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New Corporate Transparency Act: What Business Owners Need to Know

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By Chris J. Roe, CPA, PFS

A new federal law introduces reporting requirements that may impact you if you’ve established a company or are a beneficial owner of a business subject to these regulations. The Corporate Transparency Act (CTA) aims to promote transparency and prevent financial crimes like money laundering, terrorism financing, and tax evasion. Under this new law, all reporting companies are required to disclose certain beneficial ownership information in the form of a Beneficial Ownership Information report to the Financial Crimes Enforcement Network (FinCEN) of the U.S. Department of the Treasury. 

Who Needs to File a Beneficial Ownership Information (BOI) Report?

The CTA applies to corporations, limited liability companies, and other entities that file registration documents with a secretary of state’s office. This encompasses most standard business structures except sole proprietorships or general partnerships.

Certain entities are exempt from BOI reporting even if they meet the above criteria. This includes banks, credit unions, broker-dealers, accounting firms, and non-profits. The CTA also exempts entities required to disclose beneficial ownership through existing reporting rules.

Who Qualifies as a Beneficial Owner?

Beneficial owners are individuals who either own a significant portion of the entity or have considerable influence over its operations and decisions. Specifically, a beneficial owner is someone who:

  • Owns 25% or more equity stake in the entity OR
  • Directly or indirectly exercises substantial control over the entity.

In this context, “substantial control” is defined as having a significant impact on the company’s direction and decision-making process. This can occur through roles such as a senior officer or by having the authority to appoint or remove these senior figures and board members. Additionally, it encompasses the power to shape key business decisions. 

What Information Must Be Reported?

Companies falling under the CTA scope are required to report information about their beneficial owners. This information will be collected and maintained by FinCEN and will be accessible to law enforcement agencies and financial institutions for due diligence purposes.

For each beneficial owner, entities will need to provide:

  • Full legal name
  • Date of birth
  • Current residential or business street address
  • Unique identifying number from an acceptable identification (driver’s license, US passport, state ID)
  • Image of the document the number is from

Key BOI Reporting Deadlines

There are certain deadlines established for reporting. The deadlines are as follows:

  • Companies existing before January 1, 2024, must file their first BOI report by January 1, 2025.
  • Companies formed between December 31, 2024, and January 1, 2025, need to file their first report within 90 days after they are officially created or registered.
  • Companies established after December 31, 2024, must file their initial report within 30 days of their official creation or registration.

No additional reports are necessary except for updating or correcting previously submitted information. 

What Happens If I Don’t File a BOI?

Failure to comply with the CTA could result in civil penalties of up to $500 per day or criminal penalties for failing to file or providing false information. This filing obligation needs to be taken seriously.

Rx Wealth Advisors will not file beneficial ownership reports on clients’ behalf but want to provide this basic information for our clients and friends who may be affected. We recommend you consult with your attorney or CPA to formally assess if your entities require reporting based on the CTA’s criteria. Qualified professionals can also assist with handling your filings if required.

Closing Unnecessary Entities

If you have entities requiring continued filing obligations, but those entities are not necessary, we encourage you to consider seeking legal counsel to close them. Going forward, consideration should be given to the compliance requirement versus the benefit of maintaining these entities. 

Watch Out for BOI Reporting Scams

Finally, be alert for fraudulent attempts to solicit personal information under the guise of the CTA. Hackers send emails or other communications, often with the subject “Important Compliance Notice,” containing links or QR codes. The FinCEN never sends unsolicited requests and you should not respond to, click on links, or scan QR codes from these fraudulent messages. 

For additional information about the CTA, see the Small Entity Compliance Guide available on the FinCEN website. 

 

Rx Wealth Advisors is a financial advisory firm located in the Pittsburgh, Pennsylvania metropolitan area serving high net-worth professionals. Their primary focus is to help high-earning business owners, executives, and other professionals outsource personal financial management so they can cultivate wealth while living the life they’ve earned and deserve. They can be reached at 412-227-9007, via email at croe@rxwealthadvisors.com, or on the web at rxwealthadvisors.com.

This article is not meant to provide any legal advice or to be used to determine if you should or should not be filing a beneficial owner report with FinCEN. 

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.

Considering an Employee Stock Ownership Plan (ESOP) as a Form of Succession? Beware of Potential IRS Scrutiny

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By Chris J. Roe, CPA, PFS

Employee Stock Ownership Plans (ESOPs) offer an excellent succession strategy for businesses. These plans not only enable employees to share in the company’s growth and financial rewards, but they also furnish immediate tax advantages for the departing owner and continued tax benefits for the business itself.

What is an Employee Stock Ownership Plan (ESOP)? 

An ESOP operates as a qualified retirement plan, subject to Employee Retirement Income Security Act (ERISA) regulations. It functions similarly to a 401(k) plan and eventually becomes the company’s owner following a sale.

The transaction’s structure is straightforward: the current owner sells their shares to the ESOP in exchange for cash and a promissory note that is paid over time. To finance the initial cash payment, both the company and the ESOP secure loans from a bank. Over time, as the business generates profit, these are used to repay the original shareholders and the bank.

Common Misconceptions about ESOPs

Despite its seeming simplicity, several misconceptions about ESOPs persist. Here are a few of them: 

You will receive a lower sale price compared to selling to a third-party buyer. While this may be the case when dealing with strategic buyers or private equity firms, those with businesses difficult to sell may find ESOPs a more favorable option. Additionally, given the tax benefits of ESOPs, your after-tax proceeds may be significantly more.

You’ll lose control of the business, which will be managed by many shareholders having a say in operations. In reality, your employees, who are indirect owners via the ESOP, do not have voting rights concerning the business’s day-to-day activities. Governance falls to the ESOP Trustee and the appointed board of directors, a board the outgoing owner can lead if they wish. This arrangement ensures the former owner maintains control over operations until they decide it’s time to retire.

You’ll miss out on future growth of the business if you sell to an ESOP. While it’s true selling your stake means you won’t reap all the rewards of the business’s expansion, you can mitigate this by negotiating for warrants as part of your deal. These warrants can give you a stake in the business’s future growth, essentially providing a “second bite at the apple,” typically within a 7 to 10-year timeframe.

You won’t benefit from the tax deferral options you heard are available to C Corporation shareholders if you’re an S Corporation. In certain instances, if C corporation shareholders sell their stock to an ESOP and reinvest 100% of the sale price in qualified securities (basically US stocks and bonds), the capital gain realized will be deferred until a security bought with the proceeds is sold. This benefit does not currently exist when selling S corporation stock. Nonetheless, with adequate planning, you may convert from an S Corporation to a C Corporation before the sale to take advantage of tax deferrals. Additionally, there may be strategies that allow you to switch back to S corporation status, enabling you to defer taxes on income related to the ESOP shares until employees start receiving distributions. Be aware, the IRS has a keen eye for scrutinizing any transaction where corporate reorganizations are done solely for tax benefits. 

ESOP ownership and covering the debt to former owners and banks will hamper growth. Contrary to this belief, if the ESOP owns a substantial portion of the S Corporation, the company could experience roughly a 30% boost in annual after-tax cash flow, given that ESOPs are not tax-liable entities. While at first the ESOP needs to use its cash to pay down debt, after approximately five years, the ESOP can use the funds—otherwise owed to federal and state governments—to invest in its business operations or strategic acquisitions. In other words, it can grow even faster.

Four Benefits of ESOPs

So, why should a company consider adopting an ESOP? Here are four compelling reasons: 

  1. Tax-Advantaged Exit Strategy with Continued Control: The ESOP offers a unique way for current owners to sell their shares tax-efficiently while allowing them to remain in control of the business, should they desire to do so.
  2. Employee Participation in Economic Rewards: By enabling current and future employees to have an ownership stake in the company, the ESOP allows them to participate in the business’s financial success.
  3. Unparalleled Employee Incentive: The ESOP is one of the most effective ways to incentivize and reward employees. They create a sense of ownership and commitment, increasing productivity and job satisfaction.
  4. Investment Diversification: While the primary purpose of an ESOP is to invest in the company’s stock, it also offers the flexibility to diversify its investment portfolio over time, providing an added layer of financial security for the employees.

IRS Scrutiny of ESOP Tax Strategies

Given the substantial tax advantages of ESOPs, it’s not surprising that many advisors advocate for these benefits, sometimes pushing the boundaries of tax law. When tax strategies are marketed and ultimately abused, the IRS takes notice. 

In a pointed move, the IRS has zeroed in on ESOP transactions. In News Release IR 2023-144 released on August 8, 2023, the IRS begins by saying:

As part of an expanded focus on ensuring high-income taxpayers pay what they owe, the Internal Revenue Service today warned businesses and tax professionals to be alert to a range of compliance issues that can be associated with Employee Stock Ownership Plans (ESOPs).

“The IRS is focusing on this transaction as part of the effort to ensure our tax laws are applied fairly and high-income filers pay the taxes they owe,” IRS Commissioner Danny Werfel said. “This means spotting aggressive tax claims as they emerge and warning taxpayers. Businesses and individual taxpayers should seek advice from an independent and trusted tax professional instead of promoters focused on marketing questionable transactions that could lead to bigger trouble.”

Werfel noted the IRS is working to ensure high-income filers pay the taxes they owe. Prior to the Inflation Reduction Act, more than a decade of budget cuts prevented the IRS from keeping pace with the increasingly complicated set of tools that the wealthiest taxpayers may use to hide their income and evade paying their share.

“The IRS is now taking swift and aggressive action to close this gap,” Werfel said. “Part of that includes alerting higher-income taxpayers and businesses to compliance issues and aggressive schemes involving complex or questionable transactions, including those involving ESOPs.” [ “IRS cautions plan sponsors to be alert to compliance issues associated with ESOPs,” News Release IR-2023-144, August 9, 2023]

The news release highlighted various concerns, such as valuation of the stock, allocation of shares to a disqualified person, and prohibited loans within the ESOP structure. 

In particular, the IRS drew attention to certain arrangements involving S Corporations that raised concerns. The agency viewed these strategies as potentially abusive, as they directed taxable business profits into the ESOP to avoid taxes while simultaneously lending those funds to shareholders tax-free to meet their cash flow needs. 

…[T]he IRS has seen promoted arrangements using ESOPs that are potentially abusive. For instance, the IRS has seen schemes where a business creates a “management” S corporation whose stock is wholly owned by an ESOP for the sole purpose of diverting taxable business income to the ESOP. The S corporation purports to provide loans to the business owners in the amount of the business income to avoid taxation of that income. The IRS disagrees with how taxpayers interpret this transaction and emphasizes these purported loans should be taxable income to the business owners. These transactions also impact whether the ESOP satisfies several tax law requirements which could result in the management company losing its S corporation status. [ “IRS cautions plan sponsors to be alert to compliance issues associated with ESOPs,” News Release IR-2023-144, August 9, 2023]

As the News Release stated, the IRS is looking to educate taxpayers regarding the risks associated with ESOP strategies while also carrying out appropriate investigations. 

At Rx Wealth, we always caution clients about deals that sound too good to be true usually are. ESOPs, in our opinion, can offer significant advantages to business owners if implemented properly. Those considering an ESOP should seek qualified professionals for advice rather than strategy promoters.

If you’re exploring options for business succession and are interested in learning more about ESOPs, schedule your complimentary consultation here. We’ll give you the straight talk on ESOPS and explain how you can use them properly to benefit you, your family, and your employees.

 

Rx Wealth Advisors is a physician-focused financial advisory firm. Their primary focus is to help medical doctors maximize their earnings, keep more money in their pocket, and cultivate wealth so they can live the life they’ve earned and deserve. Rx Wealth can be reached at 412-227-9007, via email at croe@rxwealthadvisors.com, or on the web at rxwealthadvisors.com.

Preparing Your Business or Medical Practice for a Successful Sale

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By Chris J. Roe, CPA, PFS

Are you considering selling your business or medical practice? If so, you’ll need to take specific steps to prepare and maximize its value. Proper planning can make a huge difference in the selling process and help you keep more money in your pocket post-tax. 

  • Consider your exit strategy: Plan in advance what you want when you exit your business. Are you open to retaining an ownership stake or staying on as management? Think about how your ongoing compensation will be structured. 
  • Set realistic expectations: Many business owners just make up a value they want for their business. While this value does not just appear from thin air, it is usually the amount needed to retire and maintain their same lifestyle. This number is rarely accurate. Get a third-party opinion on your business’s worth. This information will help you decide if selling now is the right move.
  • Increase trailing 12-month earnings: Buyers often focus on this metric and will also look to your last three years to evaluate the consistency of earnings. Evaluate your operating income and expenses, and find ways to boost revenue while cutting unnecessary costs. 
  • Get your financials reviewed: Most buyers will request at least two, if not three, years of reviewed financials. This takes time and money, so plan ahead. The buyer will also usually do their own quality of earnings report, so you should consider obtaining one as well to prevent any unwelcome surprises. 
  • Address potential pitfalls: Proactively identify any issues in your business and either find a solution or be prepared to explain why they’re inherent to your operations. This foresight will help you during negotiations with potential buyers. If you hide issues from the buyer, they will discover them sooner or later, which may bring about lawsuits down the road.
  • Organize a due diligence data room: Collect and store your business data as if you were the buyer. This exercise provides insights into your business and demonstrates professionalism and organization, instilling confidence in potential buyers. You may also learn a few things about your business that you did not know. 
  • Assemble an advisory team: Don’t try to negotiate the business sale alone. Build a team of experts, including an investment banker, attorney, CPA, and financial advisor, to help you navigate the complex selling process. Rx Wealth works with business owners to help them build a competent team to manage their specific situation.  
  • Stay focused on daily tasks: Sellers commonly get wrapped up emotionally in the sales process. Instead, keep your attention on running your business. Delegate negotiation responsibilities to your team while you ensure that your earnings and financial projections remain on track.  
  • Maintain perspective and stay grounded: The selling process can be an emotional rollercoaster with highs and lows. Trust your team to help you through it, and avoid getting greedy or making excessive demands, as this can drive buyers away. Sellers have been known to continually request additional perks as part of the deal, such as ongoing health insurance coverage, payment of their cell phone and automobile expenses, and other similar benefits. Keep your eye on the prize, and don’t sweat the small stuff. 
  • Be aware of required third-party approvals: Familiarize yourself with any necessary approvals from vendors, property owners, minority shareholders, or governmental entities, as these factors can potentially delay the deal. 
  • Implement strategic estate and income tax planning: Ideally, tax planning should begin two to three years before a deal. Work with your team, well in advance, to position your business for sale from a tax perspective and maximize your after-tax profits. 

Selling your business or medical practice is a significant milestone allowing you to realize the wealth you’ve built over time. By staying focused and relying on your team of advisors, you’ll be well-positioned for a successful sale.

If you’re unsure how to build a team of advisors, maintain your lifestyle post-sale, or navigate the many decisions involved in selling your business, we’re here to help. With our extensive experience, we can support you by leading your team and guiding you through the process. Don’t hesitate to reach out and schedule a free initial consultation if you’re interested.

Rx Wealth Advisors is a physician-focused financial advisory firm. Their primary focus is to help medical doctors maximize their earnings, keep more money in their pocket, and cultivate wealth so they can live the life they’ve earned and deserve. Rx Wealth can be reached at 412-227-9007, via email at croe@rxwealthadvisors.com, or on the web at rxwealthadvisors.com.

8 Strategies to Sidestep Capital Gains Tax

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By Chris J. Roe, CPA, PFS

As many high-net-worth professionals are aware, the US Government taxes long-term capital gains (gains on capital assets held for over a year) at a lower income tax rate (0-20%) compared to other income sources such as wages, business income, or interest. However, the complexities of capital gains taxation and their interplay with ordinary income are often misunderstood.

The Impact of Capital Gains on Ordinary Income

Recognizing capital gains in any tax year may result in a higher overall income tax on ordinary income. In other words, your wages, IRA distributions, Social Security, or interest income could be subject to a higher tax rate if you have capital gains. When considering the sale of a business, real estate holdings, or realizing stock incentives, it is crucial to plan ahead and account for the effect that capital gains will have on your income taxes.

The interaction of capital gains with ordinary income in determining your tax rate can be intricate and requires proactive management. Fortunately, numerous planning opportunities are available, but preparation and foresight are essential to maximizing their effectiveness. Realized capital gains increase your adjusted gross income (AGI), which may affect your ability to make Roth IRA or tax-deductible contributions, reduce available tax credits, and increase the hurdle for claiming medical expenses, among other consequences.

While capital gains influence certain tax benefits, long-term gains are taxed at a lower rate than ordinary income and do not push you into a higher marginal tax bracket. However, it is essential to remember that short-term gains are taxed at ordinary rates. Realized long-term capital gains do not force your ordinary income into a higher marginal tax bracket. Still, they may result in higher taxes due to reductions in available tax deductions and tax credits.

However, if you know how to navigate the numerous capital gains deferral or elimination opportunities, you can save a lot of dough. 

Planning Opportunities for Capital Gains

Paying a 0% or 15% Capital Gains Rate

In 2018, the tax code was updated to introduce a 0% tax rate on long-term capital gains for taxpayers in the 12-22% tax bracket. In our experience advising clients, individuals who typically fall within this bracket are either less wealthy parents or adult children beginning their careers. It is important to note that dependent children are generally excluded from this provision, as they are typically required to pay taxes at their parents’ rate.

When planning for a significant capital gain event, it could be strategically advantageous to gift an interest in the asset to your parents or adult children, as this may result in an overall lower capital gains tax liability. 

Stepping Up Your Income Tax Basis Before a Sale

If you anticipate a substantial capital gain event and have aging parents or grandparents who may pass away before the event occurs, it is possible to strategically achieve a step-up in basis on the asset. One approach is establishing a trust for your spouse, children, and aging family members.

By setting up the trust and granting your aging relatives a general power of appointment within the trust to allocate assets to the creditors of their estate, you cause the assets to be included in the elder’s taxable estate. As a result, these assets qualify for a fair market value step-up on basis upon their passing.

Consider this example: Sammy Business Owner establishes a trust for his wife, children, and 98-year-old grandmother and gives $5 million worth of company stock with a $100,000 basis to the trust. The trust provides Sammy’s grandmother with a general power of appointment to allocate assets upon her death to the creditors of her estate. Upon her passing, the company stock’s basis increases to $5 million, up from $100,000. This strategic move saves Sammy and his family a cool $1.1 million in taxes.

Moreover, Sammy retains access to the funds in the trust, as his wife is a beneficiary. 

Deferring the Capital Gains through an Installment Sale

It’s still possible to sell your stock or other assets to a trust for your family’s benefit and receive a promissory note in return. The note may require principal and interest payments over an extended period, such as 10, 20, or 30 years. With each installment payment you receive, you’ll recognize a partial capital gain.

Selling the asset is considered a taxable transaction, so the trust purchasing the asset receives a stepped-up basis. Consequently, when the trust sells the asset, it generally experiences little to no gain. As you might imagine, the IRS wasn’t fond of this transaction and attempted to eliminate it. However, they only partially succeeded.

These transactions remain viable, but they do require advanced planning. If an installment sale occurs between related parties and the related party sells the asset it purchased within two years, the transaction is unwound and deemed to have occurred on the date of the initial installment sale.

As you can see, to make this strategy viable, you must plan more than two years in advance. In our experience, the more time you have to plan, the better the outcome.

Using a Like-Kind Exchange

If you’re selling investment real estate, you can exchange it for like-kind property of generally greater value and defer the gain. Keep in mind, however, that the exchanged property must be like-kind and held for investment purposes, not a personal residence such as a beach house or ski lodge.

For example, Johnny Real Estate owns an apartment building he built 30 years ago with a $0 basis. He wants to sell it because he has an opportunity to purchase another apartment building he believes will appreciate faster. By performing an exchange, Johnny can defer the capital gains tax. This transaction is subject to a complex set of rules and requirements, so it’s essential to consult with professionals before proceeding.

It’s worth mentioning that the Biden Administration has proposed eliminating the like-kind exchange from the tax code in their recent budget proposal.

Using Charitable Trusts to Create Installment Sale Treatment

Similar to deferring gains through an installment sale, you can establish a charitable trust that makes lifetime payments to you and your spouse.

When you give appreciated assets to the trust, you’ll be entitled to an income tax deduction for the portion considered a charitable contribution. Then, on an annual basis, you’ll receive income from the trust, a portion of which will be taxed as a capital gain.

The downside of this strategy is that if you and your spouse pass away early, any remaining assets in the trust will go to a charity of your choice instead of your heirs. To address this concern, consider supplementing the trust with 10-20 year term life insurance. In the event of an early death, your family will receive life insurance proceeds to replace the assets given to charity, ensuring their financial well-being.

Opportunity Zone Investing

In 2018, Congress passed legislation enabling the investment of capital gains into Opportunity Zones (i.e., real estate). By investing your capital gains in these zones, you can defer gain recognition until 2026. Moreover, if you hold the asset or fund for 10 years, your gains from the fund are taxed at 0%.

Opportunity Zones offer a straightforward method for capital gain deferral, but we advise against allocating a large portion of a family’s wealth to these investments solely for deferral purposes. Your money will be locked up, concentrated in real estate, and exposed to operator risk.

Active Tax Loss Harvesting

Actively harvesting tax losses in your liquid investment portfolio can help offset gains realized from a significant sale. Your investment advisor should proactively build up a tax loss reserve in preparation for when large gains are recognized.

Furthermore, when a sizable sale occurs and funds invested, short-term losses may arise. These losses can also be harvested, provided they occur within the same tax year.

Using Tax-Deferred Accounts for Gains

If you plan to invest in certain assets expected to appreciate rapidly, consider doing so within your Traditional or Roth IRA. For instance, if you’re investing in a startup company that you expect to soar, you can purchase their common shares within your IRA.

A Forbes article recently highlighted how Peter Thiel, PayPal co-founder, grew his Roth IRA to $5 billion using this technique to invest in startups.

However, be cautious, as these transactions have many rules, and the last thing you want is for the IRS to say you entered into a prohibited transaction, disqualifying your IRA. This can be a significant tax trap for the unwary.

It’s worth noting that the Biden Administration has proposed mandatory large distributions for what they consider “Large IRAs.”

Plan Ahead and Consult with Professionals

Whether you plan to sell this year or are contemplating the sale of a substantial asset in the future, it’s crucial to consult with professionals and develop a strategic plan as far in advance as possible.

If you’re interested in a free initial consultation and considering selling a business or large asset, please don’t hesitate to reach out and schedule a time.

 

Rx Wealth Advisors is a physician-focused financial advisory firm. Their primary focus is to help medical doctors maximize their earnings, keep more money in their pocket, and cultivate wealth so they can live the life they’ve earned and deserve. Rx Wealth can be reached at 412-227-9007, via email at croe@rxwealthadvisors.com, or on the web at rxwealthadvisors.com.

Tax Strategies High Earners Can Use to Combat Proposed Tax Hikes

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By Chris J. Roe, CPA, PFS

One of the biggest concerns we hear from our high-net-worth clients is how they can lower their tax burden. Those concerns are only growing with the release of the Biden Administration’s tax proposals that look to raise income taxes on high-earning business owners, professionals, and the wealthy.

Their proposal includes:

  1. Increasing ordinary income tax rates at the highest level from 37% to 39.6%, 
  2. Increasing dividend and capital gains rates to the top rate of 39.6% for taxpayers making over $1 million,
  3. Charging the 3.8% net investment income surcharge on S-Corp distributions, 
  4. Eliminating valuation discounts on the transfers of interest where the family owns at least a 25% stake in the business,
  5. Treating the grantor’s payment of income tax on a trust as a gift,
  6. Treating transfer of appreciated property by gift or death as a taxable event,
  7. Limiting the benefits of certain estate planning techniques, such as grantor-retained annuity trusts and taxing sales to grantor trusts, or
  8. Limiting an exclusion of certain gifts to a total of $50,000 per year, not the $17,000 per donee exclusion. 

If you take action now, it is possible to sidestep the above proposals should they become law. So, what are we thinking about and advising our wealthy clients to do? Here are a few suggestions:

  • Use your annual exclusion gift amounts to transfer appreciated investments to children. If your child is independent and in a lower tax bracket, it may make sense to transfer appreciated investments you are going to sell to your child and allow them to sell and recognize the gain. 
  • Give your less wealthy parent assets. This is the same as giving to your child. Additionally, if your less wealthy parents do not sell the investment but pass away, you will get a step up in basis and avoid the tax. Your parents can even leave the money to their grandchildren or great-grandchildren, preserving your lifetime exemption.
  • Donate appreciated stock to a charity. Always use appreciated investments to give to charity. You get a tax deduction for the fair value of the donation and avoid tax on the appreciation. Make sure you’ve held the investment for greater than one year. Also, lump your gifts into a single year using a donor-advised fund to ensure you maximize your itemized deductions.
  • Set up a charitable trust. If selling appreciated assets, consider setting up a charitable trust to defer the gain over many years while still getting an income stream.
  • Set up a Roth IRA for your child. If your minor child has earned income, you can contribute to a Roth IRA on their behalf – growing tax-free during the child’s lifetime. 
  • Create a trust for your spouse and make gifts and sales of assets. Your spouse may serve as trustee and make distributions to themselves and your children. Also, it is a grantor trust, so you can pay the income tax and make sales before any proposals of taxation pass.
  • Set up a trust for your children. There is a way to establish a trust for your independent children that will tax them on the income the trust earns, not you. Consider gifting some of your business interests to the trust so the children can pay the tax at a lower rate than you – enhancing the overall family wealth.
  • Consider using life insurance and annuities to shelter taxable income. Should the capital gains rates change on high-income earnings, you may consider using certain life insurance contracts and annuities to shelter investment earnings from current tax. It may be possible to kick the can down the road to a lower tax environment. Be cautious—the contracts need to be specifically designed and not just bought from any insurance agent touting the tax benefits of a contract.
  • Utilize Roth IRAs. When high tax environments exist, Roth IRAs become important to have and grow for potential future use when you need funds but do not want to pay tax to access them.
  • Utilize tax-deferred retirement plans. Look at your retirement plan’s design. When you are in the highest bracket, it makes sense to maximize tax-deductible contributions.
  • Utilize 529 plans. While these are primarily meant to fund college, you may use them for other purposes if you are wealthy. These are generally protected assets from creditors, and investment earnings are not taxable annually. If you hold the funds long enough to get significant tax deferral and allow your children to possibly use them as a retirement vehicle, the overall tax deferral will more than makeup for the extra 10% tax, if a withdrawal is taken. By the way, it is possible your grandchildren or great-grandchildren can use them for education or their lifestyle spending. Think about the earnings compounding over, say, a 50-100 year period.
  • Make a sale of assets to a grantor trust. Before any proposal becomes law, make a sale of assets to a grantor trust to provide the flexibility of forgiving the note or just taking back the asset to settle the note should the laws change. It gives flexibility. This should be done with care and proper counsel.
  • Establish a grantor trust. While you may not want to transfer assets in trust currently, you may want to set up a trust now to give you flexibility in the future. The Administration’s proposal calls for the taxation of sales to the trust and taxes paid on behalf of the trust to be treated as a gift for trusts created after the new law is passed, not before. 
  • Limit the duration of the GST Exemption. Many wealthy families use what is referred to as a Dynasty Trust. It is a trust meant to be exempt from estate tax for many generations. The proposal wants to limit the time of the exemption. So to ensure you beat any law change, set up a dynasty now in a state that allows the trust to go on for a long time. Fund with a few small assets and allow it to be grandfathered under any law change. This will give flexibility if you want to gift assets to your children and grandchildren in the future.
  • Use second-to-die life insurance to create a legacy. Should the step-up in basis be repealed, leveraging tax-free life insurance on you and your spouse to benefit children and grandchildren becomes much more attractive. When evaluating if a client should do this, we always analyze it from a return to life expectancy. Remember, life insurance is an asset that needs to be reviewed and managed. If it does not provide an attractive return. However, if structured properly, we believe every wealthy family should have some life insurance as part of the family’s diversified assets. This also leverages wealth that can pass in a dynasty trust should the law change.
  • Using life insurance to achieve a step-up in basis. Life insurance is tax-free when received, and its earnings inside of a policy grow tax-deferred during its lifetime. Consider using it inside of a dynasty trustto grow assets for your grandchildren. When you die, they receive the benefits tax-free effectively, giving them a step-up in basis even if the law eliminates step-ups.
  • Basis step-up using parents or grandparents. If your grandparents or parents are older and have no estate tax issues, consider setting up a trust for your spouse, children, and parents/grandparents. When your grandparents or parents pass, there is a way to make the trust includable in their estate and to achieve a step-up in basis, thus, avoiding income tax on all appreciation of the assets in the trust. This may change if no step-up becomes law but may be grandfathered if done before any law change.

As always, you should seek professional counsel before implementing any strategy, which should work within the context of your family’s overall financial plan. While saving taxes is important, it is not the end goal – it is part of a thoughtful, coordinated plan to manage and grow a family’s wealth over time. Should you need advice on your personal situation or want to discuss a strategy you believe will work for you, please feel free to reach out for a free consultation.

 

Rx Wealth Advisors is a physician-focused financial advisory firm. Their primary focus is to help medical doctors maximize their earnings, keep more money in their pocket, and cultivate wealth so they can live the life they’ve earned and deserve. Rx Wealth can be reached at 412-227-9007, via email at croe@rxwealthadvisors.com, or on the web at rxwealthadvisors.com.

While we are providing this as general advice, you should always consult your financial advisor,  tax advisor, or attorney before implementing any of these strategies.

11 Recommendations to Position Your Business or Practice for a Successful Sale

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By Chris J. Roe, CPA, PFS

Many private businesses and physician-owned practices face challenges when the owner decides it is time to make a transition. Whether an external sale or an internal succession, the process can be difficult and time-consuming. Many businesses fail to have a succession plan in place, whether it’s because they weren’t sure how to start creating one or just didn’t have a defined internal successor. This leads the business owner to seek an external sale. 

As a third-party sale is sought, the business owner, more often than not, realizes his mental business value is far different than the actual value third-party buyers are willing to pay. Given the goal is to maximize the value received, how do owners best position their business for sale? Here are several recommendations to consider:

Get Your Accounting Records in Order

Make sure your bookkeeping and financial statements are up-to-date and professional. If you are planning to head to market with the business, you will want to get at least the last two year’s financial statements reviewed by an external CPA Firm. This will give some assurance to the buyer that your books are in order.

Have Your Business or Practice Appraised

Hire a third-party appraiser to perform an outside business valuation. This will give you a good benchmark of what a third-party buyer may offer you.

Increase Your EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization)

Many buyers will value your business based on a trailing 12 months of earnings. You want your profit margins to be at or slightly above the industry average, so as you move forward, it is appropriate to review your earnings, profit margins, and expenses to ensure you are pricing your product or services appropriately, given the market, and have eliminated any unnecessary expenses. 

Ensure Consist Earnings and Cash Flow 

Buyers like to see strong cash flow and consistency of earnings. Wide fluctuations in cash flow and earnings tend to scare buyers and lower business values. 

Develop Your Add-Backs List

As business owners, we tend to live our lives through our business. When you are negotiating a sale, there will be expenses you are incurring, such as company-provided automobile, discretionary travel, meals and entertainment, and professional fees, that will not be considered as part of the sale and will increase the sale price when added back. The new owners will not incur these expenses. You should evaluate your expenses and develop a list of these add-backs.

Be Prepared to Either Be a Minority Owner or Carry a Promissory Note

Depending on the buyer, you may be required to roll over some of your sale price into the equity of the new company. Also, depending on your business size and buyer, you may be required to carry a promissory note to help the buyer purchase your business. Either way, you need to understand you are no longer in control of the business you sell.

Helping with the Transition

Be prepared to continue to work in the business to help transition it or to help grow it. This will serve to ensure your carried ownership in the new business will be maximized upon a future transaction. Also, develop your ongoing salary expectations for your continued work in the business. Keep in mind that if your salary expectations are much greater than you are currently making, it will reduce the purchase price of your business. 

Evaluating Your Staff & Staffing 

Evaluate the strength of your staff and whether or not you are understaffed. Keep in mind that if a buyer has to add staff to operate the business, they will lower your purchase price. Make sure your staff is adequate to run the business in its current state.

Do Pre-Transaction Tax Planning 

The value of your business is not what you get for it but what you keep after taxes. Take the time to sit down with the proper professionals to do tax planning that will increase the amount you get to keep from the sale. Bear in mind these things take time, and the more in advance you decide you want to sell, the better the planning opportunities will be.

Assemble Your Team 

You will need a team of people to help you sell your business and to manage the family’s wealth post-sale. We normally serve as a team lead and help business owners assemble and coordinate amongst all team members. It will be difficult for you to be the coordinator, given the stress and emotions you will be going through when the sale process begins. You will need a team of attorneys, your CPA, an investment banker, and other professionals. 

Mental State 

Begin to prepare yourself mentally for the emotional roller coaster you will go through when selling your business. Additionally, prepare yourself for the post-closing regret that so many business owners experience.

While succession in a private business, family-owned enterprise, or physician-owned practice can be problematic and time-consuming, a sale can be a wonderful thing. If you take the time to prepare for the exit, your sale will turn out to be a wonderful event in your life.

Rx Wealth Advisors is a physician-focused financial advisory firm. Their primary focus is to help medical doctors maximize their earnings, keep more money in their pocket, and cultivate wealth so they can live the life they’ve earned and deserve. Rx Wealth can be reached at 412-227-9007, via email at croe@rxwealthadvisors.com, or on the web at rxwealthadvisors.com.