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Preserving Wealth and Minimizing Taxes With Exit Planning

Submitted by John Brown on Mon, 03/16/2015 - 4:27pm
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Full disclosure: Wealth preservation planning can’t cheat death, but it can help business owners avoid taxes and achieve financial security.

Successful Exit Plans include strategies that minimize taxation on the business owner’s proceeds from the transfer of a business. These Plans also include strategies to preserve that wealth once the owner has it. The best Exit Plans go beyond the business owner’s exit, preserving wealth well after the owner leaves.

Owners establish the goals for wealth preservation planning when they answer two questions in Step One of The BEI Seven Step Exit Planning Process™.

  1. How much wealth do you want when you exit your company? (For parents, there’s a follow-up question: How much wealth do you want your children to have?)
  2. How long before you leave your company?

Using their answers as guideposts, business owners and their advisors then choose the planning techniques that will best preserve their wealth, provide for their families, and minimize their tax bills.

Let’s look at how one fictional business owner used wealth preservation techniques to do exactly that.

Wealth Preservation Techniques in Action

George recognized that he’d waited too long to begin gifting part of his company to his kids only when his CPA told him that, based on his company’s pre-tax cash flow of $2 million per year, his company could be worth as much as $12 million to a third party.

After recovering from that shock, George realized that (a) he didn’t need nearly that much cash to retire in style and (b) if he didn’t transfer at least half the value of his business before a sale, his family could pay millions of dollars in gift or estate taxes.

To remedy this situation George and his advisors did two things:

1. Hired a business appraiser to value the company.

Result: Based on then-current tax case law and valuation principles, the appraiser valued the transfer of a 49% minority (less than controlling) interest at $4 million. In her opinion, the appropriate minority discount was 35% of the stock’s full fair market value ($12 million). Using the 35% discount, George could give almost half of the company to his children (a gift valued at approximately $4 million) and would pay no gift tax, based on the current available unified credit.

While George was happy with the idea of not paying taxes, he didn’t relish using most of his lifetime gift and estate tax exemption, and wanted a better answer. So, he took another step to avoid needlessly wasting this most valuable exemption.

2. Created a GRAT (Grantor Retained Annuity Trust).

Result: Using a GRAT—an important tool in the wealth preservation tool box—George would avoid using a significant part of his unified credit and could still give almost 50% of the company to his children.

Executing these wealth preservation planning strategies well in advance of George’s exit gave George three opportunities:

  • Transfer 50% of his business (with a fair market value of $9–12 million) to his children in four years (a time frame George chose) using little or none of his lifetime unified credit.
  • Direct the cash flow from the company during that four-year period to himself, because the annuity payment to George was designed to equal the amount of cash flow expected from the stock transferred into the GRAT. George needed this income to achieve his financial security Exit Objective.
  • Transfer the trust asset (almost 50% of the company) to trusts for George’s children, completely free of any gift tax consequences (after four years or at the termination of the trust).

George established these trusts when he created the GRAT to carry out his wishes regarding when, and if, his children would receive money from those trusts.

Techniques such as GRATs and the careful use of minority discounts (as well as many other estate tax avoidance techniques) work best if they are put in place well before owners exit their businesses. These techniques also work well to achieve a business owner’s desire to both attain financial security and provide for their families.


The following provides additional details about how and why a GRAT can help achieve an owner’s twin objectives: the need for financial security and to provide for one’s family.

A GRAT is an irrevocable trust into which the business owner (and the GRAT’s trustee) transfers some of his or her non-voting stock. The GRAT must make a fixed payment (annuity) to the owner each year for a pre-determined number of years. At the end of that period, any stock remaining is transferred to the children’s trusts.

The IRS treats stock transferred into a GRAT as a gift. The amount of that gift is the value of the asset transferred minus the present value of the annuity that the owner will continue to receive. (George’s advisors made sure that the present value of the annuity paid out over four years almost equaled the value of the stock transferred into the GRAT. In doing so, George made only a nominal and non-taxable gift.)

The key to a GRAT’s success is to transfer an asset that appreciates in value and/or produces income exceeding 120% of the federal midterm interest rate. This rate fluctuates monthly.


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