When selling your business, the taxes surrounding the sale can be the most significant hurdle to overcome. As income tax and overall tax rates have increased, proper tax planning has become essential over the years. Many are now looking for more cost-efficient ways to sell their business to ensure they get the most value out of the company they have grown from the ground up. One of the ways to ensure this is to look to certain trusts. Trusts are not only for personal wealth but also for business assets. Specific trusts can be the key to avoiding tax burdens come business succession.
Why A Trust Can Help
Trusts are efficient means to help manage and protect your assets and reduce or eliminate costs when it comes to a wealth transfer. There are multiple personal and business trusts, and the one you choose can vary depending on your circumstances as a business. It can be wise to set up a trust while establishing your business to ensure you and your current and future assets are covered.
A trust is set in place to help maximize the value of your business legacy by implementing tax-efficient strategies. Many trusts allow you to avoid certain estate when transferring assets to give you the highest value for your business later on.
Types Of Trusts To Consider:
Everyone’s choice of trust will be different. When you choose a trust to involve your business in, make sure that it will benefit your business and be reliable in the future.
Deferred Sales Trust (DST)
A Deferred Sales Trust (DST) is a way for you to essentially sell all or part of your business into a trust ahead of a buyer purchasing the business. The buyer would then buy the whole or part of your business from the trust at a later date. The proceeds of the sale from the DST would then be paid to you in set amounts every month, quarter, or year. Similar to how someone would pay off a loan at a bank for something they purchased. The DST would provide payments to you as the seller. A DST is an irrevocable trust. This means they cannot be changed after being set up. As such, please meet with your advisors to ensure this matches your financial plan.
Grantor Retained Annuity Trust (GRAT)
A GRAT trust is perfect for assets you expect to appreciate over time, such as business shares, mutual funds, stocks, and bonds. This is a well-established wealth transfer strategy, allowing you to transfer shares of a business into the trust in return for an annuity typically equal to the original value of the shares. This can be an excellent choice in a low-interest environment, as annuity payments are based on interest rates and will be low. A transfer like this would not be subject to estate taxes either.
Charitable Lead Annuity Trust (CLAT)
This type of trust is irrevocable but can add more value to your business once a business transfer is made. Shares of your business in the trust will be an annual annuity to your choice of charity, ensure it is a tax-exempt charity, and then at the end of each annuity term, the remainder is set to be given to the beneficiary. If shares are highly appreciable, the shares given to the second beneficiary should greatly appreciate over the years while also being exempt from all estate taxes.
Charitable Remainder Unitrusts (CRUT)
A CRUT works the opposite of a CLAT. The beneficiary gets the assets first, while the chosen, tax-exempt charity will get what is left over, at least 10%. This type of trust offers multiple benefits when a business is sold, such as immediate charitable income tax deduction, capital gains mitigation, significant contributions to charity, and substantial annual payments to the owner. Giving a portion of your money to charity allows you to have a reduced income so you can claim less on your tax return, and your assets appreciate faster.
Choosing a charity that will benefit your business when it is time to sell can depend greatly on the business itself and where you see yourself in the future.
To get the guidance you need to sell your business for the most value, reach out to the team at ReVera Capital.