At Wealth Legacy Group®, Inc., we get hired to put structures in place to reduce defer or even eliminate taxes for clients in their liquidity events . . . a “fence at the top of the cliff.” That said, there are times where that is not possible for a variety of reasons, or the sale has already occurred. Thus, we want to consider strategies which will provide a “net” and an “ambulance in the valley below” if/when the client goes over the “liquidity cliff.”

Did you or someone you know sell a business, real estate or other appreciated asset(s) this year and will incur a large tax bill next year if nothing is done to mitigate the taxes? If so, this article is for you! It will outline six tax-reducing strategies which can be considered as stand-alone strategies or in combination. Often there are two or three options which end up being used to accomplish different objectives . . .  but all are “post-sale tax reduction” strategies – as long as they are implemented in the same tax year as the liquidity event. Tax savings after the fact . . . “Imagine That™!“

1. Family Giving Fund – also known as a “Donor-Advised Fund”

• In most cases, you get the full deduction for contributions in the current tax year – even though charitable distributions might not occur until many years in the future
• It does not provide income to you but could be used to free up cash flow by making donations from the fund instead of out of your pocket
• If your children/heirs wish to be involved in the distribution to charity(ies), this could be something they continue after you (or you and your spouse) are gone
• Otherwise, there can be a final distribution after you (or you and your spouse) are gone if no family member/heir wishes to be involved
  
  2. Capital Gains Alternative Trust™ – also known as a “Charitable Remainder Trust”

•  You can fund the trust with cash from the sale or other appreciated assets – which can give you deductions immediately to help offset taxable gains – from 10% to over 65% of every dollar funded
• This provides income now or in the future in addition to the current charitable deduction
• You can add/change charitable beneficiaries at any point in the future
• After you (or you and other income beneficiaries) are gone, the charity(ies) of your choice receive the remaining assets in the trust – which could be your own Family Giving Fund (see above section for more details)
  
  3. Life Estate Agreement

•  This names a charity(ies) to receive a beneficial interest in your asset(s) – typically your home – after you (or you and your spouse) are gone
• It does not restrict your enjoyment of the home during your lifetime
• Because a charity(ies) will be receiving the gift of the home when you (or you and your spouse) are gone, you receive a charitable deduction now. One client just received a $1,700,000 deduction this year to help offset taxes from a major liquidity event
  
  4. The “Terminator Trust™” – also known as a “Reversionary Charitable Lead Annuity Trust”

•  It does not provide you with any income, but at the end of the trust period, the asset(s) returns to you at its then present value – hence the name Terminator Trust™ . . . “I’ll be back”
• It pays a stream of money to a charity(ies) of your choice for the number of years you select upfront (e.g., 5 years, 10 years, etc.)
• Even though philanthropic payments are made for a designated number of years, the IRS allows you to take a significant tax deduction all in the first year
• It could also be used to meet charitable financial pledges you have made, which indirectly frees up money you were giving from current income
• Note: Since you receive a large deduction in year 1, in the remaining years you generally pay a small amount of taxes on “phantom income” – income generated by the assets in the trust

      5.  The “Baby PIF” – also known as a “Total Return Pooled Income Fund” (PIF)

•  You receive income from this fund for the rest of your life (or lives if multiple beneficiaries)
• You can receive a substantial income tax deduction this year (with a five-year carry forward of any unused deductions). A client received a $1,600,000 deduction from transferring $2 million to their individual Baby PIF to help offset taxes from a recent liquidity event
• It is creditor protected, and any undistributed income is not taxable until taken out
• When you (or you and your spouse) have passed away, the income can continue to heirs for as long as two more additional
• generations (although this reduces the tax deduction amount)
• The remaining value of the assets go to your designated charity(ies), which can include your own Family Giving Fund
• Custom-design features are available when at least $1 million is contributed to the account
• You can use less than $1 million to set up the account, but being “off the shelf,” it is less flexible
  
  6. Sheltering an Asset Sale of a Business

•  Often when a closely held business is sold, it is a sale of assets rather than stock. As of the closing date, the seller terminates the employees and they are simultaneously hired by the buyer. This leaves the owner as the only remaining employee
• Most of the time the sale calls for two specific agreements for the owner. These are ordinary income items that are deductible to the buyer making it even more attractive for the buyer to include these
• The selling owner establishes a specific tax-deductible plan for the entity (corporation) which he/she retained
• The two above mentioned agreements become the source of salary and contributions to a tax-deductible type of plan
• Depending on the age of the selling owner and his/her salary history with the company, it might be possible to make large deductible contributions to this new plan with small or possibly no current salary
• With planning, the owner, spouse, children and/or grandchildren can take minimal distributions over their lifetimes, thereby delaying a portion of the taxes for decades

Let’s have a complimentary conversation about whether any of these options might be a fit for you or your clients or friends who have had a liquidity event sometime this year. Since little time is left to put one or more of these techniques in place before year-end, please contact us as soon as possible if interested in lowering your taxes. We would rather build a fence at the cliff’s edge for those who have not had their liquidity event yet. For those who have, however, isn’t it nice to know that a net and an ambulance are there to provide at least some degree of tax reduction assistance?

Eliminate or reduce taxes after a liquidation event has already occurred . . .

“Imagine That™!“

Written by R. J. Kelly – November 2019

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