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Charles Claver, Vice President

An exit strategy for any business owner is just as important as the plan that keeps the business running and profitable. For closely-held businesses, deciding whether to sell and to whom is essential. There are also important considerations that have real and lasting financial and tax consequences, not only to the business but also to the business owner and his or her family.

For California business owners, selling can trigger a significant taxable event, which can include as high as a 37.1% tax bill right off the top between federal and state taxes. That significant tax liability ultimately means less money to you and your family. The good news is that for those business owners who are charitably inclined and want to leave a lasting legacy, certain strategies can not only be beneficial to your family, but to society as well.

When making a decision to possibly sell and entertain an offer of purchase, it’s important to understand that once an executed purchase agreement has been signed, your estate and tax planning strategies and options are then limited. You should have a plan to sell the business in place BEFORE any executed sale agreement has been signed and that it has the input of your trusted advisors, including your CPA, attorney, and financial advisor to address the tax and financial impacts to you and your family.

Some strategies include the following:

Charitable Remainder Unitrust (CRUT). The business owner transfers all or part of the business to the trustee of the charitable remainder unitrust (CRUT), gets a partial income tax deduction and a set percentage of the trust value or income stream for life, and avoids capital gains on the sale of the asset inside the trust. When the donor or other named beneficiary dies or the trust term ends, the remaining trust assets pass to one or more designated charities.

Charitable Lead Trust. An irrevocable trust that makes payments to a charity for a period of time with the remaining assets eventually going to designated beneficiaries can potentially provide an income tax deduction, as well as estate or gift tax savings on assets ultimately passed to designated beneficiaries. At the same time, the trust distributes regular payments to a preferred charity during the term of the trust. While the donor will realize taxable income on assets inside the trust that are sold to make the charitable payout, with good investment planning inside the trust, the taxes paid over time may be significantly less than the tax saved up front.

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