Planning to Sell Your Business? Plan for New Wealth too
Selling a business can be exhilarating and exciting. When the transaction is complete, you will likely have more wealth than ever before. Given the time and complexity this high-stakes transaction requires, it can be easy to put wealth planning on hold, particularly with everything you’re already managing.
However, establishing a wealth management plan isn’t something to sit on. If you wait until it’s too late, you risk losing more than you need to taxes. Some tax-efficient structures take months to set up, and your window to realize tax savings could close quickly. It’s best to engage a financial advisor before you start the process of selling your business, so you’re well prepared to preserve your future wealth and feel confident you’re not leaving money on the table.
3 ways to preserve your new wealth
When it comes to selling your business, you have plenty of options for establishing tax efficiency, achieving adequate diversification post-close, and realizing other benefits. In some cases, these opportunities evaporate after the transaction closes.
Here are three examples of how your advisor can help you plan ahead to protect and preserve your new wealth.
1. Maximizing after-tax proceeds
Your attorney and/or accountant can work with your financial advisor to review your current business structure and propose alternatives for minimizing your income-tax liability from a sale (inclusive of capital gains taxes). One option is recognizing capital losses to help offset the capital gain from the sale.
Donations to a private foundation, donor-advised fund or public charity can first be used to help offset increases in your ordinary income and then potentially in your capital gains. Relocating to a state with lower income taxes and capital gains can also be beneficial under certain circumstances.
2. Limiting transfer taxes
Estate, gift and generation-skipping transfer taxes can also be impacted by the sale of your business. If you plan ahead, you can shift a portion of your anticipated future appreciation off your balance sheet by gifting business equity to your spouse, children or others through a legacy trust. A grantor-retained annuity trust (GRAT) and spousal lifetime access trust (SLAT) allow you to contribute business assets to effectively freeze their value ahead of the sale and reduce your heirs’ future tax liability.
3. Protecting your assets
A liability umbrella insurance policy can help you protect your new wealth from legal claimants. If you’re married and don’t have a prenuptial agreement, think about creating a post-nuptial agreement. If you’re serving on the board of another company, be sure you’re covered through directors and officers insurance.
Your Transaction Support Team
Through these complexities, you want a financial advisor who is coordinating with your estate attorney and a tax advisor or accountant. Your advisor should also be working with investment bankers within the same network when wall-crossing isn’t an issue. Working together, this team can identify appropriate and impactful wealth management techniques that trigger savings.
Why Integrated Teams Matter
Business owners often fall back on the expression “if I take care of my business, it will take care of me.” But that isn’t the whole story. It requires a team working together behind the scenes to ensure your hard work adds up to maximum gain.
As mentioned, you can lose significant tax savings without an integrated approach. In one instance, an attorney within an advisor’s network brought him in to help with the sale of a commercial roofing company. Working in concert with the investment banking team, they transferred the ownership to a series of trusts for the benefit of the client’s children and spouse, saving about 10% of the transaction proceeds from going to taxes.
Your transaction team can identify potential problems and hash out solutions before it’s too late. For example, a business owner transferring business assets to a GRAT while also contributing similar business assets to a donoradvised fund will likely run into valuation issues that estate attorneys would need to resolve with the client’s tax advisor or accountant.
This level of coordination cannot and does not happen on fragmented teams. In an ideal setting, each member of your support team is constantly asking each other questions. Your advisor knows you and your wealthplanning goals, and they can tap into the firm’s greater resources, including our investment bank and estate planning teams, to help you plan for a successful future with your well-deserved proceeds.
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