A: Many successful business owners find themselves facing a similar situation. In any large financial transaction it is important to using the right financial tools to protect and/or enhance your potential windfall. Here’s an example that may be similar to your situation and details the significant benefits of deploying a charitable remainder trust within the structure of a business buyout.
A successful entrepreneur is about to sell his closely held business for $5,000,000. He began the business years ago on a shoestring budget, so the tax cost basis is essentially zero. He wants to reinvest the proceeds of the sale to supplement his retirement income. He is contemplating a contribution of $1,000,000 of the corporation’s stock to a 7% charitable remainder trust before the sales negotiations are completed. Assuming that interest rates available outside the trust are at a comparable 7%, the donor will have approximately 37% more annual income if he contributes the stock to a tax-exempt charitable remainder trust than if he retains the stock. In addition, he will be entitled to an income tax deduction of approximately $250,000 (the present value of the remainder interest passing to charity at the end of the donor’s life expectancy) in the year in which the trust is created. This deduction can go toward reducing the taxable income resulting from the capital gain realized on the sale of stock outside the CRT. Furthermore, the $1,000,000 transferred to the CRT is removed from the donor’s taxable estate for estate tax purposes without using any of the donor’s unified credit.