As every business owner knows, navigating the sale of a business poses considerable challenges. One similar goal shared by many is maximizing the sale proceeds while minimising estate and gift taxes due on an enhanced estate. Balancing these two objectives is crucial. With correct planning, there are numerous tax strategies that can be helpful during such transitional periods. Highlighted below are three such estate and gift tax strategies for consideration.
Initially, the use of an Intentionally Defective Grantor Trust (IDGT) may prove beneficial. Placing assets in an IDGT before the sale allows the owner to cease being the owner for estate tax purposes, yet continue to be the owner for income tax purposes. The trust then sells the business to a third party, but the owner still pays income tax, effectively allowing the trust to grow tax-free. The effect on estate tax can be considerable.
Next, intra-family sales also deserve consideration. By selling the business to a family member, the owner can transfer future appreciation out of their estate with minimal gift tax consequences. The owner remains responsible for the income taxes on the gain from the sale, thereby reducing the estate’s value.
Lastly, using a Grantor Retained Annuity Trust (GRAT) is another tool that can be particularly effective if the business’s value is increasing rapidly. The owner transfers assets to the GRAT, and then receives an annuity for a certain number of years. At conclusion of the term, the remaining assets pass to the beneficiaries, often with no or very low gift tax consequences.
There’s no doubt that business transitions are complicated. When considering transferring or selling a business, it’s of utmost importance to consider these -and other- proactive tax strategies. They can significantly aid in maximizing sale margins while minimizing tax burdens. As always, consultation with an experienced attorney is highly recommended during the process.
For further detailed information, we recommend reading Three Estate and Gift Tax Strategies to Consider Before Selling Your Business as prepared by Warner Norcross + Judd.