One aspect of planning the sale of your business is easy to overlook―the implications for your estate. Another consideration your transaction advisory team won’t overlook, though, is the tax considerations of your business sale, and planning for those tax implications can dovetail with your estate plans quite nicely via gift or sale of all or part of your business to a trust.

There are a number of trust options available to an entrepreneurial business owner when contemplating the sale of your business in tandem with your estate plans. By gifting or selling a portion of your business’ stock to a trust, you may be able to reduce, defer, and, in some cases, potentially eliminate some of the capital gains tax liabilities the sale of your business is almost certain to trigger.

Some of them are:

Intentionally Defective Grantor Trusts

Intentionally defective grantor trusts (IDGTs) are irrevocable trusts, to which a grantor can gift or sell assets, including shares in your business ownership. Such sales or gifts remove the shares, and any future appreciation in value, from your estate.

With IDGTs:

• You may in some cases be able to defer capital gains taxes.
• The trust income is considered your responsibility; any taxes due must be paid by you with non-trust assets, and you are responsible for reporting the trust activity.
• You retain the ability to exchange assets sold or gifted to the IDGT with assets of equal value.
• When setting up the trust, you, the grantor, can retain various other powers, but they must, of course, be specified in writing.

Spousal Lifetime Access Trusts

A spousal lifetime access trust (SLAT) is another irrevocable trust. It allows your spouse to receive trust income for his/her lifetime, giving you, presumably, some of the benefit as well. This also removes the asset from your estate, as well as future appreciation.

With an SLAT:

• You can fund the SLAT either by gift or sale in exchange for a promissory note, which can be paid to you in installments via trust income. While this might preclude your spouse receiving the income, s/he will presumably benefit from the payments to you, as you would from her income if you fund the trust via gift.
• As with IDGTs, you, the grantor, are responsible for paying taxes due on SLAT’s activity and asset growth.

Grantor Retained Annuity Trusts

With a grantor retained annuity trust (GRAT), again an irrevocable trust:

• Just as with SLATs, you can either sell or gift any or all of your business to the trust. This freezes the asset’s value, allowing the trust’s beneficiaries to receive them free of tax liabilities.
• You, as a grantor, have the right to receive an annuity for the term of the GRAT, representing a percentage of the trust assets’ original value. You can pass this right to your surviving spouse, should you die before the term is up.
• These payments are mandatory, even if the trust itself has no income, so you will want to be sure you understand all the ramifications―your fractional CFO and your estate attorney can help you.

Rigby Financial Group has helped clients prepare for, negotiate, finalize, and follow up on sales of their businesses to best advantage, We have worked closely with business and estate attorneys in these and other instances, and if you don’t yet have one, we can offer guidance and, if you like, referrals.

If you are considering a potential sale of your business within the next decade, please don’t hesitate to call upon us. We can help you through every step – it’s what we are here for. Call us at 866.690.4061 or 504.386.3050 to schedule a consultation or click here to email us directly. Let us know how we can help you―serving your needs is our passion and our pleasure.

Until next time –

Peace,

Eric