Succession Planning Example

i-prac-businesscommercialThe following is an example of how Mr. Rush, in conjunction with the Estate Planning Department of Cornetet, Meyer, Rush & Stapleton, successfully used a vehicle known as a Charitable Remainder Trust (CRT) to reduce or eliminate capital gains tax on the sale of a business entity:

Example without CRT

Client sells his/her business for $2,000,000 which has a tax basis of $200,000. Capital gains tax represents a major source of outflow. Tax is calculated as follows:

Sales Price

$2,000,000

Basis

 ($200,000)

Taxable Gain

$1,800,000

Capital Gains Tax

$450,000

(approximate Federal & State)
Net Sales Proceeds

$1,550,000

Example with CRT

Client establishes a CRT prior to the sale and transfer of the business to the CRT. The trustee of the CRT then signs the purchase agreement and other documents of title necessary to transfer the business. Capital gains tax is eliminated. Tax is calculated as follows:

Sales Price

$2,000,000

Basis

 ($200,000)

Taxable Gain

$1,800,000

Capital Gains Tax

$-0-

Net Sales Proceeds

$2,000,000

In the second example where a CRT is utilized, the income from the entire $2,000,000 works for the business owner and his/her spouse for life. The remainder passes to charity. To compensate the children of the business owner for the remainder of the proceeds that passed to charity (which otherwise would have likely passed to the children), life insurance or other estate planning vehicles could be utilized.

Obviously, the elimination of the capital gains tax makes a major difference to both the buyer and the seller. An added benefit is that the client also receives a charitable deduction in the amount of the remainder interest. If the charitable deduction is not fully used, it may be carried out for five years.