Charitable Remainder Trusts (CRTs) are incredibly versatile estate planning tools, and the answer is a resounding yes, a CRT can absolutely receive proceeds from a business sale over time—this is a common and effective strategy for business owners looking to maximize tax benefits and support their favorite charities.
What are the Benefits of Using a CRT for a Business Sale?
Many business owners accumulate significant wealth within their companies, and when it’s time to exit, often the sale isn’t a single lump sum payment; instead, it’s structured as a series of payments over several years—this is where a CRT shines. By transferring ownership of the business to an irrevocable CRT, the seller can defer capital gains taxes that would normally be due upon the sale. Instead of paying taxes on the full sale price immediately, the seller recognizes income each year as the CRT receives payments and distributes income to them, potentially lowering their overall tax burden. The IRS allows for a deduction for the present value of the remainder interest that will eventually go to charity, further enhancing the tax benefits. Consider that according to a recent study by the National Philanthropic Trust, charitable giving increased by 7.3% in 2023, highlighting the growing interest in philanthropic strategies like CRTs.
How Does a CRT Handle Complex Payment Schedules?
A well-drafted CRT agreement is crucial when dealing with a business sale involving a payment schedule. The trust document should clearly outline how the proceeds from the sale will be managed and distributed. Typically, the CRT receives the installment payments from the sale, and the trustee—often a financial institution or experienced attorney—invests those funds. The trustee then makes regular income payments to the grantor (the seller) for a specified period or for life, with the remainder going to the designated charity or charities. For instance, a business owner might sell their company for $2 million paid out over 10 years. The CRT would receive $200,000 each year, invest it, and pay the owner a fixed percentage of the trust assets as income. “Proper structuring is paramount,” emphasizes Ted Cook, a San Diego estate planning attorney, “failing to account for the intricacies of the payment schedule can lead to unintended tax consequences.”
What Happened When a Business Sale Went Wrong?
I recall working with a client, let’s call him Mr. Henderson, a successful software entrepreneur who sold his company for a substantial amount over five years. He hadn’t planned ahead and directly received the installment payments, assuming he could figure out the tax implications later. As the payments came in, he found himself in a significantly higher tax bracket each year, facing a massive tax bill he hadn’t anticipated. He ended up having to liquidate assets to cover the taxes, diminishing his retirement savings and leaving him deeply frustrated. Had he established a CRT before the sale, he could have mitigated these issues and significantly reduced his tax liability. It was a painful lesson in the importance of proactive estate planning.
How Did a CRT Save the Day for a Family Business?
Conversely, I worked with the Miller family, owners of a local manufacturing business, who successfully used a CRT to manage the sale of their company. They approached me *before* initiating the sale process, and we established a CRT to receive the proceeds, which were paid out over seven years. This allowed them to defer capital gains taxes and create a lasting legacy for their chosen charity, a local children’s hospital. They received a steady income stream during their retirement, and the hospital ultimately received a substantial gift—a win-win situation for everyone involved. As Ted Cook always stresses, “A CRT isn’t just about tax savings; it’s about aligning your financial goals with your philanthropic values.” The Millers were able to use the tax benefits gained to provide financial security for their grandchildren and ensure that the hospital would continue to benefit from their generosity for years to come.
“A CRT isn’t just about tax savings; it’s about aligning your financial goals with your philanthropic values.” – Ted Cook
In conclusion, a CRT is a powerful tool for business owners looking to structure a sale over time. It provides tax benefits, income planning opportunities, and a vehicle for charitable giving—but it requires careful planning and expert legal advice.
Who Is Ted Cook at Point Loma Estate Planning Law, APC.:
Point Loma Estate Planning Law, APC.2305 Historic Decatur Rd Suite 100, San Diego CA. 92106
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