Sell? Buy? Give?

Welcome everyone and thank you for attending today's webinar. I'm David Shaw the publishing director for family business magazine. I hope that you and your family members are enjoying this summer time. The last year and a half has really caused a number of family businesses to examine their options. Do they buy other businesses in a hot m&a Market do they sell do they rethink internet intergenerational transition? There's even the possibility of merging with a spec a special purpose acquisition Corporation and going public. Any of these approaches and others have implications for the family and this webinar is going to look at ways to blend personal and financial objectives as well as tax considerations into a comprehensive business plan to preserve family wealth. Before we get started some housekeeping details, if you've attended our webinars in the past, you know how to ask questions. But if you haven't right under the video screen, there's an ask a question area. We please do ask questions throw in your comments. We'll get to as many of them as we can today. We will go for no more than 60 minutes today and get to as many questions and comments as we can. I'm really pleased to be joined today by Claudia develas and Irina Estrada. Both colleagues from PWC. Irene is a tax managing director who serves as a national resource to pwc's private company services practice specializing in estate gift and trust issues for high net worth individuals. She advises clients on planning and compliance matters involving a state and gift tax generation skipping transfer tax Furniture income tax and family business succession as well as International estate and gift issues and pre immigration tax planning. Claudio develas is a tax partner in the personal financial services practice on pwc's New York City office Claudio advises High net worth individuals families and business owners on all aspects of their income tax state gift and generation skipping transfer tax planning structuring tax efficient business succession plans as well as counseling clients on the income State and gift tax treatment of charitable giving these two are both highly qualified to talk about some of the issues that'll come up today and I welcome both of you. So with that I'd like to turn it over to you Irene to introduce today's discussion, right? Thanks David. Good afternoon everyone. So today we'll be talking about as David mentioned transitioning a family Enterprise and in all the considerations I go into that. We have an agenda for today. Well first we'll cover the business transaction from both the buyers and the sellers perspective then we'll talk about Deferral techniques and light of the potential tax rate increases that you know, it's been in the news and then we'll finish with planning for with various trusts for closely held businesses. So with that let's start with the first item Claudia when looking at a potential sale, what would be the considerations from each of the buyers and sellers perspectives? Thank you Irene and thank you David and for having us and for everyone in attendance. So this question I'm going to obviously we get asked a lot and we deal with it, you know frequently enough when clients are buying and selling businesses and spend the whole day. Just talking about this. I I just want to touch, you know a few of the main points and the things that we have the most discussion around and we'll start from the you know, buyers perspective. And this is in no particular, you know order of priority or importance just you know, the big ticket items like valuation. You're you you're the excuse me from the seller's perspective. So in terms of evaluation, you know, what what are you selling for? Is it the right number? How did you get to it? Is there an industry, you know standard or specific there were different evaluation methodologies and in certain industries, you might have, you know, some multiple of you know earnings. You might have a multiple of you know, top line revenue, you might have, you know, a comparisons to other companies at the end of the day. It's tends to be industry specific and from that point forward, you know entities specific, you know, it becomes a negotiation. In terms of deal structure. There's a lot of different things to consider me, you know being a tax guy that I I tend to get involved there the most so from a seller's point of view, you want long-term capital gains, right? It's a preferential rate versus ordinary income and historically that meant, you know, you you want to sell you know, stock versus you know, the the business selling the assets today you have, you know, passed through entities where their corporations or LLCs tax as Partnerships, you can still you know, sell the assets of the entity and get capital gain, you know treatment for The owners we often looking at you know other specific items that might be I'll use the term Claude back because people think I'm telling my business like I get long-term capital gain treatment not always because you might be selling as part of your sale. You might be selling inventory account receivable. You might be selling an asset that's fully depreciated in in those instances. You have a portion of your proceeds. The portion of your gain is recaptured as ordinary income. It's not all capital gain, even though you're selling, you know, what would be, you know capital gain assets. It's important to See what's going on. If you're not selling the full business, you know, you might get rolled over equity and and that gives you a deferral opportunity a lot of discussions around. How much you receive today versus the future you might be receiving, you know, some financing whether that is I'll sell 80% or solving the entire business, but I'm getting 80% today. I'm gonna collect 20% over time that could be a simple as a promissory note. It could be more complicated in terms of you know, and earn out so that I think my company's worth a hundred and you Irene as the buyer think it's it's worth a hundred. So we agree on that price, but you said I just want to make sure it's worth a hundred Claudia. So I'm happy to give you 70 today. And I'll give you 30 over the next you know, four or five years depending on you know, what the performance is. So you you so you I essentially have to earn out the rest of my money and and that could be complicated right because I'm in control of the business today. You buy it you're in control of the business. So if the earn out is based on, you know, what the earnings of the business are. I'm no longer in control of what those earnings are and you might you know load up with certain expenses. You might say well I needed to go out and hire three other people to do, you know what you did and you know that impacts the bottom line. So, you know, we don't make as much money as you said we made so sometimes you negotiate like, you know, what goes into the determination of what the real earnings. Are. You quote like normalize, you know, the those earnings and that's impactful for you know valuation also because someone might say, hey you only make 20 dollars a year. No, I really make 80 I you know on for tax purposes I make 20 because you know, we might be, you know charging rent to my you know, personal entity which you know, we we overstated for for You know various reasons, maybe we're paying the children more salaries than we could get out in the open market. So you kind of like normalize those things so that when you're talking about a real earn out and how someone is performing you you get to a point where it's like what we we think our income is around ten dollars, you know a year. So if you're if you've done something to drop it down to four so that I don't get my earn out, you know, that that's not going to work for us. The the recommendation is always get as much money as you can you know today, you know versus the future, you know, unless it's just a promissory note and it's not tied to specific, you know performance because you know think about someone who might have sold their business in 2019 or 18. Look. Look what happens in terms of the pandemic, you know, I I can't imagine how many issues there might be out there from the the buyers perspective. You know, I've sold my business to you the pandemic hits, you know, you owe me money on the back end this probably a lot of negotiation that that's going on and even in terms of just that financing right? I'm gonna sell 70% now 30% later on. Okay. Well, you know you you've essentially sold your business as the seller on an installment basis, you know, maybe that's good. Maybe that's the the deal you you know, you came to At the end of the day for income tax purposes. You have installment. Sale and you pay tax on an installment basis, which I mean which means you calculate your gain and you pay the tax as the cash is received for for what you've sold. There's usually a lump sum upfront make sense. And you pay tax in that year as you get future installments the taxes paid in those later years, which means you're taking some risk from from an economic point of view, but you're also taking the risk from a tax point if you right because if you sold your business in 2020 and you receiving installments in 2022, there's a good chance next year tax rates will be higher. So you you sold the same business. You're just collecting your your money your accounts receivable, but it's something to a higher tax because of this installment treatment. Well you installment treatment is the Um, you know standard it's the default myth you you can actually opt out of that. You know, if you want to someone a client says, you know, do I want to opt out of you know, installment sale treatment that means I have to pay all the tax today and I'm not going to get all of this money for the next two or three years. What are the considerations for that decision? Well one is you think you know capital gains, you know might go up in the future. So you'll you'd rather pay tax today on money. You haven't, you know fully received and then when you receive, you know, the back end of the payments you don't have a taxable event because you've already paid the tax up front there. If you do that though, you know, you you run the risk that you don't get a payment on the back end and you've paid the tax up front and then there's adjustment Provisions to to take that into consideration, but you're prepaying attacks that you didn't have to pay. If you stayed in installment sale treatment and your back end payments are greater than five million dollars. There's a different interest charge that the government, you know charges you because the thing will let you pay the tax and installments just like the money you're receiving but we're going to charge you for that so that that's an additional transaction cost and I remind everybody on these earn ounces. So in my example Irene, you're giving me 70 down 30 over time and there's no interest. There's no such thing as an interest free Loan in terms of the IRS. So when you make those payments to me, there will be imputed interest income. It's original issue discount. So for someone thing so I have 30 dollars of capital gain on the back end some portion of that 30 does get recast and as ordinary, you know income and as interest expense and and the last big thing I want to talk about is, you know, nothing to do with taxes. What are you gonna do after yourself? Right? We have business owners who've been in business for 40 years 50 years or the family, you know, multi-generational 80 a hundred years. A lot of their lives is centered around, you know that this you know business, you know, sometimes it just becomes the identity of the family. If you're out of that business, you know, what are you going to do? Do you have philanthropic, you know interest do you have you know other interests that that you might want to pursue the family business sometimes becomes the pseudo-family office, you know, like the accounting department takes care of things for the family. You know, that that's gone. You know, the the business is gone. Do you form a family office? Do you join a multi family office all things to work through because you are going to have a major lifestyle change and from the point of view of the buyer the first topic I want to hit is valuation because it's the same thing that that the seller had except. It's in the reverse. So did we get the number right? Maybe we should have an urn out to hedge against. Oh my God. We you know, we've potentially, you know overpaid for this. From the sellers from the buyer's perspective, you know, we we're buying your business Irene like you you're you are the business. You're the face of the business. Maybe we should keep you on three years Consulting Arrangements try to help facilitate the the transition maybe you help us bringing over the you know, the the key clients or customers of that business. What about key employees? You might have a management team in place that we want to retain. And those people might have loyalty, you know to you the original family that they've worked with for many years A lot of them will still likely need jobs. But if you want to retain them, we've had conversations regarding structuring, you know, whether it's you know, like Phantom Equity like, you know, we want you to stay we don't want you to leave but we will incentivize you to stay whether it's you know, future appreciation will guarantee you some sort of phantom Equity, you know in your retirement or if we subsequently sell the business and then just, you know tax in in general, you know, you're the buyer you're sending a lot of money to buy the business. How do we get the most bang for our buck? You know, we we want to take depreciation deductions and organization deductions and lastly in in the purchase. Who is there a possibility of tying a state planning in to the purchase, right? I want to buy your company for a hundred dollars. Maybe I've already done some mistake, honey. Maybe there's Trust for kids that's got 10 million dollars in it. Maybe it can participate and become a purchaser for five ten percent what whatever it may be. It's a good opportunity at that time to tie in some of these other family entities and we've had this conversation in million times in terms of Estate planning strategies which which I'll just point it back to you. What are the type of things you're seeing in terms of the last few years with with the state planning. I'm talking about tying getting to a purchase, but it could be that or you know, just in general. There's been a lot of noise in the system with the state tax changes. Yes. Yeah, definitely Claudia and that thanks. I was a great ever view of you know considerations if you're selling to a third party, but as you mentioned you could have you could be wanting to transition to to your family and and what kind of a state planning strategies would you want to incorporate in that situation? I think I would first talk about what you mentioned the noise with the potential changes. There were several legislative proposals released earlier in the year. We had Senator Warren's wealth tax proposal. We had a Senator Sanders proposal which covered a wide variety at the state planning strategies or targeted them including your reducing. Of the estate and gift exemption making changes to grats Grant who retained annuity trusts, which I'll talk a little bit more about changes to how defective Grant or trust are treated valuation discounts GST Dynasty trust. So there are a lot of a lot of things Incorporated in Senator Sandersville, and then we had two very interesting tax proposals get released from the house and the Senate related to the Step Up in basis current step of invases rule and really making changes to how that applies and and really getting rid of that benefit that we currently have for taxpayers. So taxing unrealized gain upon gift or at death in certain situations and even sort of Mark to Market role for trust. So those are some of the proposals that were floating out there early before the administration really had a chance to weigh in on what its priorities were. We were curious Find out what they would focus on. I think we were expecting at the very least that the estate exemption would be reduced the estate and gift exemption. There was a lot of talk of that but then the administration released their proposals at the end of April and they followed it up with the green book which went to some more detail about on their proposals and a little bit to our surprise. There was no mention of reducing the estate and gift exemption at least in the near short term under the current law. If no changes are made the exemption will drop by about half after 2025. So it's already built in that there will be a reduction in the future unless that's changed but we were expecting it to be accelerated. And at least at this point, it's not clear that's going to happen, you know this year and next year. Although they still need to actually negotiate the bill and so we'll see what happens when we get a draft of the bill and That will make its way back in the into the discussion. But all of that is the way to saying that, you know, we have clients who are engaging in estate planning now or planning to in the future and there's been a lot of questions of what do we do? How do we plan for these changes that could or could not happen? There's a lot of uncertainty out there and it is a little bit difficult to to plan with so much uncertainty. I would say with respect to timing. If you do want to use up your exemption amount even though it's not looking now, like it's an immediate danger that it would be reduced, you know by the end of this year, which is what we initially thought. I still would go ahead and plan to get it done this year because We don't know what next year. We'll bring we don't know what the tax changes might be. But we feel fairly confident that we know what the rules are this year, you know, there was some concern about retroactivity potential retroactivity. But at least in the green book, it does appear that aside from capital gains tax that all of the other proposed changes would be perspective. The effective date would be perspective. So January 1st, 2022, which at least is good. It would give people some time to plan. Once we know what actual changes will be implemented. So so the good news is it looks like we know what the rules are this year. If you did want to engage in some estate planning either creating a defective Grand Tour trust or regret or substituting assets out of an existing trust, you know selling to an existing trust Distributing from a district existing trust. You might want to consider doing that this year when we know what the consequences would be as opposed to wait. Next year where it could be a little bit less certain of what potential tax changes would result from those transactions. So I'll I'll stop and give a little bit of an overview of both grats and defective Grant or trust. For those of you who are not familiar. These are too pretty popular techniques. They're both known as the state freezing techniques because they freeze the value of your current estate and then they shift appreciation down to later generations. And so basically a grat a grand to retained annuity trust is a trust that you you put assets into the trust and then a lot of people zero the trust out where it's called searing out the brat and what that means is you take back an annuity that is equal to the amount of money that you've put into the grad. So you put in one million you're going to take back one million over the course the term of the grad including an expected rate of return which is known as a 7520 rate right now, you know, the right interest rates are historically low, so it's a pretty Low bar that you have to meet and exceed to get any appreciation over that passed on to later generations. The nice thing about a grat is that you know, if you're successful that that additional appreciation passes on to your beneficiaries free of gift tax grats are generally set up a short-term. So two year grads, you could definitely set it up for a longer term, you know, especially with interest rates being so low, maybe you want to lock that in for a longer period of time the reason most people do short-term grats is that grats are really great for volatile assets so assets that, you know could move up and down very quickly. And so if the asset does happen to move down in the first year that you set up the grat and you do a two-year grat, then you get the asset back at the end of two years and you can try again and you can try to catch it on the upswing. Whereas if you set up say a 10 year grit a longer term Brett and you have the misfortune of having the asset go down and the first year The assets tied up for the next 10 years. You can't really, you know, try again and even if there's appreciation later in the gratin may not make up that initial downfall. So that's why people often do to your grats and even rolling grats where you just you keep setting up new to your grass and you keep rolling it over and and trying to capture the upside and pass that on the defective Grant or trust is similar in that you're trying to get appreciation out of your state. So the way the defective Furniture trust works is you generally need to see the trust so put in you know, 10% of what you would like to eventually put into the trust through a gift and then you would sell the remaining assets to the trust for promissory note. So the nice thing about the defective Grant or trust is that even though you're putting assets into the trust you are getting you know, the promissory note payments back. So you're not losing that cash flow per se but any appreciation Over the promissory note which would have you know, an interest rate based on the current AFR applicable federal rate would again pass on to your beneficiaries. Now as I mentioned a threat and a defective rent or trust, they're very similar in many ways. They're both ways to freeze your state and pass appreciation down to the Next Generation, but they do have very different tax considerations. So depending on your actual facts and circumstances one may be more relevant to you than another so a threat typically is not a great vehicle. If you want to apply generation skipping transfer tax exemption known as the GST exemption. That's the exception that you have to Shield assets from generating attacks. If you pass it down to say a grandchild or you know a generation to below you, so grats are not effective or not generally effective for that because you Apply your GST exemption on the front end you have to wait till the grat terminates and you know how much it's appreciated, you know over the 7520 rate and at that point you apply your GST exemption, but then you've lost the leveraging that you normally get whereas with the defective Rancher trust. You can allocate your GST exemption on the front end and then any appreciation that occurs down the road is fully covered and so to extent you want to do GST planning, you know, you may prefer one vehicle over the other but That's a brief interview. There's definitely a lot of other things that go into, you know, both dress. So the the details are where it gets complicated because you definitely have to think about cash flow, you know, when satisfying the payments for grat, if you're putting in an asset that's hard to Value. You have to consider the consider getting valuations each time when you're using the hard to value Asset to satisfy the annuity payment if you're going to do that, they're both Grand Tour trusts, which means that you're paying The Grand Tour is paying the income tax on the assets that are inside the trust which is really a great benefit from a tax perspective because these assets are out of your state presumably there are the appreciation is out of your state and yet you're paying the income tax on the that the assets are generating. So it's a nice way to almost make gift text free transfers into the trust because you're paying the income tax. On those assets it does make them. Good vehicles for S corporations because a grand tour trust is one of the eligible shareholders. So it is something that you could use an S corporation interest in but again, you know considering the cash flow. I think in addition to those planning techniques, which as I mentioned are the two most popular for those of our clients who are inclined to philanthropy the the two most popular trust charitable split interest trust that I see our charitable remainder trust and charitable lead trust and so starting with the charitable Lee trust. That's a trust that's can be very effective because you can zero it out much like you can zero at regret and what that means is you can transfer a lot of money to a charitable lead trust and have no gift text ramifications, even though the remainder of the trust would pass on to non charitable beneficiaries. Unlike a grat a child will lead trust is generally longer term. I mean the longer the better because you really see the leveraging, you know, if you have like a 20 year class, although you might not be able to set it up for that long. But the longer you can make it the better if you set up as a non-granter class, you don't have to worry so much about previously seeing the term of the trust which is the case if you if you set up a grant or quite you might have to Make sure the term is one that you think you'll survive just because there's some very ownerous recapture roles with the charitable deduction. If you die before the term of the class again clats are there they're powerful vehicles, but they're they are complicated. So I don't want to spend a ton of time talking about them because as quality mentioned he could talk all day about the the business transactions is the same with charitable split interest trust, but I guess I'll talk just mentioned briefly on the chair of remainder trust. It's the reverse of the charitable lead trust it the trust that you set up and you actually retain an interest annuity interest or a unit trust interest for yourself or your spouse during your lifetime. I mean, you can't set it up for someone else but most commonly, you're retain it for yourself or spouse and then the remainder goes to charity and the reason you would set that up is to get the deferral because the charitable major trust is a tax exempt vehicle so you can But appreciated assets into that trust and then sell those assets and the gain that's that's generated on those sales is trapped inside the trust and until those distributions are made out to the The Grand Tour. It doesn't carry out that that capital gains and so it differs the taxation. Which is going to be very beneficial if some of these tax proposals get get through and and things like the capital gains rate getting increased but Claudia, maybe I'll turn it back to you on what other potential deferral strategies shareholders of closely held private companies should be thinking about with the some of the proposed tax changes. Because just before that Irene a question that was relevant to what you just talked about and it can you touch it all on the proposed King Grassley legislation for private foundations and dafs because you know when you're talking about charitable remainder trust and so on many clients tend to establish large You're such Vehicles right after a big liquidity event is do you have any comment on that how someone how a family could prepare around that? Now that's a good question. And I know that that did come out. I must confess. We have a tax exempt group that deals more with private foundations and and dinner advice funds and so I know they have been all over that in in our planning to have a write-up about those tax changes, so I haven't I haven't been keeping close touch on that. I don't know Claudio have you that? No, I was waiting for Laura to send me. He's waiting for the cliff notes version. All right over to you. Claudia yeah, so, you know in terms of you know, deferral strategies, especially if someone you know is really thinking about you know when you're a seller. You know, you're gonna sell your business. Maybe you'll have capital gain back that capital gain could be from the sale of stock. It could be, you know pass through to you. from your interest in an LLC or some some partnership, so The last few years has been a lot of conversation around, you know, qualified opportunity zones. So you have the ability. Starting, you know from 2018 was the first year to roll over your gain into a qualified opportunity Zone fund. So I sell an asset I have $100 gain. I could take a hundred dollars and invested into a qualified opportunity Zone fund which will essentially permanently to just not pay tax on that hundred dollars until some future date. That future date is 2026 anything that you any gain that you roll over into an opportunity Zone fund. Is essentially deferred and deemed recognized 12:30 December 31st, 2026. So the tax will be due for the 2026 tax year. Let's say in April of 2027. There are some benefits the earlier you make these rollovers because you can essentially if you did it up front in 28, you know 18 and 19. You essentially get a reduction in that capital gain that you rolled over of 15% You still have an opportunity for this year? And as long as you you in the opportunity zone for five years you can essentially reduce. That capital gain that you rolled over by 10% So in my example, I got a hundred dollar gain that I rolled over this year into a qualified opportunity Zone. I will ultimately pay tax or recognize that gain in 2026, but only on 90 Not the full hundred in addition if you remain invested in the opportunity zone for 10 years or more the investment the appreciation above your initial investment. So in my example, I rolled over a hundred dollars everything above that hundred dollars. The future gain is exempt from tax, you know, whatever it grows to. So that's a pretty powerful tool and we would have run a lot of conversations about that in 2018 and 19. It kind of slowed down after that. It seems to be picking up again. A lot of the decisions were not so much about the tax benefits. But but the real economics right because I'm going to take my game. I'm Gonna Roll it over if the you know pituities own funds. It does not perform my hundred dollar investment in my example decreases in value to 65 dollars. On December 31st 2026 I'm jeans to have recognized one hundred dollars of game. So a lot of clients were more concerned about the the actual economics not not the tax result because the tax results. Is very good and that tax deferral qualified for whether it was long term, you know or short term gains. So this is something that has been a hot topic for the last few years. We have clients when they're structuring Investments and and then they're on this, you know, if you're on the set the buy side for instance. If you're you know buying, you know a business that business is a you know, C corporation, you know, not a partnership something like that. You potentially can make sure that your investment qualifies as a qsbs qualified small business stock. If you meet the criteria, which there are a bunch of them not going to go through you you essentially could get you know, 50 million dollars, you know, exclusion in capital gains in the future. It can actually be even more depending on how you structured how things are our language to to, you know, it seems to 10 million dollar but you could you multiply that by by structuring it the right way to get capital gain exclusions. Additional exclusions and lastly we have conversations with clients who are selling, you know, maybe roll over Equity right Irene is gonna buy my business. Maybe she buys 60% of it. I hold on to 40 or we sell and you know reinvest in a new entity in which I will get a piece of that, you know, maybe 25% the or if there's a strategic buyer that comes along a Fortune 500 company that's going to give me stock. In their entity, so I'm a seller but I essentially get roll over Equity into the extent I get roll over Equity. It is possible to structure that so that I'm not paying tax on on the full sale. That is my role. The portion of my role over Equity is not currently taxed and it will be taxed at some point in the future. Those are the most common things. We've been talking about lately in terms of deferral strategies for someone selling the business. Thanks Claudia. So, um, it's great to think about potential deferral strategies. I guess on the other end for clients who are looking to potentially accelerate gains, you know, they're thinking the tax rate could go up capital gains rate could go up. I mean, maybe not to the ordinary income tax rate, although that's possible. But if the client is planning on selling their company later this year or even next year and they want to get ahead of any potential increase in the rate. What are some techniques that they could consider to accelerate that game? So I for everyone's benefit. I will tell you personally. This has been the hottest topic the last two months. Biden proposals, you know, what's gonna happen with with capital gains? You know, what what should I do now? I mean, we I have two of these calls, you know a day. And you know internally and Irene and I had worked on this, you know, we kind of came up with okay. Well, what could we be telling clients? What should be advising them is like a whole host of different strategies. They're not all applicable to everyone. But in terms of just getting ahead, you know of the client conversations I go through a list of things that that we talk about all the time in the first instance start with the simplest. If someone is just concerned about increases in capital gains rates, you know right now capital gains rate is 20% The Biden Administration has talked about you know, bringing that up to ordinary rates meaning next year. It could be 40% you know, and that's for anyone, you know, making us a certain level, you know of income. The likelihood of that happening is is low but there's a good chance that capital gains rates do increase to 25, you know, or or 28% which seems to be the revenue maximizing rate in terms of like how much can you increase the tax before you start losing money? Because people just don't engage in transactions. So somebody wanted to plan for you know, this rate increase of five or eight percent. What what can you do? You know, if you really wanted to lock in the 20% rate, you know for for this year Well, if you have marketable Securities with you know, big built in games You could just sell them. And then bind them back the next day. So, you know, I I hold in it, you know Microsoft at a hundred dollars with the $10 basis. I sell it. I recognize my $90 game but I like Microsoft the next day I go out and buy the Microsoft again, you know, I use the same money that I just, you know got in from the proceeds to repurchase the stock. So I'm invested in Microsoft at a hundred. I just stepped up my basis now and I have you know, $90 of capital gain, which I'm gonna get which I know I'm gonna pay tax at you know, 2020, excuse me, 20 21 capital gains rates right now, you know 20% if you don't have marketable Securities, which are the easiest to dispose of What do you do with closely held assets like, you know interest in the business escort partnership, whatever it might be well. You know, you could sell them to a non-grant or trust that kind of keeps the asset, you know in the family. So a non-grant short trust is separate and apart from me. The the seller it's a standalone taxpayer. It says if I'm selling to a third party, so I sell my asset to the trust, you know, the trust needs to have cash to pay me for that asset or it could issue a note and there are you know concerns around that is it real dead for tax purposes, but assuming you you structure the transaction properly you have a taxable event. I've sold the acid but but it stays in the family. For clients who might have an S corporation you can distribute an asset from an S corporation to a shareholder that for tax purposes. When when the S Corp distributes an appreciated asset. That's as if it sold the asset for cash and distributed the cash. So any highly appreciated asset from an S corporation that's distributed to a shareholder is a deemed sale. So the shareholder winds up with the acid and the corporation recognizes the game and pushes out that gain to all of the taxpayers so you can do that before the rate goes up. If you have Assets in a non-grant or trust you could distribute the asset very similar to the S Corp strategy you distribute the asset to a beneficiary it under the general rules a distribution of an appreciated asset from a trust to a beneficiary is not a taxable event at all. But the trustee of the trust can actually make an election to say we know it's not taxable, but we'd like to elect. Taxation here. So now I'm going to distribute to Irene the beneficiary of a trust. I want a asset that's worth $100 with a $10 basis and I make the election that event then that distribution to Irene trigger the $90 game and Irene will pick up. That capital gain on her personal return and she gets the asset, you know for a hundred dollars if anybody is a seller. And maybe you've sold a portion of your business on the installment method that that I talked about earlier. Maybe there's a note. Hanging out there because in Irene's case. She's a Claudio. I'll tell you this a hundred dollar asset. I'll give you $70 today for your business and $30, you know over time. I haven't installed in sale. I'm go and if I didn't opt out of installment sale treatment, I have this account receivable that I'm gonna pay tax, you know on the capital gain as I mean makes, you know payments on that note to me so my hands are kind of tied but you I can actually trigger the game today on Irene's note even though I didn't opt out of installment sale treatment, you know, let's say two years ago when I entered into the transaction I can get that note to say my children. I trust from my children. I could pledge to know that's collateral with with a bank and have them give me you know alone against it those events will automatically trigger the game on that installment sale for someone, you know, I mentioned opportunity Zone, maybe someone rolled over again. one opportunity Zone and they said yeah, Claudia told us that we don't have to pay the tax on this until 2026 but We think capital gain rates are going to be higher in 2026. And now I can't, you know, get out of this thing. Well, I guess you could always sell your You know opportunity Zone investment if you want or you could just gift it you could even get it to a spouse in a non gift transaction, but that's a trigger meaning the gain that you rolled over will automatically be triggered now, so it's it's no longer tax-free. There are some partnership strategies also for contributions to Partnerships. I won't get into all of the details. It's it's very complicated. But ultimately when when I have an appreciated asset, so I read and I you're gonna start our own accounting firm to compete with PWC and Irene, you know, she's a big shot. She says, I'll put up $50,000 of cash and I'll say oh boy. I don't have 50,000 bucks. I got $50,000 worth of office equipment. Let me contribute that but in my basis in this office equipment is like $10 or something like that when I contributed appreciated property to a partnership, that's not a tax. Event because it's specifically Exempted from the code. It is possible to structure the contribution to a partnership in a way where you trigger the game. You you have to like fail certain investment partnership rules and in family limited Partnerships, like which we use for. Estate planning purposes. These issues come up all the time, right because you know, you're contributing cash and maybe you're contributed. A book of marketable Securities everyone thinks well, I'm just putting it into the partnership. It's it's no big deal. I'm gonna do this for a state planning purposes, but you can actually engineer that in a way that your contribution of those marketable Securities. It is a taxable event. So you still own the marketable Securities, you've just triggered the tax and lastly I will say, you know, as we're talking about all of these strategies in people's out. This is great. I have a few different options, you know, we got to work through the nuances and and the difficulties remember this unless you're selling the asset and just taking the cash. Like I've talked about a bunch of strategies in which you keep the asset and just trigger the gain you have a dry tax charge meaning you've triggered the gain and now you owe tax, but you don't have the cash. You still own the the acid on which you've triggered the game. So you've got to come out of pocket, you know somewhere else that presents an opportunity cost. Right? Because if I was going to sell the acid in five years, but I said, yeah, I'll just trigger this game today. That means I have to come out of pocket the tax dollars today. That means those tax dollars are not otherwise invested and that's an economic decision that that needs to be made and I I don't want to under you know estimate that and have people think yeah. This is all these wonderful gain triggering, you know strategies to lock in the lower rate. These things would be great. If you thought I'm gonna sell this asset within six to nine months. Okay my tax on I you know Phantom transaction here that triggers the game is due next April if I'm going to sell the acid in March fine. I'll have the tax anyway, so I might as well just sell it today. But if you're not selling for five years you need to think about the the consequences of selling that So yeah, Claudia, that's a good point. And I think at one other thing I would like to mention is, you know, we're talking about these acceleration opportunities as if the effective date for any capital gains rate increase is in the future, but the green book did actually put the effective date. I made a quick references early, but I didn't go into detail. They did put the effective date for the capital gains rate increase as April 28th. I mean that that day does not actually in the green book. It says data the announcement, but from all accounts, that means April 28th the date that President Biden gave his speech on this American family's plan, so Although no one expects that date to stick. I mean it would be highly unusual to tie an effective date with basically, you know a speech because there is there is no bill they have in the past tied the effective date of a capital gains rate increase to the introduction date of the bill itself, you know, when an actual bill is introduced they say the effective date for the capital gains rate increase is today and you can understand why they would do that. They wouldn't put it in the future. They're worried about people rushing out and selling assets and then, you know potentially affecting the stock market so so they don't want to put a date in the future that being said to put a date in the past because the green book came out at the end of May and then they put their date April 28. It just be would be very unusual so we don't think that's going to stick but I don't want people to be surprised or or not understand that there is a risk that any transactions you Turn to now. Could potentially be caught if they do stick with the April 28th date or some other date in the past, but I think most people do think it'll be date of introduction of the bill, which we're expecting to be this fall, but we won't we won't know that until we see the Bell we see what the effective date is in there. Yeah, that that's important to note because if people think well, let me just get this done, you know over the summer there is nothing that says Congress cannot say the change in the capital gains rate is you know, even if it's not April 28, it's July 1st and like oh, I did my transaction on July 10th. I thought I was you know, following pwc's lead here and locking in the lower rate and it turns out, you know not to be the case. So there's no guarantee you and in addition. Maybe you can talk about it Irene. If anyone wants to enter into these gain acceleration strategies, how do you maybe you just talk about like how does that impact any existing planning the state planning that was done in the past to trust structures that are already in existence. Sure. Yeah. So you may have you may have business centers that are already held in some of these trusts that we discussed. It's effective Grant or trust or a grat or something and especially if you're entering into a third party transaction, so you're selling to to someone outside of the family. So, you know a Bonafide sale, but you don't own the entire asset you've already done some of the planning we discussed and now, you know 50% of the businesses and by these trusts that are outside of your state and 50% is owned by you but as I mentioned earlier a lot of times these trusts are set up this Grand Tour trust which means that from an income tax perspective you almost ignore the trust is a separate entity that it's you effectively you pay the income tax on those assets. And so the Would happen for sale. If you were to sell a hundred percent of your business and 50% of Zone in the trust and 50% is owned by you a hundred percent of the gain assuming it's a grand tour trust would be taxed to you now. That's a great answer from an estate gift tax standpoint because you know, there's this huge gain going to the trust you're paying the tax on it. The trust has all of the assets that has no reduction for taxes and it's all out of your state from the state planning standpoint. We love that from the client standpoint. Maybe not always the best news because they may have liquidity or cash flow issues. They may not love the fact that they're paying, you know, 20% or higher capital gains rate on assets that are out of their estate so they don't have access to those assets. So it it may be the kind of thing that even though you liked the idea of a grant or trust you would Maybe not like the idea so much if there's going to be a huge capital gains bill that you have to pay. So In that situation you may want to consider if you're engaging in a sale and you and you have the situation turning off the granter trust power to turn off the grantor trustpower. It's also known as toggling. There's usually a way to do that trust are generally drafted so that the grand tour trust power can be turned off. It may be more complicated depending on if there's the spouses of beneficiary or not, but there's generally ways to turn it off. So that would be something you'd want to consider before engaging in a sale where a trust and a part of the interest. If you do decide to turn it off, I would not recommend turning it back on right after the sale. It just it starts to look abusive if you're toggling on and off especially in a very short time frame or you know around a big event. So generally we say, you know if you're going to toggle on or off The plan for that to be somewhat of a permanent change now there can always be changes in circumstances and you know, 10 15 years down the road. Maybe Something's Happened where you really want to switch it back on or off if enough time has passed and you can really make your reason for why this makes sense. I think that's okay. But I think I think turning it off for the sale and then turning it back on right after the sale might be a bit. We just would raise some questions potentially from the IRS. So that's on the income tax side on the gift in the state tax side. I think the main thing to keep in mind is that Even though we're ignoring the trust from an income tax perspective for like, oh that's the grand tour from an income tax perspective. You really do need to respect it from kind of evaluation standpoint. So if the trust owns 50% of your business and you sell the trust or sell the business 50% of the proceeds needs to get to the trust now that may seem you know obvious but it might be less obvious in a restructuring situation. So let's say your restructuring a business that is partly held in a grand tour trust effective Grand Tour trust and you're saying well, I'm your structuring. I'm not transferring anything into the trust. How could their potentially be a gift or you know other transfer if you're restructuring the business in a way just the value either into the trust or out of the trust that could be an issue. There is an ordinary course of business exception. So if you can prove this is something that you know is in the ordinary A business it'd be something that a business would do without family members then then you might not need to worry about any shift and value but if that's not the case and IRS is just always going to scrutinize transactions involving family members because you know, they're they're worried about these these shifts that are happening kind of below the below the like as disguised as a resuring you just need to be aware of that and I would say that you don't you need to be worried about it both ways. So people generally think oh well as long as the value is not shifting to the trust. I'm okay because the shifting to the trust that's a gift. We all understand that but if it's Shifting the other direction who cares that's not actually the case because if it's Shifting the other direction to The Grand Tour that's a benefit that the grant Force getting from the trust and that's a section 2036 A1 issue. So that actually could be worse because that could taint the trust and That trust back into your state. So you really need to be careful about shifting value in a restructuring. I mean just one last point because you talked about like ranch or trust depending on what happens with the you know by an Administration and tax reconciliation bill later in the year. This might be like your last opportunity. To deal with a grand tour trust, right? So if you had an acid in the trust that you thought maybe based on new tax law. You know, I don't want that in the trust or vice versa. I have an asset that's not in the trust, you know, you still have an opportunity before the end of the year potentially to swap assets, right? So I have Microsoft stock in the trust and you know, another your closely held business interest or or some other asset that if you can prove the values are you know? The same, you know, and that might require an appraisal you can swap those out. So I'm gonna take a dead asset take it out of the trust but a hot asset in there, you know, or vice versa just in response to tax law and that that won't be an income taxable event values are the same. There's none of this shifting that right talking about you. This might be the last year to do that, you know. Yes. Yeah. I mean we didn't go into great detail about the step up and basis potential changes but a significant one is that it would take a lot of things that we we kind of take for granted now that we can do with Grant her trust because of the the disregarded nature of them for income tax purposes that we can we get swapped this assets in and out we can sell to the trust we can give to the trust the pending law on the step up and basis could potentially make all of those transactions taxable and Trigger gain if you're shifting appreciated, that's it. So it's a good point Claudio. I mean another proposal that I think most people think is not likely to pass but we'll see no one can really predict what Congress will do and we'll have to see when they start negotiating this fall if it does have some lakes and if it does, you know, the effective date and the green book is January 1st 2022, so that gives you some time to do it but Maybe not what it's already June. Great terrific. Well, I've got a couple of questions here. We only have three minutes left. But let's see if we can at least get to one of these. Okay, can you help with taxes if in a transaction if you sell to an ESOP without taking the cash up front? Does that give some kind of tax benefit to a selling business? I mean, there's definitely benefits right of selling to a Nissan or at least a C Corp. I know there's a rollover benefits but are you referencing in connection with the tax changes or just in their current law just put it in current law I think was the question. Okay. So with current law, I mean you can essentially like, you know, swap the stock for cash. You have a certain amount. I haven't done much work with esops, but you have a period of time to like deploy That Into You know, like you're yeah and that that essentially get you deferral because then I can sell off those other Securities over time. And when I do that, I'm triggering the gain it's it, you know, I I haven't done as much of that over the years but it in the right circumstances, it can really be powerful in terms of like getting out of the of the position the you know, the health company and really diversifying, you know, and and differing game. Okay, and then you were talking Irene about various trusts, but with a generation skipping trust if you sell a company, that's held by one of those don't the proceeds have to stay in that trust to be invested. In other assets. Yes. Yeah, so that when I was talking earlier about making sure you know, you don't have any shifts and values that that's when I mentioned if the trust and 50% or let's say the trust ends a hundred percent. You may be paying the income tax the capital gains tax on that sale, but the proceeds I'll stay in the trust. So to Claudia's Point earlier about making sure you have the money to pay the tax if the trust and 100% of the business interest, then you definitely need to consider that because if it stays a defective Grant or trust as of the date of the sale, then you need to you need to have a liquidity or you need to turn off the grant her power that we what one last Point David. I think it's always important to even you know, like Allowed economics you really got to model out the tax cash flow. How much is it? Where is it coming from? What's the source because you know wealthy families, there's money in trust in Partnerships and who's paying the tax on it that it's important to work through those issues Okay, so we've got just a few like a minute to go key takeaway from each of you. Irene okay, I would say my key takeaway is not to wait till November December to do estate planning because it's like there's some people who did that last year and you know, it was a crazy end of last year. I have a feeling this year might be the same depending on how these the still goes. But you know, you just don't want to wait that long. It's not the kind of thing that you can just flip the switch and everything, you know these trust these terms you need to get some thought to that. So I would I certain thinking about it now and not expect to wait till last minute to get that done. Okay, and for me, I would say, you know, there's a big changes on the horizon in terms of you know, ordinary rates and capital gains it consider, you know, maybe acting sooner rather than later if you have Capital transactions coming up take them now and don't wait. Terrific. Well, thank you both Irene and Claudia. This was really in depth and and very very interesting. I want to thank you for sharing your expertise with our audience and audience members. Thank you for being along with us today again. I hope that you and your families have a wonderful summer and with that I'm going to end the webcast. Thank you Irene. Thank you Claudia. Thank you.