The Blaines’ children can also be involved in the philanthropic activities of their family foundation. As the William and Susan have expressed interest in making a difference in their community and beyond, their foundation can be used as a “parking lot” where the assets can be managed until specific public charity grant decisions are made. There are very creative ways business owning families have made significant improvements in their communities through grants from family foundations.
Summary As William and Susan continue to contemplate the potential acquisition of XYZ Manufacturing by Boston Capital, they have also reviewed their pre-sale planning goals and objectives with their advisors. The pre-sale planning questions that especially resonated well for them were the following: Q
How can they help minimize the income tax burden on a prospective sale transaction?
Q
What are their long-term cash flow needs post-sale?
Q
Should they consider implementing any specific wealth transfer planning strategies prior to the sale?
Minimize income taxes on the sale transaction William and Susan’s advisors determined that an asset sale to Boston Capital for $30 million would produce approximately $5 million in income taxes, because of built-in-gain taxes, depreciation recapture, capital gains, etc. From an income tax perspective, contributing the patent on XYZ’s balance sheet to a CRUT produced approximately $300,000 in capital gains and built-ingains tax savings, and the CRUT and CLAT strategies produced a combined charitable income tax deduction of $2.4 million, which could be used to offset the tax liability from the asset sale. This reduces the income tax liability from the asset sale from $5 million to approximately $2.3 million, which was one of the couple’s planning objectives.33 They could also consider using a portion of the proceeds from the sale to fund a private foundation, should they wish to consider an additional charitable income tax deduction.
Determine post-transaction cash flow needs William and Susan had performed a pre- and post-sale cash flow analysis with their advisors and determined that they would need approximately $400,000 annually (in pre-tax dollars) post-sale to maintain their standard of living.
Fortunately, since they have already accumulated a portfolio of marketable securities, a portion of their post-sale cash flow goal can be met by their existing portfolio, which has consistently generated net income of $250,000 or more annually. The IDGT strategy also provides the flexibility to make interest-only payments to William (i.e., $284,000 annually for eight years and then a balloon payment of $20.5 million in year nine) or with payments that amortize principal and interest (i.e., $2.4 million annually for nine years), both of which provide William and Susan with the additional cash flow to meet their long-term retirement cash flow needs. They would also received $3 million in proceeds from the sale of their voting shares to Boston Capital, which could be used to help meet their remaining income tax obligation as a result of the sale or to meet their cash flow goal. Should cash flow be a concern in the future, the “grantor” feature of their dynasty trust, which shifted the income tax liability of the grantor trust to William, can be designed to be discontinued or “toggled” off. This has the effect of shifting the income tax liability of the dynasty trust back to the trust itself,34 leaving William and Susan with more cash flow. If, in the event of William’s premature death, cash flow for Susan would be inadequate, they could also consider naming her as a beneficiary of the trust. As neither of the Blaines has expressed any real concerns about their post-sale cash flow, they have focused much of their planning attention on meeting their wealth transfer planning goals, which are discussed below.
Evaluate wealth transfer planning opportunities The most important long-term goals for the couple were leaving a legacy for their three children, Pat, Sarah, and Tim, and providing an impact on their community through philanthropy, especially to their two favorite charities. Implementing the IDGT, CRUT, and CLAT strategies pre-sale has allowed them to meet both of these goals in meaningful and significant ways. Beginning with the IDGT strategy, they created a dynasty trust for their children, which will manage a substantial amount of wealth for the children over the term of the IDGT. If the trust is created in a certain justifications, the trust will provide asset protection benefits and not be subject to either state income taxes, or federal gift, estate, and generation-skipping taxes. Under current tax law, the IDGT strategy produced
Pre-Sale Planning for Business Owners Facing Liquidity Events
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