Welcome to the final installment of the “business is simple guide” to dealing with the sale of a business or large assets. Let’s talk about my favorite topic, eliminating taxes. This is where all the real fun things are. But, as you can imagine, some significant complexity as well…
The final method can eliminate gain altogether. But as you can imagine, the tools for doing that require some significant concessions. Namely, you have to give the money away. Not a lot of people want to do that. But if you do, here is how you do it.
Save by Giving it Away
Two options are the Charitable Remainder UniTrust (CRUT) and the Charitable Remainder Annuity Trust (CRAT). OK, the difference between these two is just how the payments are calculated. So for our purposes, I will only refer to CRUTs and I will use the term CRUT and CRAT interchangeably.
A CRUT is a trust that has a charity (legal, 501(c)3 and all that) as the beneficiary. It has you, typically, as what we call the income beneficiary. It is an irrevocable trust. This means you cannot change your mind! Once you set this up it is permanent. After establishing it, you contribute the assets you don’t want to pay tax on to it. The trust itself doesn’t pay any tax, so it gets to hold and manage all the assets. Typically, you have someone like a bank, lawyer, or financial advisor as the trustee who makes the investment decisions. The trust agrees to pay an income stream to you (it can be a fixed percentage of assets, a fixed dollar amount, or just about any combo you want) that is fixed ahead of time. You only pay tax on the income that comes out to you, as it comes out to you. The idea is, generally, to have the income pay out to you so that you end up getting most of your money back. But, this is an irrevocable gift to a charity. It requires some serious planning and thought. If you have charitable intentions, this is a FANTASTIC tool!
A Charitable Lead Trust (CLT) is the same thing as a CRUT except the opposite. It pays out the income to a charity while you are alive and then pays the remainder to a beneficiary you name (your kids, your spouse, etc). It is not used in a business sale purpose very often. It is used when you have an income property that you don’t need the income from but where you want to preserve the underlying asset for your heirs.
Reduce, Defer, Eliminate
And there you have it! If you are selling a business, property, or any asset really and have gains, you now have the theories behind how to deal with it. I hope that the main idea came across clearly. It doesn’t matter the tools, tips, or tricks that you use. For every additional amount of gain you defer or eliminate it will require you to have additional restrictions or limitations, or to give something up. So, how much do you want to give up? How much do you need now? Once you have those questions answered go through the list: Reduce, Defer, Eliminate.
If these strategies are interesting, or you think you might need additional help, please go to the contact page. I would love to work with you!
Big shout out to Jason Rehmus and http://sweatingcommas.com/ for all his help in making this readable. I would be unintelligible if he wasn’t around.