Quick Summary

Here’s a summary of a tax strategy the IRS is now pushing back on.

Some planners have suggested transferring non-voting ownership interests in a family LLC to a charity or donor-advised fund while the original owner keeps control of the business through voting interests. The idea is to claim a charitable deduction while still controlling the assets and income.

The IRS has made clear that this type of arrangement may not qualify for a charitable deduction if there is no real transfer of ownership or control.

In simple terms, you can’t claim a charitable gift while still effectively owning and controlling the asset.

Why This Matters

Charitable giving is an important part of many estate plans. But the tax rules require that a real gift be made — not just a technical transfer on paper.

In the situation reviewed by the IRS, individuals created an LLC and transferred non-voting units to a charitable organization. They kept the voting units, which allowed them to continue managing the company and controlling its assets.

From the IRS’s perspective, nothing meaningful had changed economically. The donors still controlled the business and benefited from its income. Because of that, the IRS applied what is called the economic substance rule, which basically says that transactions must have a real purpose beyond tax savings.

When that rule applies, the IRS can ignore the transaction for tax purposes. That means:

  • The charitable deduction can be denied

  • The income may still be taxed to the original owners

  • The structure may be treated as if the gift never happened

This is important because strategies that sound creative or sophisticated can sometimes cross the line between legitimate planning and tax avoidance.

Charitable planning works best when it is simple, transparent, and clearly transfers ownership and benefit to the charity.

This is also a reminder that donor-advised funds and charitable entities cannot be used as tools to shift income while retaining control of assets.

Good charitable planning focuses on:

  • Intentional giving

  • Proper structure

  • Real transfer of ownership

  • Clear tax compliance

When those elements are present, charitable gifts usually work exactly as intended.

Simple Lesson

If you still control the asset, it probably isn’t a completed charitable gift.

Action Step

If charitable giving is part of your estate or tax planning, review how those gifts are structured to make sure they will be respected for tax purposes.

If you’d like help reviewing your plan, call (517) 548-7400 or connect with us here: https://www.michiganestateplans.com/contact-us