There are a few ways you can defer taxes on the sale of a
business, although I must admit except for a seller note most of our clients don’t take advantage of
these. The one that most people have
heard of, a Private Annuity Trust (PAT) was disallowed by the IRS in October
2006 so that one is no longer available.
The first way is with a seller note. They qualify as an installment sale with the
IRS, so taxes are not due until you receive payment. Many sellers do not wish to take a note for
even a portion of their business, although often it is required by a lender,
and often it makes a lot of sense tax-wise.
With the IRS not allowing tax deferral with a Private
Annuity Trust, an entirely new industry has popped up around “Structured Sales”. This is a way to use an insurance company to
set up an annuity, which is only taxable when you receive the money.
First, to use Structured Sales you have to set it up well
before the transaction. A key to the tax
deferral is that you can not directly (or even indirectly) receive the money
from the transaction. (Because then the
IRS essentially says, “you got the
money now, so you pay the tax now”).
It has to go directly to the life insurance company. The good news is that you get to specify a
payment schedule that you’ll receive, and it can be just about anything you
want. The bad news is that you can’t
change the payment schedule once it starts.
Another popular tax deferral method is a Charitable
Remainder Trust (CRT). This one is
especially nice if you actually have a charity you would like to support. These are the main points of a CRT:
- Irrevocable – life time trust
that pays out to you at a rate based on current interest rates
- 10% minimum remainder goes to
charity you name when you die
- Investment vehicles you can
use within the trust are pretty flexible
- There are a variety of
schemes for the payout, even payouts, or fixed percentage of account