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Thursday, May 2, 2024
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Case Studies |
Sale of a Closely Held Business with Zero Taxes
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Case:
Robert and Betty Johnson, ages 70 and 65, respectively, have an estate valued at $3.5 million. Included in the estate is a small business valued at $1 million. The business, which is structured as a "C" corporation, was started on a "shoestring" twenty years ago and, therefore, Robert and Betty have relatively no basis in their stock. They would like to sell the business to three faithful employees who have been working in the business the past ten years. The employees have verbally expressed an interest in buying the business, but no documentation has been signed. In talking with their CPA about the sale, they are very concerned about the capital gains taxes that would be due if the stock is sold. Also, they have been quite active in charitable work throughout their marriage and thought perhaps they would like to use a portion of the business to eventually make a charitable gift to their alma mater and to their church.
Question:
Can Robert and Betty sell the business to the employees with a diminished tax "bite" and make the desired charitable gift to their two charities? Is there a way perhaps to sell the business with "zero taxes" on the sale?
Solution:
In a recent financial and estate planning seminar sponsored by their alma mater, Robert and Betty learned that they could sell an asset through a charitable remainder unitrust and bypass the capital gain taxes due on the initial sale of the stock. In turn, they would receive a nice lifetime income stream from the trust. The assets in the trust would then be transferred to their two charities upon their passing. They were quite pleased to learn of these benefits of a charitable trust. However, they were uncomfortable funding a charitable trust with all the stock of the business as they did not feel they could place the full $1 million in the trust at this time.
As a result of attending the seminar, they decided to make an appointment with the Planned Giving Director of their alma mater who explained to them that they could place some of the shares of stock into the trust and sell the other shares outside the trust. By funding the trust with just the right amount of shares, they could achieve a zero tax scenario wherein the capital gains tax on the stock held outside the trust would exactly equal the income tax savings generated by the trust via the income tax deduction.
Robert and Betty decided to choose a 7% unitrust with income payable to them for the rest of their lives. In order to achieve zero tax, shares valued at $651,123 were transferred into the unitrust. The charitable deduction is $176,200. The retained stock which will be sold outside the trust is valued at $348,877. In the end, after taking tax rates into account, the tax savings and tax liability perfectly offset each other. Therefore, by equalizing the income tax savings and capital gain taxes, a zero tax scenario was achieved.
Robert and Betty were very pleased with this outcome - zero taxes were achieved and they were able to make substantial gifts to their alma mater and their church upon their passing.
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