Tax Planning Strategies Every Business Owner Must Know Before Selling a Business

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One thing people often don’t realize is that for business owners, their estate planning attorney needs to be intimately involved in the succession planning of any type of business. A big aspect of what we do in our practice is focusing on exit planning strategies that are tax-efficient.

Let me give you an example: let’s say a business owner has a closely held business interest, and they’re going to sell it. It doesn’t really matter who they sell it to, but there are two things they need to be thinking about: income tax savings and estate tax savings.

When it comes to income tax savings, most people are already trying to figure that out. But there are two areas that people often overlook. First, state income tax. If you’re a business owner living in a jurisdiction with a state income tax, you can potentially move your business interests to a trust for your benefit that’s domiciled in another state. We love South Dakota because it doesn’t have a state income tax and is recognized as the premier trust jurisdiction in the U.S. By doing this, you can avoid state income tax when you sell the business. Additionally, you get the added bonus of asset protection.

Next, there are charitable planning and giving opportunities that could help reduce your state and federal income taxes. I won’t go into too much detail about that right now, but it’s something worth considering.

Now, the other big piece to think about is this: maybe, as a business owner, you’re currently worth $1 million, $2 million, or $3 million. That’s a lot of money, but it’s not enough to put you in a taxable estate situation. Meaning, if you passed away, you wouldn’t have a taxable estate. However, if you sell that business, now all of a sudden, you’re worth maybe $10 million, $20 million, $30 million, $40 million, or even $50 million. Your financial situation has changed dramatically.

So, the key thing to consider is how you’re going to reduce estate tax. Planning is so much easier to do before you have that liquidity event. Your trust planning needs to be a part of your business succession plan and exit strategy. Don’t miss out on these significant income and estate tax planning opportunities before you sell that business!