March 26, 2025 • 21 mins
Could your current tax strategies be creating a ticking time bomb for your future?
Sam built a successful business for 30 years. Then, he lost nearly half their $2 million sale price to unexpected taxes.
In this forward-thinking episode, we explore tax planning beyond just this year's return. You'll discover:
-
Three critical tax-planning timeframes most business owners completely ignore
-
How to structure your business today to save taxes when you eventually sell
-
Estate planning strategies that protect your business legacy from excessive taxation
-
The surprising ways business profits can increase your Medicare costs in retirement
Key Quote: "The tax strategies that work great for your business today might actually set you up for bigger tax headaches down the road."
Listen now to learn how you can develop a comprehensive tax strategy that serves your business well through every life stage.
Get your free "Business Owner's Legacy Planning Guide" in the Wealth Wisdom Financial Community. www.wealthwisdomfp.com/community
00:00 Introduction to Sam's Story
00:40 Welcome to Wealth Wisdom Financial Podcast
01:33 The Importance of Long-Term Tax Planning
03:03 Planning for a Business Sale
08:32 Estate Planning and Business Succession
12:29 Retirement Tax Planning for Business Owners
19:13 Conclusion and Next Steps
Watch on YouTube here: https://youtu.be/0aMY5WxljCc
Mark as Played
Transcript
Episode Transcript
Available transcripts are automatically generated. Complete accuracy is not guaranteed.
(00:01):
Today I want to introduce you to Sam.
Sam sold their business for $2,000,000
but ended up with less than half after
taxes. Today we're sharing the long term
planning strategies that could have saved
Sam hundreds of thousands. And
how you can protect yourself and your
business legacy, whether you're planning
(00:22):
to sell, pass it on to some
beneficiaries, some heirs, children,
those kind of people. Or if you want to
just become an absentee lord of
your business, right, where it runs and
you just collect a paycheck. We're going
to cover all those today. Buckle up. Here
we go.
In a world where chaos seems to reign
(00:42):
supreme, where uncertainty lurks around
every corner. And financial markets are
now more unpredictable than ever. There's
one place you can turn to to find clarity
and control. Welcome to the Wealth Wisdom
Financial Podcast. Hey, I'm Brandon.
And I'm Amanda. Join us as we dive deep
in the world of personal and business
(01:05):
finance to assist you in navigating
through the chaos and building the
financial future you deserve. We believe
when conventional financial thinking
doesn't get you where you want to go, you
need wealth. Wealth Wisdom. So if you're
ready to take control of your financial
destiny, tune into the Wealth Wisdom
Financial podcast because in a chaotic
(01:26):
world, your money shouldn't be.
Subscribe now and never miss an episode.
OK, welcome back. Today we're talking
about something most business owners
don't even want to think about, and they
put it off until it's too late. Long-term
tax planning. And I don't just mean next
year's taxes. I mean the big picture,
(01:46):
retirement, selling your business,
passing on your legacy, whatever it might
be. And Brandon's not joining us today.
It's just me because I'm going to go
really fast. I got a lot to cover. I know
your time is valuable. And you're going
to maybe slow this down, listen to it
multiple times, bring it to your tax
pros, bring it to your financial planner
like me. And let's make sure we got you
(02:07):
and we're making good decisions. Not just
short-term, but also long-term. Here we
go. Here's the big idea. Here's what
catches most business owners off guard.
The tax strategies that work great for
your Business Today might actually set
you up for a bigger tax headache down the
road. Let's look at Sam's story to
(02:28):
illustrate this, and then we'll break it
down. Sam built this successful business
and manufacturing over 30 years. They
did everything right for annual quote UN
quote right for annual taxes, maximizing
deductions, reinvesting profits, keeping
great records. But when they sold the
business for $2,000,000 to fund their
retirement, they were shocked. Between
(02:49):
capital gains taxes, state taxes, extra
Medicare charges for the higher of
income, they walked away with less than a
million. The worst part, most of
this could have been avoided with better
long-term planning. So let's talk about
three key areas of long-term planning
that most business owners miss. And we're
going to talk first about the planning
(03:11):
for a business sale and the taxes
there. The second we're going to talk
about is. Planning for passing on your
business to your children or other
beneficiaries. And then the third one
is planning for when you get to quote UN
quote, retire from your business but
still own it. One quick reminder. First,
(03:32):
I'm not a tax professional. This episode
is meant to empower you with knowledge to
bring to your tax professionals, not
giving anybody individual advice. We're
just sharing some great information that
we think will help you have better
conversations and make better decisions.
As you collaborate and work with your tax
pro, which you've got a collaborative tax
pro, right?OK, good. So first, let's dive
(03:53):
into planning for a business sale and the
taxes there. First, you want to
understand how the sale will be
taxed. Are you setting up for an asset
sale or a stock sale?Each
asset category in an asset sale has
different tax treatments, and an asset
sale is when a buyer purchase purchases
individual business assets. So if they're
(04:14):
purchasing your equipment in inventory,
that might be taxed as ordinary income.
If they're buying a building, then you
might have a 25% rate on depreciation
recapture. If they're buying goodwill and
other intangibles like copyrights, then
you might get capital gains rates in
terms of the taxations there. And
usually, buyers prefer
(04:35):
to do an asset sale for better tax
treatments. For themselves, you know,
long term and but it can result
in higher taxes for sellers due to that,
especially that depreciation recapture.
If you're doing a stock sale, this is
where the buyer purchases the actual
business entity. This is usually better
for sellers because you get one tax rate
(04:56):
on the entire sale. But it's harder to
get buyers to agree to, partially because
there's some liability they take on from
past business practices that they have no
control over what happened in the past.
This is also more important for
corporations than LLCS.
So part of this with the asset sale
versus the entity sale is
(05:16):
that buyers and sellers are just going to
have competing interest and your
taxation might be one of your interests.
And of course the buyer's eventual
taxation, if they resell it, is going to
be one of their big interests that
they're looking out for. So there's some
structures that spread taxes over
multiple tax years. So you could do an
installment sale that lets you pay your
(05:37):
taxes as you receive payments. You can
do earn outs that spread your income over
several years. You might even set up an
employee stock ownership plan, an ESOP
that can refer to the taxes until you
want or need to use the funds. So even
as you get into the buyer's part, right,
you can have some tax advantages that
(05:58):
you have more control over and maybe
they're open to an installment sale, an
earn out or an ESOP. So before
you even get though to the negotiating
table, there's some steps you can take
before the sale. First, clean up
your books and your records. Make sure
you've got, you know, personal and
business expenses clearly separate.
Document any asset purchases and
(06:18):
improvements. Keep good corporate minutes
and records. Just clean up your books and
records. We talked about that a lot this
month. Go back and listen to previous
episodes. If you're not sure how to do
that, we got some shortcuts for you.
Another thing is consider whether
converting to an S Corp, if you're not
one already, might be in your interest
there. This has to be done at least five
(06:39):
years before a sale to avoid built-in
gains tax. But it can save
you significant self-employment taxes
even as you go throughout to your
business before you sell it. And it also
allows for better sell structuring
options. If you're an S Corp or filing as
an S Corp, document improvements that
you're making that increase your cost
(07:00):
basis. Keep receipts for any kind of
capital improvements. Track your sweat
equity contributions. Document major
business process improvements. Make sure
if you're putting extra value into any
kind of capital asset that you've got
those things documented. Okay. So this is
things you can be doing in the meantime.
And then there's some things you want to
(07:20):
avoid, some common mistakes that will
increase your taxes at a sale.
One is waiting until a buyer appears to
start planning. This limits your
structuring options, gives you less time
to clean up issues. might force you to
accept less favorable terms. So start
preparing now, even if you're not
planning on selling for a long time.
(07:41):
Also, make sure you don't make the
mistake of not considering state
tax implications. You want to think
about the Internal Revenue Service and
what the federal government might charge
you, but some states are going to tax
business sales differently. You might
move to a new state long before you would
actually ever sell. You might, you
(08:02):
know, just have a heads up of how your
state that you're in might tax the sale
based on maybe where you're located or
even where your customers are. Great
conversation to have with your tax pro.
And then don't forget about basis
adjustments, missing those past
improvements that could increase your
basis, not tracking shareholder loan
(08:23):
repayments, failing to document those
capital contributions. Okay, that's
things to think about to avoid taxes on
the sale of a business. Now let's talk
about estate planning and business
succession. Maybe you aren't going to
sell your business, you prefer to pass it
down to the next generation. We've got
some key tools for reducing estate
(08:43):
taxes. One is a
family limited partnership, FLP.
These are a great way to start involving
your adult children and gift to them
parts of the business each year, rather
than they get it all at once later. This
can save on estate taxes, can also give
them the skills they need to run the
business, all those kind of things. But
(09:04):
don't worry. You can still maintain
control even while using the strategy.
And you do that by setting up different
levels of ownership so that you have the
level that's the controlling part and
you're gifting them the other level that
they don't have any control, but they
have ownership. Another option
is a grantor of a trained annuity trust,
(09:25):
a GRAT. This is a great option for
rapidly growing businesses or businesses
that have assets that are greatly
appreciating, maybe like a real estate
business, right?With this option, you're
essentially, again, not giving tax
advice here or legal advice, but
essentially, simplifying it, you're
gifting at today's values, and
(09:47):
the growth of that value is not included
in your estate later, okay?So
you can gift today's value, and then it
could grow millions of dollars before you
die, and all of that growth is
not factored in. That's called a grantor
retained annuity trust, a GRAT.
And then finally some buy sell agreements
are a great option for to fund
(10:09):
and make sure there are clear transition
plans for death or disability. These
are especially important for multiple
owner businesses where you're in the
business with somebody outside your
family or a non close relative.
They're also really great for if you have
maybe multiple children and only one
(10:29):
wants to be in the business, and you can
think about how what needs to happen with
the others. There's some common pitfalls
to avoid here with estate planning and
business succession. One pitfall is not
coordinating business and personal
planning. You want to make sure, as we
talk about a lot here, that what works
for you personallypersonally works with
(10:50):
the business and what you decide to do
with the business works for you
personally, right?Business owner focused
here. You want the business
succession plan to align with your
personal estate plan. You want to
consider the impact on non-business
heirs. We call this estate equalization.
Again, if you have multiple children,
only one's receiving the business, what
(11:11):
are you going to do with the other ones?
to make sure that they get an an equal
share, which equal, or fair is not always
equal, but we like to call it a state
equalization as a shorthand there,
and also playing for a state tax
liquidity that way. Another
common pitfall to avoid is forgetting
about state estate taxes. Just like when
(11:32):
you sell a business, there's the state
gets involved. um Same with estate
taxes. Certain states have lower
exemptions than the federal exemption.
And you might, even while you avoid
federal estate taxes, you might end up
having to pay, or your heirs might have
to pay state estate taxes.
And then also, too many people just
(11:53):
assume estate tax laws aren't gonna
change. The current exemptions sunset in
2026, and there's gonna be much lower
exemptions unless Congress takes actions.
act takes action. And of
course also the federal
limits can change and the state limits
can change independently too. So you kind
of want to check in and make adjustments
(12:14):
as those things change in both levels.
Okay. So that's about estate planning and
equalization, kind of thinking long range
that way. Now, what if in the
meantime, before you sell or before, you
know, you worry about business succession
within your family,What about before
then?If you want to do some retirement
tax planning, right?You're going to
retire from the business, but still own
(12:36):
it. And here there are some
special considerations.
In the first episode this month we talked
about the different tax buckets for
retirement savings, the
tax later bucket, the tax now
and not later bucket, and then the never
taxed bucket. You could also think about
(12:56):
Capital gains, tax rates versus income
tax rates, all those fun things.
You might have some traditional pre tax
accounts where you've gotten immediate
tax deductions throughout the years. And
your taxes are due on withdrawals and you
have to start required minimum
distributions at 73. You might have Roth
or Roth like accounts where you didn't
(13:17):
get a tax benefit later, but now you can
use it tax free and there's no required
minimum distributions on those things
like Roth IRA's or Roth like accounts
like bank and yourself type whole life
policies. And then you might still have
some taxable investments or you pay taxes
as you go. Maybe you also have some
things that you pay taxes when you sell
them and because you held them for more
than a year, then you get capital gains
(13:39):
rates. You might have some that get a
step up in basis at death and others that
wouldn't. All of these kind of
moving parts tax wise is what you might
already have. But there
are some very specific
retirement options for business owners.
that can help fill in these buckets in a
(14:00):
way that works for you. So one of them is
called a cash balance plan that you might
use in your high income years. You know
how like a IRA, you can only contribute
7,000 as of 2025 with maybe some catch-up
room. 401k might be about 40 to
60,000. I forget what the exact limit is
right now. Well, these cash balance plans
can, you can contribute 200,000 or
(14:22):
more annually. This really works though
if you've got consistent profits, just be
aware if you've got employees, you have
to cover them. Another option, you know,
solo 401k, SEP IRA, you can
use those maybe Roth types. This might be
better if you've got a spouse involved in
your business that kind of gives you that
tax leader bucket, kind of like the cash
(14:43):
balance plan, but a little smaller
contributions. But here's the thing.
What this all boils down to is there are
some unintended consequences of
profitable business ownership after
65 years old, things that
people just don't think about. They get
to 65 and they're like, oh, I did all of
these things to lower my taxes up until
now that I have to deal now with
(15:06):
the consequences of those things. For
instance, business income can impact how
much of your Social Security gets taxed.
Right. And especially if you
sell a business after 65, that's going to
have, you know, for sure going to put
your Social Security taxable, you know,
unless you're selling it for very
cheaply. It would impact your Medicare
(15:27):
premiums, right?How much do you pay there
in the surcharges with that two year look
back, all those kind of things that can
add thousands to your health care costs
and then. So this is
where you wanna look for, you got those
high years where maybe you've deferred
some things. You might have some lower
years where you can control your taxable
(15:48):
income for the longer time. Maybe you do
some Roth conversions during those lower
years. Maybe you plan for some qualified
charitable distributions from your
pre-tax accounts that you're going to
incorporate into your retirement
planning. Maybe you strategically time
when you're going to sell the business
and when those payments come out, maybe
(16:09):
before RMDs start, right?There's all
kinds of fun things to play around with
there. You just have to be thinking long
range, not just about today.
Okay, if all this sounds complicated and
expensive, stay tuned after the break.
We're gonna keep breaking it down,
helping you make some good decisions.
(16:36):
Ready to take the next step towards
securing your financial future?Whether
you're planning for retirement, saving
for your dream home, or you just want to
make your money work harder for you, the
team at Wealth Wisdom Financial are ready
to assist you. And now it's easier than
ever to see how we might give you a boost
on your financial journey. Schedule a 15
minute discovery call with one of us
(16:57):
today. And let's discuss your questions
and your financial goals together. Don't
wait any longer. Your financial freedom
awaits. Schedule your discovery call at
www.wealthwisdomfp.com/call.
Complication and expense, right?This is
(17:20):
where most people go like, holy cow, do I
really need to worry about this now?
Actually, yes. The earlier you start, the
more options you have. Remember Sam, the
one who sold his business for $2,000,000?
If they had started planning just five
years earlier, they could have
structured the sale differently to save
over 200,000 in taxes, used gifting
(17:42):
strategies to move some of the business
value to their kids tax-free, and built
up Roth and Roth-like accounts to provide
tax-free income, especially during those
years where they're getting the income
from the sale, right?Great ideas. Love
those. And of course they factor in
multiple things from each of the things
we just talked about. One of the great
things here is by being proactive, by
(18:03):
starting earlier, you have more options.
You can strategize. If we sell, here's
what we do. If we give this to our kids,
here's what we do. And if we just retire
while still owning the business, here's
what we do. And often there's things that
work for all all three circumstances
that you can do, no matter if you're
just, I don't know what I'm going to do.
What it comes down to is having an honest
(18:23):
conversation with your money team about
preparing early and often.
That's when you can have the
conversations and you can put
into action what you talk about. And if
you don't have time to do it, consider if
you can delegate other things to create
the time right things that somebody else
can do. At least 80% is what you can do.
(18:44):
Delegate that so you've got the time to
put into some of those higher level
things that only you can do. And also
think about how an ounce of time could
save pounds of time later for you or
for who has to pick up your mess. This is
an area where an ounce of prevention can
literally save pounds of cure later,
right?Or a couple dollars spent on
(19:04):
prevention can save you lots of
dollars in taxes and fees and all kinds
of attorney costs. All of that later. OK,
in conclusion, long-term planning isn't
just about avoiding taxes. We talked a
lot about taxes, but there's all kinds of
other ways that you want to be strategic
about when and how you pay your taxes,
(19:27):
how you avoid other fees, attorneys, or
all those things. The best time to start
is right now, when you have the most
options available. Too many business
owner conversations with their tax pros
are all about saving taxes this year or
next year. Be sure you're scheduling
time with them, talking about long-term
tax planning, adjusting your plan
(19:48):
regularly. And this is often where a
certified financial planner, a CFP like
me, comes in really handy and can
have even better conversations, give you
better tools and resources to go and
bring to your tax professionals and all
of that. Thinking through what are your
goals, what's the likelihood of a sale
versus retiring while you still own it?
All the, you know, pros and cons and how
(20:09):
it fits into the rest of your portfolio.
That's what a CFP like me does and loves
doing. So Are
you ready to start your long-term tax
planning?We've created a business
owner's legacy planning guide that walks
you through the key decisions that you
need to make and get it for free in the
Wealth Wisdom Financial community, along
(20:31):
with a checklist of questions to ask your
tax and legal advisors. And we'll also
include in there a link to schedule a
call with me to have these kinds of
conversations about legacy planning as a
business owner so that you can.
Have more custom tailored questions that
you can bring to your tax and legal
advisors as well, and to make sure you
(20:52):
get all your ducks in a row as quickly
and efficiently as possible. Thanks for
joining me. Hit that subscribe button.
We've got some really cool things planned
for the month of April. We got the
taxes out of the way, hopefully, and now
we're ready to move on to more fun
things. In the meantime, I hope that
you live long and profit.
(21:14):
The topics presented in this podcast are
for general information only and not for
the purposes of providing legal,
accounting, tax, or investment advice. On
such matters, please consult a
professional who knows your specific
situation and maybe share this episode
with them so they can know what you've
been listening to and what you are going
to be wanting to talk about with them
very soon. Take care.
Today I want to introduce you to Sam.
Sam sold their business for $2,000,000
but ended up with less than half after
taxes. Today we're sharing the long term
planning strategies that could have saved
Sam hundreds of thousands. And
how you can protect yourself and your
business legacy, whether you're planning
(00:22):
to sell, pass it on to some
beneficiaries, some heirs, children,
those kind of people. Or if you want to
just become an absentee lord of
your business, right, where it runs and
you just collect a paycheck. We're going
to cover all those today. Buckle up. Here
we go.
In a world where chaos seems to reign
(00:42):
supreme, where uncertainty lurks around
every corner. And financial markets are
now more unpredictable than ever. There's
one place you can turn to to find clarity
and control. Welcome to the Wealth Wisdom
Financial Podcast. Hey, I'm Brandon.
And I'm Amanda. Join us as we dive deep
in the world of personal and business
(01:05):
finance to assist you in navigating
through the chaos and building the
financial future you deserve. We believe
when conventional financial thinking
doesn't get you where you want to go, you
need wealth. Wealth Wisdom. So if you're
ready to take control of your financial
destiny, tune into the Wealth Wisdom
Financial podcast because in a chaotic
(01:26):
world, your money shouldn't be.
Subscribe now and never miss an episode.
OK, welcome back. Today we're talking
about something most business owners
don't even want to think about, and they
put it off until it's too late. Long-term
tax planning. And I don't just mean next
year's taxes. I mean the big picture,
(01:46):
retirement, selling your business,
passing on your legacy, whatever it might
be. And Brandon's not joining us today.
It's just me because I'm going to go
really fast. I got a lot to cover. I know
your time is valuable. And you're going
to maybe slow this down, listen to it
multiple times, bring it to your tax
pros, bring it to your financial planner
like me. And let's make sure we got you
(02:07):
and we're making good decisions. Not just
short-term, but also long-term. Here we
go. Here's the big idea. Here's what
catches most business owners off guard.
The tax strategies that work great for
your Business Today might actually set
you up for a bigger tax headache down the
road. Let's look at Sam's story to
(02:28):
illustrate this, and then we'll break it
down. Sam built this successful business
and manufacturing over 30 years. They
did everything right for annual quote UN
quote right for annual taxes, maximizing
deductions, reinvesting profits, keeping
great records. But when they sold the
business for $2,000,000 to fund their
retirement, they were shocked. Between
(02:49):
capital gains taxes, state taxes, extra
Medicare charges for the higher of
income, they walked away with less than a
million. The worst part, most of
this could have been avoided with better
long-term planning. So let's talk about
three key areas of long-term planning
that most business owners miss. And we're
going to talk first about the planning
(03:11):
for a business sale and the taxes
there. The second we're going to talk
about is. Planning for passing on your
business to your children or other
beneficiaries. And then the third one
is planning for when you get to quote UN
quote, retire from your business but
still own it. One quick reminder. First,
(03:32):
I'm not a tax professional. This episode
is meant to empower you with knowledge to
bring to your tax professionals, not
giving anybody individual advice. We're
just sharing some great information that
we think will help you have better
conversations and make better decisions.
As you collaborate and work with your tax
pro, which you've got a collaborative tax
pro, right?OK, good. So first, let's dive
(03:53):
into planning for a business sale and the
taxes there. First, you want to
understand how the sale will be
taxed. Are you setting up for an asset
sale or a stock sale?Each
asset category in an asset sale has
different tax treatments, and an asset
sale is when a buyer purchase purchases
individual business assets. So if they're
(04:14):
purchasing your equipment in inventory,
that might be taxed as ordinary income.
If they're buying a building, then you
might have a 25% rate on depreciation
recapture. If they're buying goodwill and
other intangibles like copyrights, then
you might get capital gains rates in
terms of the taxations there. And
usually, buyers prefer
(04:35):
to do an asset sale for better tax
treatments. For themselves, you know,
long term and but it can result
in higher taxes for sellers due to that,
especially that depreciation recapture.
If you're doing a stock sale, this is
where the buyer purchases the actual
business entity. This is usually better
for sellers because you get one tax rate
(04:56):
on the entire sale. But it's harder to
get buyers to agree to, partially because
there's some liability they take on from
past business practices that they have no
control over what happened in the past.
This is also more important for
corporations than LLCS.
So part of this with the asset sale
versus the entity sale is
(05:16):
that buyers and sellers are just going to
have competing interest and your
taxation might be one of your interests.
And of course the buyer's eventual
taxation, if they resell it, is going to
be one of their big interests that
they're looking out for. So there's some
structures that spread taxes over
multiple tax years. So you could do an
installment sale that lets you pay your
(05:37):
taxes as you receive payments. You can
do earn outs that spread your income over
several years. You might even set up an
employee stock ownership plan, an ESOP
that can refer to the taxes until you
want or need to use the funds. So even
as you get into the buyer's part, right,
you can have some tax advantages that
(05:58):
you have more control over and maybe
they're open to an installment sale, an
earn out or an ESOP. So before
you even get though to the negotiating
table, there's some steps you can take
before the sale. First, clean up
your books and your records. Make sure
you've got, you know, personal and
business expenses clearly separate.
Document any asset purchases and
(06:18):
improvements. Keep good corporate minutes
and records. Just clean up your books and
records. We talked about that a lot this
month. Go back and listen to previous
episodes. If you're not sure how to do
that, we got some shortcuts for you.
Another thing is consider whether
converting to an S Corp, if you're not
one already, might be in your interest
there. This has to be done at least five
(06:39):
years before a sale to avoid built-in
gains tax. But it can save
you significant self-employment taxes
even as you go throughout to your
business before you sell it. And it also
allows for better sell structuring
options. If you're an S Corp or filing as
an S Corp, document improvements that
you're making that increase your cost
(07:00):
basis. Keep receipts for any kind of
capital improvements. Track your sweat
equity contributions. Document major
business process improvements. Make sure
if you're putting extra value into any
kind of capital asset that you've got
those things documented. Okay. So this is
things you can be doing in the meantime.
And then there's some things you want to
(07:20):
avoid, some common mistakes that will
increase your taxes at a sale.
One is waiting until a buyer appears to
start planning. This limits your
structuring options, gives you less time
to clean up issues. might force you to
accept less favorable terms. So start
preparing now, even if you're not
planning on selling for a long time.
(07:41):
Also, make sure you don't make the
mistake of not considering state
tax implications. You want to think
about the Internal Revenue Service and
what the federal government might charge
you, but some states are going to tax
business sales differently. You might
move to a new state long before you would
actually ever sell. You might, you
(08:02):
know, just have a heads up of how your
state that you're in might tax the sale
based on maybe where you're located or
even where your customers are. Great
conversation to have with your tax pro.
And then don't forget about basis
adjustments, missing those past
improvements that could increase your
basis, not tracking shareholder loan
(08:23):
repayments, failing to document those
capital contributions. Okay, that's
things to think about to avoid taxes on
the sale of a business. Now let's talk
about estate planning and business
succession. Maybe you aren't going to
sell your business, you prefer to pass it
down to the next generation. We've got
some key tools for reducing estate
(08:43):
taxes. One is a
family limited partnership, FLP.
These are a great way to start involving
your adult children and gift to them
parts of the business each year, rather
than they get it all at once later. This
can save on estate taxes, can also give
them the skills they need to run the
business, all those kind of things. But
(09:04):
don't worry. You can still maintain
control even while using the strategy.
And you do that by setting up different
levels of ownership so that you have the
level that's the controlling part and
you're gifting them the other level that
they don't have any control, but they
have ownership. Another option
is a grantor of a trained annuity trust,
(09:25):
a GRAT. This is a great option for
rapidly growing businesses or businesses
that have assets that are greatly
appreciating, maybe like a real estate
business, right?With this option, you're
essentially, again, not giving tax
advice here or legal advice, but
essentially, simplifying it, you're
gifting at today's values, and
(09:47):
the growth of that value is not included
in your estate later, okay?So
you can gift today's value, and then it
could grow millions of dollars before you
die, and all of that growth is
not factored in. That's called a grantor
retained annuity trust, a GRAT.
And then finally some buy sell agreements
are a great option for to fund
(10:09):
and make sure there are clear transition
plans for death or disability. These
are especially important for multiple
owner businesses where you're in the
business with somebody outside your
family or a non close relative.
They're also really great for if you have
maybe multiple children and only one
(10:29):
wants to be in the business, and you can
think about how what needs to happen with
the others. There's some common pitfalls
to avoid here with estate planning and
business succession. One pitfall is not
coordinating business and personal
planning. You want to make sure, as we
talk about a lot here, that what works
for you personallypersonally works with
(10:50):
the business and what you decide to do
with the business works for you
personally, right?Business owner focused
here. You want the business
succession plan to align with your
personal estate plan. You want to
consider the impact on non-business
heirs. We call this estate equalization.
Again, if you have multiple children,
only one's receiving the business, what
(11:11):
are you going to do with the other ones?
to make sure that they get an an equal
share, which equal, or fair is not always
equal, but we like to call it a state
equalization as a shorthand there,
and also playing for a state tax
liquidity that way. Another
common pitfall to avoid is forgetting
about state estate taxes. Just like when
(11:32):
you sell a business, there's the state
gets involved. um Same with estate
taxes. Certain states have lower
exemptions than the federal exemption.
And you might, even while you avoid
federal estate taxes, you might end up
having to pay, or your heirs might have
to pay state estate taxes.
And then also, too many people just
(11:53):
assume estate tax laws aren't gonna
change. The current exemptions sunset in
2026, and there's gonna be much lower
exemptions unless Congress takes actions.
act takes action. And of
course also the federal
limits can change and the state limits
can change independently too. So you kind
of want to check in and make adjustments
(12:14):
as those things change in both levels.
Okay. So that's about estate planning and
equalization, kind of thinking long range
that way. Now, what if in the
meantime, before you sell or before, you
know, you worry about business succession
within your family,What about before
then?If you want to do some retirement
tax planning, right?You're going to
retire from the business, but still own
(12:36):
it. And here there are some
special considerations.
In the first episode this month we talked
about the different tax buckets for
retirement savings, the
tax later bucket, the tax now
and not later bucket, and then the never
taxed bucket. You could also think about
(12:56):
Capital gains, tax rates versus income
tax rates, all those fun things.
You might have some traditional pre tax
accounts where you've gotten immediate
tax deductions throughout the years. And
your taxes are due on withdrawals and you
have to start required minimum
distributions at 73. You might have Roth
or Roth like accounts where you didn't
(13:17):
get a tax benefit later, but now you can
use it tax free and there's no required
minimum distributions on those things
like Roth IRA's or Roth like accounts
like bank and yourself type whole life
policies. And then you might still have
some taxable investments or you pay taxes
as you go. Maybe you also have some
things that you pay taxes when you sell
them and because you held them for more
than a year, then you get capital gains
(13:39):
rates. You might have some that get a
step up in basis at death and others that
wouldn't. All of these kind of
moving parts tax wise is what you might
already have. But there
are some very specific
retirement options for business owners.
that can help fill in these buckets in a
(14:00):
way that works for you. So one of them is
called a cash balance plan that you might
use in your high income years. You know
how like a IRA, you can only contribute
7,000 as of 2025 with maybe some catch-up
room. 401k might be about 40 to
60,000. I forget what the exact limit is
right now. Well, these cash balance plans
can, you can contribute 200,000 or
(14:22):
more annually. This really works though
if you've got consistent profits, just be
aware if you've got employees, you have
to cover them. Another option, you know,
solo 401k, SEP IRA, you can
use those maybe Roth types. This might be
better if you've got a spouse involved in
your business that kind of gives you that
tax leader bucket, kind of like the cash
(14:43):
balance plan, but a little smaller
contributions. But here's the thing.
What this all boils down to is there are
some unintended consequences of
profitable business ownership after
65 years old, things that
people just don't think about. They get
to 65 and they're like, oh, I did all of
these things to lower my taxes up until
now that I have to deal now with
(15:06):
the consequences of those things. For
instance, business income can impact how
much of your Social Security gets taxed.
Right. And especially if you
sell a business after 65, that's going to
have, you know, for sure going to put
your Social Security taxable, you know,
unless you're selling it for very
cheaply. It would impact your Medicare
(15:27):
premiums, right?How much do you pay there
in the surcharges with that two year look
back, all those kind of things that can
add thousands to your health care costs
and then. So this is
where you wanna look for, you got those
high years where maybe you've deferred
some things. You might have some lower
years where you can control your taxable
(15:48):
income for the longer time. Maybe you do
some Roth conversions during those lower
years. Maybe you plan for some qualified
charitable distributions from your
pre-tax accounts that you're going to
incorporate into your retirement
planning. Maybe you strategically time
when you're going to sell the business
and when those payments come out, maybe
(16:09):
before RMDs start, right?There's all
kinds of fun things to play around with
there. You just have to be thinking long
range, not just about today.
Okay, if all this sounds complicated and
expensive, stay tuned after the break.
We're gonna keep breaking it down,
helping you make some good decisions.
(16:36):
Ready to take the next step towards
securing your financial future?Whether
you're planning for retirement, saving
for your dream home, or you just want to
make your money work harder for you, the
team at Wealth Wisdom Financial are ready
to assist you. And now it's easier than
ever to see how we might give you a boost
on your financial journey. Schedule a 15
minute discovery call with one of us
(16:57):
today. And let's discuss your questions
and your financial goals together. Don't
wait any longer. Your financial freedom
awaits. Schedule your discovery call at
www.wealthwisdomfp.com/call.
Complication and expense, right?This is
(17:20):
where most people go like, holy cow, do I
really need to worry about this now?
Actually, yes. The earlier you start, the
more options you have. Remember Sam, the
one who sold his business for $2,000,000?
If they had started planning just five
years earlier, they could have
structured the sale differently to save
over 200,000 in taxes, used gifting
(17:42):
strategies to move some of the business
value to their kids tax-free, and built
up Roth and Roth-like accounts to provide
tax-free income, especially during those
years where they're getting the income
from the sale, right?Great ideas. Love
those. And of course they factor in
multiple things from each of the things
we just talked about. One of the great
things here is by being proactive, by
(18:03):
starting earlier, you have more options.
You can strategize. If we sell, here's
what we do. If we give this to our kids,
here's what we do. And if we just retire
while still owning the business, here's
what we do. And often there's things that
work for all all three circumstances
that you can do, no matter if you're
just, I don't know what I'm going to do.
What it comes down to is having an honest
(18:23):
conversation with your money team about
preparing early and often.
That's when you can have the
conversations and you can put
into action what you talk about. And if
you don't have time to do it, consider if
you can delegate other things to create
the time right things that somebody else
can do. At least 80% is what you can do.
(18:44):
Delegate that so you've got the time to
put into some of those higher level
things that only you can do. And also
think about how an ounce of time could
save pounds of time later for you or
for who has to pick up your mess. This is
an area where an ounce of prevention can
literally save pounds of cure later,
right?Or a couple dollars spent on
(19:04):
prevention can save you lots of
dollars in taxes and fees and all kinds
of attorney costs. All of that later. OK,
in conclusion, long-term planning isn't
just about avoiding taxes. We talked a
lot about taxes, but there's all kinds of
other ways that you want to be strategic
about when and how you pay your taxes,
(19:27):
how you avoid other fees, attorneys, or
all those things. The best time to start
is right now, when you have the most
options available. Too many business
owner conversations with their tax pros
are all about saving taxes this year or
next year. Be sure you're scheduling
time with them, talking about long-term
tax planning, adjusting your plan
(19:48):
regularly. And this is often where a
certified financial planner, a CFP like
me, comes in really handy and can
have even better conversations, give you
better tools and resources to go and
bring to your tax professionals and all
of that. Thinking through what are your
goals, what's the likelihood of a sale
versus retiring while you still own it?
All the, you know, pros and cons and how
(20:09):
it fits into the rest of your portfolio.
That's what a CFP like me does and loves
doing. So Are
you ready to start your long-term tax
planning?We've created a business
owner's legacy planning guide that walks
you through the key decisions that you
need to make and get it for free in the
Wealth Wisdom Financial community, along
(20:31):
with a checklist of questions to ask your
tax and legal advisors. And we'll also
include in there a link to schedule a
call with me to have these kinds of
conversations about legacy planning as a
business owner so that you can.
Have more custom tailored questions that
you can bring to your tax and legal
advisors as well, and to make sure you
(20:52):
get all your ducks in a row as quickly
and efficiently as possible. Thanks for
joining me. Hit that subscribe button.
We've got some really cool things planned
for the month of April. We got the
taxes out of the way, hopefully, and now
we're ready to move on to more fun
things. In the meantime, I hope that
you live long and profit.
(21:14):
The topics presented in this podcast are
for general information only and not for
the purposes of providing legal,
accounting, tax, or investment advice. On
such matters, please consult a
professional who knows your specific
situation and maybe share this episode
with them so they can know what you've
been listening to and what you are going
to be wanting to talk about with them
very soon. Take care.
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