by Jim Wagoner, CPA | Partner, Director of the Tax Services Group and Anita Sherman, CPA | Managing Partner
For the past couple of months we have been writing about business and leadership succession matters. This week we want to focus on how to minimize income, gift and estate taxes as part of a sale or transition process. Individual goals are always different and so the key is to tailor some of these ideas to fit your personal objectives.
If you have family members active in the business, it is worth considering whether you would want to gift some or all of your company stock to them. Through the end of 2012, gifts of up to $5.1 million ($10.2 million jointly) can be made tax free. The law could change substantially after 2012. Some owners make annual gifts of stock to their children. Annual gifts valued under $13,000 ($26,000 if given jointly) per recipient may be given without using any of your estate tax exemption. Your spouse does not need to be a shareholder in the company to take advantage of this strategy.
If you are charitably inclined, and a sale of company stock is likely, you could consider setting up a Charitable Remainder Uni-trust (CRUT) and gifting some or all of your company stock to it. The stock would be purchased from the CRUT income tax free, you would get a sizeable current year charitable contribution (based upon a formula), and you and your spouse could receive a 5-10% payout annually for life. The charities which will ultimately receive the residual balance are identified by you and can be changed by you in future years.
If, in considering use of a CRUT, you are concerned about the fact that the company value would no longer go to your children or other heirs, a wealth replacement trust in the form of an Irrevocable Life Insurance Trust could be established, which upon your death would flow to your children tax free.
Let’s assume you have no children involved in the business, but you have a great employee group and a good business. You might want to investigate setting up an ESOP (Employee Stock Ownership Plan). There is no tax on the sale of your stock to an ESOP as long as the funds are invested in qualified securities. An ESOP can own some (must be at least 30%) or all of the company stock.
The sale of a company involves a lot of negotiation between buyer and seller because what’s best tax wise for one is usually less favorable for the other. If your company is an S-corporation, you will want to retain that status if a sale is likely to occur, in order to avoid double taxation. We can help you structure a sale to minimize the total taxes that would be payable.
There are many other ways to transition a business and receive funds from the company. The exact formula depends upon your goals and situation. Please don’t hesitate to contact us to discuss your questions and ideas.
A few reminders, the current capital gains rate is 15% and this rate expires January 1, 2013. The current gift tax exemption is $5.1 million, and this will revert to $1 million on January 1, 2013, as will the estate tax exemption.