- Understand what a Charitable LLC is
- Understand the risk areas of abuse for a Charitable LLC
- Understand that charitable intent is a requirement for charitable tax planning
Charitable LLCs: An Introduction
In the world of tax planning, advisors and taxpayers like to be aware of tax savings vehicles and strategies. A dual tax/philanthropic planning strategy that has gained popularity of late is a technique referred to as a “Charitable LLC.” This dual-purpose vehicle is typically created to help fund philanthropic endeavors and create tax benefits in a way that is flexible for the taxpayer. Despite the benefits, the technique and vehicle can be prone to misuse without proper planning and guidance.
What Is a Charitable LLC?
A Charitable LLC is commonly defined as a limited liability company (LLC) that has at least two owners, one of whom is an owner who is not a charity and one of whom is a charity eligible to receive tax-deductible donations. The naming convention is somewhat of a misnomer, as a “Charitable LLC” is not actually an entity type in and of itself, but rather a term used to describe the ownership characteristics of an LLC.
Typically, in a Charitable LLC, a taxpayer will establish and fund an LLC with assets and hold all ownership interests, usually receiving both voting and non-voting ownership interests. At this point, there are no immediate charitable tax benefits, and because the LLC has only one owner at this time, it is not recognized as a separate entity for income tax purposes.
The non-voting membership interests are then donated to a qualified charity of the owner’s choice. The donor generally receives a tax deduction for the donation of ownership interests to the extent compliance requirements are met. The charity receives a benefit as further detailed below.
Charitable Intent Is a Prerequisite for Every Philanthropic Component of a Wealth Strategy
As with many donation strategies, charitable intent should be a driving factor. To the extent a Charitable LLC is merely a tool to increase donor flexibility and a way to maintain control over assets while still benefiting from a charitable deduction, the planning technique opens itself up to risk. As noted in an IRS memo:
“Because Taxpayers lacked the charitable intent to make a contribution or gift of the nonvoting interest in LLC1 to Organization1, their claim for a charitable contribution deduction under section 170 is disallowed. Taxpayers may argue that Organization1’s charitable contribution to Charity1 in Year3 supports their charitable intent. This argument is not persuasive because Taxpayers’ financial benefits from Strategy significantly outweighed any charitable benefit Charity1 received from the de minimis amount of Organization1’s distribution. Therefore, as in Singer Co., Taxpayers’ predominant reason for entering into the Strategy was “other than charitable.”
Where This Technique Can Be Misused
This structure can lend itself to abuse. As a general matter, the abuse can arise in any arrangement or structure where the donor has retained control and has created an illusory transaction where it appears the donee (charity) has benefited. In reality, the donor still retains too much control for this to be the case.
This issue is addressed in an IRS memorandum (Field Attorney Advice (FAA) 20260401F) from 2022 (but released in 2026). As stated in the memo, promoters of the arrangement suggested that the donor, still holding a voting interest in the LLC, may be able to retain control of the non-voting interests, which would now be held by the charity, after donation. This is typically by virtue of the rights granted to the voting interests.
In addition, promoters suggest the donor can “buy back” the gifted LLC units at a steeply discounted rate. While on its face this may not be an issue and similar types of transactions have worked out favorably for taxpayers, the issue is control, and bargaining power retained by the charity.
Further, as noted above, there must be an economic benefit to the charity. An example the service found abusive in this regard, as noted in the facts described, was primarily that the voting owner had full control over income. Effectively, the charity was unable to enjoy the income generated by the LLC, resulting in no real benefit provided to the charity.
Holding a significant level of control over the donated ownership interests that create a mismatch in what the donor transfers and what the charity receives creates risks of the deduction being disallowed. In the memo, the donor also used assets from the LLC for personal benefit, which were later repapered as loans from the donor to the LLC. These types of fact patterns may suggest abuse. As noted, charitable benefit must be a driving factor in implementing any charitable giving strategy.
Is This a Legitimate Planning Structure?
Donating LLC ownership interests to a qualified charity, donor-advised fund, or foundation1 has long been a staple of tax planning and has been accepted by law and the IRS.2 However, donations of ownership interests, cash, or any asset to a qualified charity must actually benefit the charity. As a result, this type of planning can be respected if done correctly. However, it is crucial that anyone attempting this strategy work closely with their tax and legal advisors considering the significant amount of nuance related to this tax planning strategy. To the extent this plan is being considered for its tax benefits alone, without any regard (or intention) to the philanthropic benefit, it is worth discussing with your tax and legal advisors if there are better options available to meet your goals.
If you have any questions or need assistance, please reach out to a professional at Forvis Mazars Private Client.
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