Selling Your Company? Don’t Leave Money on the Table

By Justin Miller | March 17, 2023

The author Zig Ziglar once said, “Money isn’t the most important thing in life, but it’s reasonably close to oxygen on the ‘gotta have it’ scale.”

Still, a business owner caught up in the stress and time-consuming work of negotiating and structuring the sale of their company can lose sight of what the transaction can mean at the personal level. It’s time to take a deep breath and consider this possible once-in-a-lifetime opportunity to maximize personal after-tax profits; minimize income, gift, estate, and generation-skipping transfer taxes; accomplish charitable goals; and protect assets.

A successful transaction starts with a collaborative team of advisors – which can include investment bankers, attorneys, accountants, and strategic wealth planning advisors – all working together to prepare the business owner for the liquidity event and to maximize the value, speed, and certainty of the transaction closing. By combining tax, estate planning and business succession strategies, we believe business owners will have the greatest opportunity to maximize the wealth from the sale of their business.

With strategic wealth planning, the resulting savings can be significant – and the earlier you start, generally, the better the results can be. However, the sheer number of potential planning strategies can be overwhelming and easily lead to planning paralysis. For example, options could include intentionally defective grantor trusts, grantor retained annuity trusts, completed gift non-grantor trusts, incomplete gift non-grantor trusts, spousal lifetime access trusts, asset protection trusts, charitable trusts, family limited partnerships, family limited liability companies, qualified opportunity zone investments, qualified small business stock stacking, installment sales, discounting, recapitalization, estate freezes – it’s enough to make almost anyone’s head spin!

So, how can Evercore Wealth Management help? Consider the recent experience of a California-based couple, described below, who were able to successfully close their private transaction in a tax-efficient manner while creating a lasting legacy for their family and charity. By adding a wealth advisor to their collaborative advisory team, the couple successfully eliminated $45 million of the sale proceeds from being subject to federal income taxes, as well as $35 million from being subject to state income taxes, deferred an additional $10 million from both federal and state income taxes, generated a $6 million charitable income tax deduction, and created a lasting legacy for their family that provided both asset protection and the ability for assets to grow free of gift, estate, and generation-skipping transfer taxes in perpetuity.

Selling a business is a challenging, and often exhausting, transition. But it’s important to make time, as early as possible, to ensure that a strategic wealth plan is structured to maximize the potential advantages of the transaction. After all, this life event is often the result of many years of hard work and sacrifice. In short, don’t leave any money on the table.

If you are selling your company, consider contacting a Wealth and Fiduciary Advisor at Evercore Wealth Management and Evercore Trust Company, N.A., who can work with you, your family, and your team of advisors to help protect your wealth, your legacy, and your family’s values for future generations.

Justin Miller is a Partner and National Director of Wealth Planning at Evercore Wealth Management. He can be contacted at justin.miller@evercore.com.

Wealth Planning When Selling a Business: One Couple’s Experience

A California couple was so caught up in the approaching sale of their private technology business that they almost canceled the meeting with the wealth advisor recommended by their investment banker. They already had done some estate planning years ago by funding an irrevocable intentionally defective grantor trust, or IDGT, for their children, and while they knew it was a good idea to consider other estate planning strategies, they thought it could wait. But in the end, they took the meeting.

The first thing this couple’s new wealth advisor discovered while reviewing their financial and estate planning documents was that a required gift tax return was never filed for their existing IDGT. After working with their attorney and accountant to rectify that issue, the wealth advisor prepared easy-to-follow flowcharts and detailed financial projections for the couple to consider additional tax planning options.

Next, the wealth advisor recommended setting up three new irrevocable non-grantor trusts in Delaware for the benefit of each of the couple’s adult children and any future grandchildren. Unlike their IDGT, each of those new non-grantor trusts qualified for a $10 million exclusion from both federal and state income taxes by taking advantage of section 1202 of the Internal Revenue Code with respect to qualified small business stock, or QSBS. As a result of the QSBS planning, the couple was able to exclude a total of $40 million of proceeds from federal income taxes – that is, $30 million with the non-grantor trusts and $10 million personally. And even though they lived in a state that does not have a similar QSBS exclusion at the state level, the three non-grantor trusts based in Delaware also were able to avoid state income taxation on $30 million in gains. In addition, by using their remaining lifetime exemption amount, which is $25.84 million per couple in 2023, those trusts’ assets and all the future growth of the assets will remain protected from creditors and free of gift, estate, and generation-skipping transfer taxes for multiple generations.

After their wealth advisor walked them through various philanthropic planning options, the couple decided that a private foundation was not worth the extra administrative burden, but they did decide to set up a donor-advised fund with $5 million of their company stock. Not only did that charitable gift generate a $5 million tax deduction – which was used to offset their ordinary income from salaries, bonuses, and exercise of stock options – but the gift also protected the family from paying any capital gains on the sale of that stock. In addition, the couple funded a charitable remainder trust, or CRT, with $10 million, which generated an additional $1 million charitable deduction, deferred federal and state income taxes, and should provide an annual payment of 7.7% of the value of the trust to the couple for the rest of their joint lifetimes (projected to be $21 million pre-tax over 32 years with an assumed 7% return). Everything remaining in the CRT after both their deaths (estimated to be $7.2 million with that assumed 7% return¹) would go to their donor-advised fund, which their children would then be able to participate in giving away to charities during their lifetimes.

As part of the comprehensive wealth planning process, the wealth advisor also made sure that the couple had a short-term cash management plan in place to protect the post-transaction proceeds, generate interest, and cover the federal and state income taxes that would be due on the transaction. The wealth advisor included a senior portfolio manager as part of the wealth management team to help this couple create an initial goals-based investment policy statement that would help guide their long-term investment strategy and overall asset allocation, taking into account both the location and structure of all their assets across various family trusts and business entities.

Last, the wealth advisor facilitated the couple’s first family council meeting, in which their adult children had an opportunity to learn more about the various planning structures, and the family could communicate about how the substantial proceeds from the sale of the company would be used to support the family’s values and future legacy.

– Justin Miller

¹ Estimated returns are based on a balanced assets allocation and net of fees.

Evercore Wealth Management, LLC ("EWM") is an investment adviser registered with the U.S. Securities and Exchange Commission under the Investment Advisers Act of 1940. EWM prepared this material for informational purposes only and should not be viewed as advice or recommendations with respect to asset allocation or any particular investment. It is not our intention to state or imply in any manner that past results are an indication of future performance. Future results cannot be guaranteed and a loss of principal may occur. This material does not constitute financial, investment, accounting, tax or legal advice. It does not constitute an offer to buy or sell or a solicitation of any offer to buy or sell any security/instrument, or to participate in any trading strategy. The securities/instruments discussed in this material may not be suitable for all investors. The appropriateness of a particular investment or strategy will depend on an investor’s individual circumstances and objectives. Specific needs of a client must be reviewed and assessed before determining the proper investment objective and asset allocation which may be adjusted to market circumstances. EWM may make investment decisions for its clients that are different from or inconsistent with the analysis in this report. EWM clients may invest in categories of securities or other instruments not covered in this report. Descriptions provided in this material are not substitutes for disclosure in offering documents for particular investment products. Any specific holdings discussed do not represent all of the securities purchased, sold or recommended by EWM, and the reader should not assume that investments in the companies identified and discussed were or will be profitable. Upon request, we will furnish a list of all securities recommended to clients during the past year. Performance results for individual accounts may vary due to the timing of investments, additions/withdrawals, length of relationship, and size of positions, among other reasons. Prospective investors should perform their own investigation and evaluation of investment options, should ask EWM for additional information if needed, and should consult their own attorney and other advisors. Indices are unmanaged and do not reflect fees or transaction expenses. You cannot invest directly in an index. References to benchmarks or indices are provided for information only. The securities discussed herein were holdings during the quarter. They will not always be the highest performing securities in the portfolio, but rather will have some characteristic of significance relevant to the article (e.g., reported news or event, a new contract, acquisition/divestiture, financing/refinancing, revenue or earnings, changes to management, change in relative valuation, plant strike, product recall, court ruling). EWM obtained this information from multiple sources believed to be reliable as of the date of publication; EWM, however, makes no representations as to the accuracy or completeness of such third party information. Unless otherwise noted, any recommendations, opinions and analysis herein reflect our judgment at the date of this report and are subject to change. EWM has no obligation to update, modify or amend this information or to otherwise notify a reader thereof in the event that any such information becomes outdated, inaccurate, or incomplete. EWM’s Privacy Policy is available upon request. EWM is compensated for the investment advisory services it provides, generally based on a percentage of assets under management. In addition to the investment management fees charged, clients may be responsible for additional expenses, such as brokerage fees, custody fees, and fees and expenses charged by third-party mutual funds, pooled investment vehicles, and third-party managers that may be recommended to clients. A complete description of EWM’s advisory fees is available in Part 2A of EWM’s Form ADV. Trust services are provided by Evercore Trust Company, N.A., a national trust bank regulated by the Office of the Comptroller of the Currency and/or Evercore Trust Company of Delaware, a limited purpose trust company regulated by the Delaware State Bank Commissioner, both affiliates of EWM. Custody services are provided by Evercore Trust Company, N.A. The use of any word or phrase contained herein that could be considered superlative is not intended to imply that EWM is the only firm capable of providing adequate advisory services. This material does not purport to be a complete description of our investment services. This document is prepared for the use of EWM clients and prospective clients and may not be redistributed, retransmitted or disclosed, in whole or in part, or in any form or manner, without the express written consent of EWM. Any unauthorized use or disclosure is prohibited. The Chartered Financial Analyst and CFA trademarks are the property of CFA Institute. Certified Financial Planner Board of Standards Inc. owns the certification marks CFP®, Certified Financial Planner™ and CFP® in the U.S.

IRS Circular 230 Disclosure:

Pursuant to IRS Regulations, we inform you that any U.S. Federal tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for (i) the purpose of avoiding IRS imposed penalties or (ii) promoting, marketing, or recommending to another party any transaction or matter addressed herein. This information is provided for information purposes only and does not constitute financial, investment, tax or legal advice.