TABLE OF CONENTS
I. Taxes: payment and minimzation
II. Estate planning considerations
III. Asset protection & privacy review
IV. Family office considerations
V. Asset allocation
VI. Get organized: beneficiaries, financial statements, etc
VII. Philanthropic consideration
VIII. Build your team: financial advisor, attorney, bookkeeper, etc
IX. Take time to grieve and take a breath
X. Just say no
This guide is no substitute for an ongoing relationship with an advisor, but it should serve as a roadmap for making the most of your post-sale life.
I. TAXES: PAYMENT & MINIMIZATION
Among the first considerations, and perhaps the lengthiest, is the coming tax bill. Much of the windfall should be categorized as Long-Term Capital Gains and subject to a preferred tax rate, which in 2019 is capped at 20 percent. Get an estimate of your tax liability from your accountant. Set those dollars aside in a short-term cash account. You’ll want to get some return on your funds, even if it is just one or two percent, before paying Uncle Sam, but you need to focus on preserving your capital and being liquid for this portion of the sale.
a. Estate freezing and transfer techniques:
Freeze the value of the business, transfer the asset to a child, then sell it after it has appreciated in value. This avoids gift or It is an event every inheritance taxes on future appreciation. Most of this planning must be completed a couple of years in advance of the actual transaction.
Strategies include annual gifting of stock, an installment sale to an intentionally defective grantor trust, private annuities, Grantor Retained Annuity Trusts (GRAT), Charitable Lead Annuity Trusts (CLAT), and Family Limited Partnerships (FLP).
b. Rollovers, exclusions, and tax deferral techniques:
These are sections of the tax code that can be used as long as certain criteria are met. They include:
Section 1042 – A business owner can sell company stock to an ESOP (Employee Stock Ownership Plan) and defer federal, and sometimes state, tax on the transaction by rolling proceeds into a qualified replacement property (QRP). Leveraging the stepped-up basis at death can eliminate taxes on the sale of these assets later.
Section 1202 – Capital gains exclusion. Allows small business owners to exclude at least 50% of the realized gain on the sale or exchange of a qualified small business stock that is held longer than five years. This gain is limited to the greater of either $10 million or 10 times the basis in the stock.
Section 1045 – Rollover of gains. Allows the business seller to rollover the taxable gain of QSBS into another QSBS within 60 days of the sale. This defers recognition of the gains until the second QSBS is sold. This strategy is often combined with Section 1202, to partially monetize the small business.
Opportunity Zones – Any individual or entity with capital gains can roll capital gains into an Opportunity Zone. Benefits are the temporary deferral of taxes on previously earned capital gains, basis step-up of previous earned capital gains invested, and permanent exclusion of taxable income on new gains.
c. Deductions and State Income Tax Minimization:
There are many deductions available to the owners of small businesses, but two strategies especially applicable in this situation are an IC-DISC (Interest Charge Domestic International Sales Corporation) and an INGT (Incomplete Gift Non-Grantor Trust). An IC-DISC enables exporters to convert ordinary income from sales to foreign unrelated parties into qualified dividend income (up to 50% of combined domestic and international income).
This allows international companies to convert ordinary income tax into capital gains tax, reducing their federal tax obligation and increasing the value of the business a buyer would be willing to pay.
II. ESTATE PLANNING CONSIDERATIONS
Many business owners have lived a life in which their business is one of the most tangible manifestations of their legacy. Suddenly, that legacy is turned into cash. This a change that can impact generations to come.
Tax minimization: So important we are mentioning it again! At a minimum, these things should be discussed with your attorney and financial advisor.
Updating documents: All documents that reference your business should be adjusted to reflect the sale. This will likely be an ongoing process as you begin to deploy your windfall in new investments.
Insurance: An insurance evaluation should be completed to optimize your coverage. If you had key person insurance, or buy-sell life insurance, these should be updated to reflect your new status.
Inheritances: A discussion should take place with your spouse, children, and any other close relatives about how the money will be distributed.
Legacy: Discuss your vision for your family, your children, and your wealth, and the impact you want to have on society. These conversations can be facilitated by your financial advisor.
III. ASSET PROTECTION & PRIVACY REVIEW
Asset protection and privacy is especially important in today’s increasingly litigious society. Depending on the size of your exit, you could gain some fame in your community. The deep pocket theory of litigation contends that the deeper the pockets, the greater the likelihood of being sued. Some basics of asset protection include:
Insurance: Personal insurance is the first line of defense against creditors. Consider maxing out auto insurance limits, making sure you have sufficient homeowner’s insurance, and purchasing an umbrella policy.
Exemptions: Address certain assets that are protected from creditor attacks and bankruptcies. These exemptions can vary from state to state. Examples include homestead exemptions, life insurance cash values, annuities, and retirement plans.
Liability protected entities for investment assets: Think about placing most, if not all, assets into a liability protected entity. Rental properties, vacation homes, securities, financial and brokerage accounts, and other properties should be considered. Typically, the entity of choice for this type of personal creditor protection will be an LLC.
Domestic and offshore modular planning with Asset Protection Trusts: Add another layer of asset protection. If you have a revocable living trust, for example, you should know that such trusts do not provide asset protection from creditors.
DAPTs: DAPTs vary from state to state, but they offer significant protection from creditors. Real property or investments may be held within a liability-protected LLC, and then 95% ownership is transferred to the trust. This modular ownership of assets creates significant barriers to potential creditors, who must obtain a judgment against the business owner personally; sue the trustee of the DAPT and attack the legal viability of the structure; obtain a judgement against the LLCs; and receive a charging order remedy which could lead to further legal futility, income tax bills on income they never receive, delays, etc.
IV. FAMILY OFFICE CONSIDERATIONS
Consider a family office to help with both the transition and this next life stage. A family office can help with the objective engagement of family members such as spouse, kids, and even grandkids. An independent professional management team can provide invaluable insight into strategies to preserve wealth, manage it responsibly, guide the family on philanthropic endeavors, and be there for subsequent generations to ensure preservation of capital.
V. ASSET ALLOCATION
Asset allocation is among the most important considerations for those who have sold their businesses. The optimal balance can only be reached when consideration is given to long- term legacy goals and portfolio objectives are discussed. Among the primary considerations:
Dollar cost average: Taking a systematic approach to deploying your assets is key. Dollar cost averaging reduces the risk of putting your money to work in assets that are nearing a correction.
Diversification of proceeds: Diversification has been proven to be a winning long-term strategy. That said, diversification’s merits extend well beyond picking different securities for your portfolio. Diversification strategies include active vs. passive strategies, private vs. public securities, domestic vs. international assets, stocks vs. bonds, etc.
Stock compensation: If you have entered a deal where stock is the primary consideration given for your company, proceed with caution. There are significant risks with owning shares of a company where you have limited control and most of your wealth is tied up. There are many hedging strategies to be considered.
Cash flow: Special consideration must be given to cash flow needed in the immediate future. It may sound silly, given that you are now more liquid than you have ever been, but post-sale business owners are often surprised when they invest injudiciously that there is not enough cash left over to meet their needs.
Private Investments: You have sold your business and now you have access to the exclusive world of private equity and hedge funds. While these can be valuable tools, proceed with caution. Not all funds are created equally. Additionally, the internet is littered with stories about private investors getting defrauded by these types of investments. Even if intentions are good, these investments can be black holes.
VI. GET ORGANIZED: BENEFICIARIES, FINANCIAL STATEMENTS, ETC.
There is no better time to take inventory of your life and get organized than after a momentous event. Take the opportunity of selling your business to get organized; put together key personal documents such as estate documents, personal financial statements, beneficiary designations, insurance documents, etc. Consider digitizing backups and evaluate your financial preparedness.
VII. PHILANTHROPIC CONSIDERATION
After selling your business, what are your philanthropic considerations? If this is something that is important to you, planning is key. You’ll likely have many requests for donations coming your way; how will you handle them? Having a gatekeeper can be useful, having a process to evaluate inbound requests can simplify your life, and taking full advantage of the tax breaks associated with philanthropy can be a bonus.
VIII. BUILD YOUR TEAM: FINANCIAL ADVISOR, ATTORNEY, BOOKKEEPER, ETC.
Among the most important considerations you’ll have is building out your team. Often you already have many of these advisors in place but ask yourself if they are qualified to meet your updated needs. Additionally, our recommendation is to have one team member quarterback the rest of your professionals in order to have a more cohesive plan.
IX. TAKE TIME TO GRIEVE AND TAKE A BREATH
This may sound a bit out of place. Why would you grieve after achieving what could be a lifelong goal? With athletes who are accustomed to around-the-clock training to reach the top of the proverbial mountain, whose diet, training, and daily schedules have revolved around this goal, there is often a “what now” feeling that occurs.
The same can be true of business owners.
- Take a break
- Pick up a hobby
- Don’t make any commitments
X. JUST SAY NO
Sadly, one of the biggest changes in the lives of business owners who have sold their businesses is the sudden influx of requests for your time and money. In today’s world, with the proliferation of access to media, you can potentially see hundreds of inbound requests after selling your business. Creating a plan of how you’ll want to handle such requests can ease the stress associated with them:
- Say no to many of these requests in the first 90 days of selling your business.
- Find a partner who can objectively evaluate many of these requests.
- Create a gatekeeper who can assist in screening these inbound requests.
You have sold your business, an achievement that many can only dream of, but what lies ahead can be just as challenging: creating a plan that will allow you to act as a steward of your family’s new legacy.
Jaffe Tilchin Wealth Management, headquartered in Tampa, Florida, is an Investment Management and Insurance Services Advisory firm that is focused on helping clients achieve prosperity and peace of mind throughout their life journey. Our firm has assembled a uniquely talented and seasoned team of more than 45 professionals, each of whom bring specialized skills and is passionately invested in our clients’ futures. We seek to align our interests and goals with our clients through thoughtful and unbiased guidance. When we succeed our clients succeed.