Episode Transcript
MELISSA: Hello, and welcome to the Purposeful Planning Podcast. My name is Melissa Mitchell-Blitch. I serve as the Purposeful Planning Institute's Dean of Individual Development. And in my consulting practice, I focus on helping clients develop the skills they need to navigate conflict, make decisions, and navigate change in family business and family wealth. I'm excited today to have as our guest: Tiffany House. Tiffany, welcome.
TIFFANY: Thank you. Thank you so much, Melissa.
MELISSA: We are thrilled to have you here with us. Tell us a little bit about your background.
TIFFANY: Certainly. I call myself a recovering financial advisor. I was in practice with my father for 17 years, and we focused on ultra-high networth individuals. And I did a lot of very complex planning around asset protection, tax advantage strategies, and all of our clients were business owners. So I've had the experience of helping many individuals and families sell their business and tax advantages, and I really enjoy that work. So the best part of it, too, is that a lot of these business owners are philanthropic and there's some great charitable tools, as well as, non-charitable tools for helping an individual sell their business.
MELISSA: Fantastic. Well, we are glad to have you today to talk about tax advantaged strategies for business sales. Let's give a picture, first. Let’s say, a family in a business is considering selling the business. What are some things that you would suggest from your years of experience that they consider?
TIFFANY: Well, I think it's really important when you're looking at different strategies for tax savings or asset protection, that you include the entire picture. You really have to take that 3000 look of view of the family and what it is they want, because you can come up with the best tools and strategies to save on taxes but if it doesn't fit in with their estate plan, with their retirement plan, with their plan B, about what they're going to do next and incorporate with the rest of the family and transitioning not only wealth, but values to the next generation, you can have the best strategy in the world, and if it doesn't fit those other aspects of a person's life, it's not worth doing.
MELISSA: It sounds like there's a lot to consider, Tiffany. So let me ask you a very granular question now, because of all those things that you said, you really need to consider the interplay of all of these pieces and dynamics. What would you suggest as far as a family for when to consider if they're going to sell and when to start planning for that sell?
TIFFANY: Yes, well, I always say it's never too early to start. Today's better than any other day. If we're looking at an internal transfer, meaning two family members, I think it's really important to get started early. There are opportunities to gift out shares of business to other individuals, family members. And being able to do that before the business value is really high. So that we can utilize the estate tax exclusion, and have things grow outside of the estate can be a really efficient way to look at helping family members get into owning the business. However, if we're looking at an outright sale and looking at taxation, and what are the best strategies, I like to say three to five years is the best time horizon. However, if it's in three months, or if it already happened within the same calendar year, there are still strategies you can utilize but you won't be able to do as much of maximizing the benefits that a person or their family can receive from a tax advantaged business sale.
MELISSA: Fantastic. I wonder if you might share with us just a couple of case examples? Maybe to kind of illustrate the starting-sooner or starting-later sort of scenarios.
TIFFANY: Well, here's one that started a bit later. I met a family who had a dermatology practice and it had already been acquired from a private equity company, and they were able to maintain shares. Now the private equity company was being purchased by another private equity company, and they wanted a tax advantage solution to be able to sell their shares of their partnership. And their motivation was a few things: they didn't want to pay any taxes. They were somewhat charitable but they were more charitable for their family, and they had three sons, but one of them was an unfavored son. He was an attorney and they actually had something called shoe-gate, as it referred to him, and he was no longer invited to Christmas and Thanksgiving. But they knew that if they left him out of the estate plan that he would sue his brothers when they were no longer here. So we were able to put the partnership interest into a charitable remainder trust. And we were able to sell the shares tax free inside the trust. They were also able to get a tax deduction for the remainder interest going to charity in the future. So they had so much tax savings. It worked out wonderfully. And what we decided to do for them is to have them receive lifetime income from all of their funds, including that tax savings and the tax deduction that they received. And we put a 20 year term on their two favored sons. So now their two children that they wanted to do more for were part of an irrevocable trust that was going to pay them income for 20 years. And they were able to leave out the son that they did not want to include. And it turned out to be a good win-win for the entire family. They were able to accomplish all of their goals. And when we wrote this charitable remainder trust, we put their charities in a appendix at the end of the trust so that they could change their mind, which I think is good, because they did include a donor advised funds so that their kids and grandkids can gift from that in the future when they're no longer here but they also included 15 different charities. So just in case, they come to change their mind, they won't have to go back to the attorney each and every time when a new charity gets it close to their heart.
MELISSA: What I hear from that example, is the opportunity for creativity. So many families value fairness, of course. And oftentimes it can seem like fair equals, fair equals equal equals identical. And we know those three things aren't always the same. What I hear in this example is that a family felt like they arrived at a fair solution that was creative and was different. And that may resonate with some families, even those who don't have maybe the level of conflict that this family had.
TIFFANY: Yeah, and it's always good to do planning ahead. Even I like to ask people, “How much is too much to leave for your kids?” I'm working with another couple. They have a tech company that they'll be selling, and they only have one heir. And they were very charitable by the way. So we're able to do some great planning strategies, utilizing their charitable components, but we're able to plan for what the son's going to get and then also, we're going to go ahead and use a charitable lead trust that will avoid estate taxes on a portion of the assets that will come to him later. So that it's not too much at any one point in time.
MELISSA: Thanks, Tiffany. So we have both seasoned advisors who listen to us, and they're going to know what a charitable trust and charitable remainder trusts are. And then we have family members who listen to us as well. But I'd be curious to hear a description of some of the tax advantaged strategies that business owners may consider. And to have the explanation to go along with those descriptors for folks who are listening who don't know. In fancy terminology, please.
TIFFANY: Well, and the fancy terminology you could give me here all day, I could get into a bunch of different rabbit holes on that. So really putting things into a general context is if an owner is charitable, there are a lot of wonderful strategies that can be utilized but it's going to depend on their whole picture perspective. What is their estate plan? What are their goals? What do they want to accomplish? So there are great trusts out there. Now, there's different types of trusts whether you want to avoid income tax, estate tax, or a capital gains tax scenario. So there's a lot of different opportunities. We don't need to get into the nitty gritty of the individual trust. But I do have a tools matrix, which I call a cheat sheet on my website, and we'll give that website out at the end, that you can download. One of them just walks through the different types of charitable trust. How do they work? Who can be the income beneficiary? Who can be trustee of it? Where does the remainder interest go after the fact (which can be very helpful)? I also have another tool matrix on tax advantaged business sales, because the first question anyone should ask when they're looking to sell a business is, “How is the business structured?” Is it a C Corp? Is it an S corp? Is it an LLC? Is a disregarded entity a single member LLC? Or is it a partnership? Or is it just an asset? Because a lot of times when selling a business, you have the business, but then you also have separate real estate that might be sold at the same time. So I also have a cheat sheet that walks through the different strategies that you can utilize for each of those different entities. I will say the majority of corporations are S Corporations, and those are the trickiest to do some good planning with. I know that I talk a lot about charitable tools because I'm very charitable myself. I have 10% of my husband and I's estate go into charity. And, but there's other tools also that can be utilized after the sale or be different investments that can help offset some of the tax, transitioning into an ESOP or Employee Stock Ownership Program which can make a business completely tax free if it's set up correctly as an S Corp. and I was able to be with a single family office and my first call with them — they ended up hiring me — my first question was, “Okay, you have this tech company that you're going to sell in the next couple of years, how is it structured? And the patriarch said, “Let me text my son.” And at the end of the call, he let me know that it was a C Corp. I said, “Wait a minute, how long have you owned it? If you have a C Corp and you've held it for over five years, and there's some other factors that you've fit into, that you fall into, you can get up to a $10 million tax exclusion through the 1202 Qualified Small Business stock.” And so that was a great conversation, because we're going to be able to save them a lot in taxes, just by finding out what kind of entity it is, and making sure that it fits some of the parameters for being Qualified Small Business Stock.
MELISSA: Thank you for that. So the structure really matters and you said before, you're talking about the charitable remainder, the charitable lead, would you like to tell a little bit more about what those sorts of things may, how, or when amounts are given to the charities?
TIFFANY: Certainly. So which charitable trusts that I like to look at as apple trees? So with a charitable remainder trust, your asset is the apple tree, and the apples are the income. So with a remainder trust, the donor is actually able to take the apples or the income for life, and then transition it to charity at the end of their life, after a term of years or both. You can do up to 20 year terms. So they're able to be the trustee, which means they're able to nurture that tree, choosey investments, and be able to act as trustee. And the tax savings of selling inside this tax exempt entity, and up making it an extremely viable tool, even if somebody's not charitable. I have had many people who weren't necessarily charitable, but when I showed them the numbers, that when they get to keep their hard earned money working for them, rather than paying it in taxes — even giving the remainder interest to charity — their family's going to end up ahead as long as they live to life expectancy. But I say that happy people give and giving makes you happy. So they usually live longer after doing this kind of planning. Now a lead trust is just the opposite, in that the income is going to go to the charity. And when the income goes to the charity, you can set it up as a grantor style or non grantor style. So again, the donor gets to be the trustee. They get to nurture that tree. The income will go to charity, and could even be their own Donor Advised Fund, which is just a charitable savings and investment tool that I called a Poor Man's Private Foundation, where you don't have to have all the private foundation rules so that that can be the charitable beneficiary. And then if you let the trust go over a long enough time, it can make the asset completely estate tax free. Or if you want to give it back to yourself as a grantor style trust, you get a great big income tax deduction on the front-end, so it can help with income tax issues. So those charitable trusts are great and there's also other great tools that can be set up as the trust: pooled income funds. The donor advised fund can be set up like a charity, trust and accept complex assets. And supporting organizations can all be great tools. If you have the charitable intent, or like I mentioned for charitable remainder trusts, you don't always necessarily have to have the charitable intent when you look at the tax savings.
MELISSA: And I was going to highlight from your story that sometimes the tax advantage, the tax savings, some families do, or some business owners do decide to go that route, even if the charitable intent wasn't there, their primary reasons. So it's helpful again, to take the time, start early and consider all of the options and consider all the dynamics.
TIFFANY: I was going to say I completely agree. And I don't like to look at this as complex planning. It is flexible planning. And when I work with a family, I only want to do as much complexity as they're comfortable with. So it takes a team of advisors. So don't be intimidated, if you're an advisor listening, and you think that some of these tools are too complex, or you don't know enough of the intricacies. Or if you are a family of business owners yourself, that is looking to do this. Because there are other advisors out there and I believe in collaboration, I think it takes a team of advisors, and that's how I've set up my business. I don't have any licensing, I don't sell any products, I don't draft the documents, I don't do the taxes, I have to work with all of those professionals to be a fiduciary and act in the best interest of the of the business owner to help them tax efficiently sell their business and, and keep more of their hard earned assets.
MELISSA: That's a core value that we have at PPI is collaboration. Letting each professional bring their best. And for that to fit together in that matrix to complement and serve the needs of the family. We spoke earlier about the role and basically the example that you shared highlighted this the role of family dynamics and personalities and how that can impact the planning and how the planning can impact the family members share more of what many families may want to consider, as it regards that?
TIFFANY: Yeah, well, another area that I work is actually called value based estate planning. I think it's so important that many of us professionals have heard the old adage that 70% of the wealth is going to get lost before the second generation, 90% lost before the third by the time the third generation comes along. I think it's extremely important to not only share with your family. Fine if you don't want to share financials but we all need to share our morals and values and what's important. I like to use charitable planning tools to be able to help do that, have a family come together and choose what their charities are and find out what's important to people. It can be a great way to bridge some of those gaps when we think we know our brother, our sister, our mother, our father, when you actually get to know what is in their heart. That has been one of the most surprising things for me that families have gone through when they see what and who their other family members support and see what's really deep inside their heart. But I also believe in creating a family structure of coming together. Maybe it's a milestone for grandkids to take them on adventures and teach them volunteerism. Or creating a family logo where everybody feels that they have a place but it is important if you want to include all of your children. Unlike my story earlier, I think that you look to include the family in thoughts and decisions that do not necessarily revolve around wealth or selling of the business, but helping everybody feel empowered so that they can come together so that that glue of the family unit, that's the most important thing. Why do we do all this hard work? Why do we grow businesses? Why do you put all this effort and energy into life? And most of the time it's to have great relationships with our loved ones.
MELISSA: Thank you for that. Tiffany, we have a little bit more time left today. So I'd love just to give you a chance to share any final thoughts for families who own businesses who may be thinking about maybe in the midst of planning, what would you want to leave them with today, as some final thoughts?
TIFFANY: I'd love to reiterate that it's never too early to start planning, whether you want to start gifting some shares utilizing the estate tax exclusion, right now in 2024, the state tax exclusions at 13.6 (%) for just an individual. If you have an estate that would be above that, you might want to look at doing some planning before the potential sunset of the estate tax and 2026. So there can be some good planning to do with that. Even while ahead of the sale, the sale could be 10-15 years down the road. However, when you are getting more serious business owners often work in their business, not on their business. It takes a lot to just run your business and have it be successful, actually planning for what's next. It can be very difficult and intimidating but the more you plan, the less intimidating it can be. So it's very important to look at, “What is your plan B? What are you going to be doing after you sell your business?” Because I'll tell you that pickleball and golf might not fill up all the time that you spent managing your business and your employees. And you might need to consider doing other things that make you happy, maybe volunteering, maybe finding some investments that you are passionate about, maybe starting a small business, maybe working with your kids to help them start a business, but the sooner that you start planning not only for what you want. And I'm really big on people needing to understand what they want, because at the time of the business sale 75% of the time, it doesn't go through. And it's usually because the business owner is not ready. This is for closely held businesses. So the business owner needs to be ready. And to do that, you need to know what you want. You have to take a look at your family, what your estate plan is or your retirement plan. And then how much do you need out of the sale of your business because if you don't want to pay 20% to 45% to Uncle Sam and your state and taxes, there're great tax advantaged solutions that can really help you mitigate the sale of the taxes on the sale of your business. So it's very important to look ahead, look early, and look beyond just the numbers.
MELISSA: Thank you for that. So many interrelated parts and so I just want to emphasize the opportunity to get started. And you said on your website, I want you to let folks know if they want to learn more about you and get in touch with you to know your website. But you've also share it will also share on your website, a potential first step next up the family members could take you know going and looking at some of the information that education that you are providing, because again, what you've said from the beginning to end is there are multiple interrelated parts to this. And I want to simplify for our listeners. Just a simple first step is getting some information. And you have promised to share that as one one resource. So Tiffany, for folks who want to get in touch and want to access those cheat sheets, how do they do that?
TIFFANY: Certainly. You can go to my website, www.tax -estate.com. So my business is tax and estate strategy. So my website is just tax dash est.com. And those cheat sheets are available for you to download. It's a great conversation starter to bring to your professional advisors, your trusted advisors to be able to start looking at opportunities that you can do to empower you and or your clients around the sale of their business. And I always think that it's great to start with stories. And so if you are an advisor out there share stories about other people who've been able to sell their business and save taxes with your business owner clients because that's how you can really get a business owner to pay attention.
MELISSA: Thank you for that, Tiffany. Speaking to both of our audiences, Tt has been a delight to have you with us today. We appreciate the wisdom that you have shared.
TIFFANY: Thank you so much, Melissa. It's been a pleasure.
