If you haven’t already, go ahead and subscribe to our channel and like this video. We want to make sure you receive our other content as we release it, so don’t miss the opportunity to stay updated!
One thing people don’t realize is that for business owners, their estate planning attorney needs to be intimately involved with the succession planning of any type of business. A big aspect of what we do in our practice is focus on exit planning strategies that are tax-efficient. Let me give you an example.
Let’s say a business owner has a closely held business interest, and they’re planning to sell it to someone—it doesn’t really matter who. There are two key areas they need to think about: income tax savings and estate tax savings.
For income tax savings, most people are already trying to figure that out. But there are two areas people often miss. First, state income tax. If you’re a business owner living in a jurisdiction with a state income tax, you can potentially move your business interest to a trust for your benefit that’s domiciled in another state. We love South Dakota because it doesn’t have a state income tax and is recognized as the premier trust jurisdiction in the U.S. By doing this, you can avoid state income tax when you sell the business. Additionally, you get the added bonus of asset protection.
Next, there are charitable planning and giving opportunities that could help reduce your state and federal income tax. I won’t go into a lot of details about that right now.
Another big piece to consider is this: maybe as a business owner, you’re currently worth $1 million, $2 million, or $3 million. That’s a lot of money, but it’s not a taxable estate situation, meaning if you passed away, you wouldn’t have a taxable estate. However, if you sell that business, now all of a sudden you’re worth maybe $10 million, $20 million, $30 million, $40 million, or $50 million. Your financial situation has changed dramatically.
So, the key thing to think about is how you’re going to reduce estate tax. The planning is so much easier to do before you have that liquidity event. Your trust planning needs to be a part of that business succession plan and exit strategy. Don’t miss out on these heavy income and estate tax planning opportunities before you sell that business.