Did you know that you could sell a business or a highly appreciated asset and not pay a dime in taxes? I know what you are thinking. Yes, it does sound too good to be true. However, this is not one of those cases. It is absolutely possible with a charitable remainder trust. Check out this video to find out how!
I had clients who were selling their business for a hefty price. They were going to make an outstanding profit from the sale. Yet with the nice yield coming from unloading the company, the clients were frustrated by the total amount of taxes they would have to pay. So we immediately sprang into action, meeting with their CPA and attorney, to see what – if any – tax break we could utilize to minimize the clients’ tax burden. After all our planning, we were able to reduce the taxes to $0 AND drop this year’s taxes so far down that we were able to pull money out of their IRA, further diminishing the taxes on that as well. You are probably thinking, “how in the world?”
We chose to utilize a Charitable Remainder Trust or a CRT. This particular tool was perfect for our clients, who are philanthropic people. That character trait is a must for using a CRT. The most significant downside to these is the fact that they are irrevocable, meaning once they are in place, there is no going back. Once you make that decision, you can’t change it. For these clients, they were in their mid-60s with about a 25-year life expectancy. The numbers and their overall financial well-being made this irrevocable planning tool a great way to maximize the benefits of using a charitable remainder trust. So what is a CRT?
The first thing to make a note of is that a charity is involved and will receive your business assets in the future. This tool is extremely complicated. However, for the purpose of this post, I am giving an overview and simplifying the benefits they may offer.
In short, our clients gave their business to a charity. As a legal charitable entity, the charity is not liable for paying any taxes. So once my clients gave the business to them, the charity and our clients entered into an agreement that stated the clients would receive income from the asset for the remainder of their lives—thus a Charity Remainder Trust. Because it is a trust, that means it is outside of the clients’ estate. Again, these are complicated, but to simply state it, the clients gave the business to the charity, which in turn sold the business, paying $0 in taxes. Then based on the agreement, the full value of the business went into an account for the charity, from which our clients will receive income for the rest of their lives. WOW! That is pretty powerful!
Let’s walk through the numbers. We will assume the business was worth $1 million. Many times the taxes can be a whopping $200k to $400k, possibly, even more, depending on the breakdown of the actual tax classification. For this example, we’ll say the taxes were 30%, or $300k of the million. Well, because of the Charitable Remainder Trust, my clients did not pay that. Instead the full $1 million went into the trust account.
Not only that, but they also received a substantial charitable deduction on their taxes which reduced their liabilities significantly, so much so that we were able to pull out some of their retirement money which further decreased their overall tax burden. In the clients’ case, we only need about 3% distribution, or $30k, from the $1 million sale, and the trust easily provided that 3% for the rest of their lives. That means instead of only being able to take 3% of $700k (the after-tax amount if they sold their business outright), they were now taking 3% of a million. In this case, it was a fantastic tool.
So guys, listen. If you’re contemplating selling your business, a piece of real estate or another highly appreciated asset, then a Charitable Remainder Trust could save you hundreds of thousands of dollars and provide you with a nice income stream, all while minimizing or eradicating your taxes altogether! Life is hard. Business is complicated, especially when it comes to planning something of this nature. Let’s work together to make your life and taxes, at least, financially simple. Contact us now if you want to learn more about what tools might be right for you.