By Rob Cucchiaro, CFP;
Often times our business owner clients are interested in selling their businesses and walking away, but fear that the tax bill will be so high that it won’t be worth it. When this is the case, one of the options that we help clients consider is the Charitable Remainder Trust (CRT). The idea behind a CRT is, that if done correctly, you can sell an asset and defer the capital gains taxes.
Let’s use a simple case study to help illustrate the concept:
Joe and Betty Smith (both age 65) have built a very successful business and believe they will sell it in the near future for approximately $10,000,000. They started the business with virtually no assets and have no cost basis in the company stock. Their tax advisors tell them that they will owe as much $2,500,000 in capital gains tax on the sale of the business. Furthermore, the sale of the business would mean less income for them each year as they both draw a salary and profits from the business today.
In addition, Joe and Betty have been very generous over the years and given many gifts to their favorite charities. They plan to do even more gifting as part of their estate planning as they want to leave some but not all of their estate to their children.
One way for the Smith’s to avoid both of these problems (taxes and loss of income) is through a Charitable Remainder Trust (CRT). This tax and estate planning strategy will allow Joe and Betty to do the following:
- Avoid capital gains taxes upon the sale of the stock,
- Provide them with a lifetime income,
- Generate an immediate income tax deduction,
- Reduce their ultimate estate tax bill, and
- Provide a large gift to their favorite charities after their deaths.
By working with our client’s other Advisors, like their CPA and Estate Planning Attorney, we put together the following process:
- Create an irrevocable trust that will provide lifetime income to Joe and Betty, as long as either is alive
- Transfer stock in the company to the trustee of the trust
- The trustee sells the stock and reinvests the proceeds into income producing investments. The trust will provide that a certain percentage of the trust (6% for example) shall be paid out to Joe and Betty each year
- Joe and Betty will take an immediate tax deduction on their personal tax returns based off of the value of what will ultimately go to charity from the trust
If you are interested in selling your business and reducing the tax bill or simply have more questions on how the process works, give us a call. We are always here to help and offer an initial consultation at no charge to review your specific situation.
Robert Cucchiaro is a Certified Financial Planner and a registered tax preparer. He is a Partner and owner of Summit Wealth & Retirement Partners, a financial planning firm with over 75 years of combined experience in the financial services industry that has been serving Danville for over 30 years. Rob specializes in retirement, investment, tax, and estate planning. You can find more information on our website www.summitwealthandretirement.com