We sat down with Steve Holt, Partner with Mandelbaum Barret P.C., to discuss the importance of proper tax planning ahead of a sale, especially in such a competitive market. For background, the current estate tax rate is locked in at 40 percent and little can be done about federal tax after the sale. However, you can change the ownership of capital assets ahead of the sale in ways that can reduce potential estate taxes.

There are two strategic opportunities that can reduce these tax bites as well as increase the flow of funds for you and your family’s benefit post-transaction – a Spousal Lifetime Access Trust and Charitable Trusts. Let’s explore the benefits of utilizing these trusts.

Spousal Lifetime Access Trust (SLAT)

The Spousal Lifetime Access Trust, or SLAT, is a trust technique that you as the business owner would create to provide benefits for your spouse and if you wish, children, grandchildren, or other beneficiaries.

In this case, it’s important to include your spouse as a permissible beneficiary so if you decide to transfer the business to a SLAT, you will continue to have indirect access to the cash flow from business proceeds by reason of the right of the trust to distribute assets out of the trust to your spouse. Technically, your spouse will or could be the trustee, controlling how and when assets are distributed out, and, under the trust’s laws of most states, you as the business owner can be appointed as the investment advisor to the trust, thus having the power to direct investment decision-making. This thereby allows you to manage how the transferred assets/proceeds are being invested without the risk of having the transferred assets included in your estate for estate tax purposes.

The benefit of a SLAT is you can transfer assets at potentially reduced “pre-sale” private company values, while allowing for the dispersal back to your spouse; that way you can enjoy the cash flow from your assets and be on a better path towards family planning. However, there are limitations to this technique – one being that you can only give away up to just under 13 million dollars’ worth of assets during your lifetime without incurring a federal gift tax, which typically falls anywhere between 18 to 40 percent. That said, you should not transfer more than your exemption amount into a trust of this nature.  Note that your spouse can also transfer up to just under 13 million dollars’ worth of your spouse’s assets during her lifetime.

Charitable Trusts

Other types of trusts that can help you tiptoe around large tax cuts and drive a great deal of benefit to your estate tax planning and savings are Charitable Trusts. When your business assets are gifted to a charitable trust, and the trust then sells the assets, the gain is eliminated from federal and state level income taxes because charities are exempt from tax at the state and federal level. This technique is a terrific way to significantly reduce your income tax liability on the sale as well as your estate tax on your accumulated wealth.

If you believe you still need access to the cash flow from your sold asset, you can set up a Charitable Remainder Trust. This type of trust provides for a distribution of a certain amount of the assets for several years (the annuity period) to assure you will still receive cash flow for a significant span of time. Following the annuity period, the asset will be passed down to the charity. From this, you will get an income tax deduction for the transfer of the asset into the trust as well as a charitable gift tax deduction to the extent of the value of the remainder interest.

A Charitable Lead Trust is a technique that allows a business owner to place assets in a trust that will generate cash flow for a charity while having the residual value of the assets pass after a certain time period to his family. This type of trust pays an annuity to the charity for a term years after which the assets are passed to family or anyone else that he or she wishes to benefit. Many clients do not have an interest in charitable trusts, but with a little bit of knowledge, there can certainly be a way for any business owner’s numbers to be accommodated.

If you’re looking to sell your business down the road and don’t know where you’d like your assets to go, start by taking the SLAT and Charitable Trusts into consideration and have that conversation with your trusted advisors. Remember to start thinking about your estate taxes far ahead of a sale rather than at the letter of intent stage; begin when the idea of a sale first enters your mind. As Osage Advisors continually advocates, tax planning works best if you think about it well ahead of a sale; this minimizes any surprises and struggles that might become apparent towards the end of a deal.

Stay tuned for more proper tax planning techniques from Steve Holt in a future post.

Osage Advisors provides a lot of guidance in the M&A market here on our blog and on our YouTube channel and Podcast.