provides an outstanding employee benefit.
1. Charity has $1,000,000 in cash.
2. Net cash flow to stockholder is +$400,000.
3. Company receives a $1,000,000 tax deduction.
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