Pre-Liquidity Planning: Developing a Strategic Approach to Preserving Legacy Wealth

Business owners involved in pre-sale planning will benefit from proactive advice as they consider a more thoughtful and comprehensive approach to long-term financial success. Within this approach, there are five consistent practices – invest, borrow, spend, manage, and protect – that, when followed, will help families build, manage, and maintain their wealth across generations and market cycles.

When a business owner is considering selling a business, maximizing after-tax revenue is usually high on their list of priorities. Income tax planning, while substantial, should not be done at the expense of or in place of inheritance tax planning. With state estate and gift tax exemptions (currently $ 11.7 million per person) expected to be cut in half by 2026, strategic estate planning ahead of a company sale can now be more valuable than ever.


Founders invest decades in growing their business with the aim of maximizing long-term value. Similar to the target of “buy low and sell high”, success in estate planning means “transfer low and sell high”. Business owners who commit early on to the interface between estate planning and a strategic exit strategy can pay off for generations to come. When a company is sold, it usually comes at a premium to what an independent appraisal might have made. This inherent appreciation presents a great opportunity for estate planning.

Freezing the value. Freezing the value for gift tax purposes means the donor will benefit from all or part of their lifelong exemption. A donation of $ 11.7 million will be returned to the donor’s estate to calculate inheritance tax. However, it will only be returned to the estate at its value at the time the donation was completed. If the value of the gifted property increases between the date of the gift and the date of death, the transfer tax is avoided with each increase in value. In other words, the giver has “frozen” the value of the gifted property when making a gift. For example, if a $ 11.7 million gift of company stock is subsequently sold for $ 13.7 million, the $ 2 million increase should escape transfer taxes and potentially an 800,000 inheritance tax saving Effect US dollars.


Approaching estate planning and tax mitigation with a business mindset is an increasing trend in the planning process – and no one understands the power of leverage as well as a business owner. In today’s low interest rate environment, strategic borrowing can play several roles in the pre-sale planning process. Such effective use of leverage occurs when, in an effort to “freeze” the value of the company on a pre-sale valuation, all or part of a company is sold to an irrevocable trust in exchange for a promissory note.

Installment purchase to an intentionally defective Grantor Trust. If the business is later sold, the trust receives the proceeds from the transaction and can repay the note. Any increase in goodwill between the transfer to the trust and the final sale will remain in trust with the seller’s family as it was transferred from the estate with no gift or inheritance tax. During this time, profits from the business that are distributed to the trust can be used to meet the interest payments on the bond to the seller.

The concept of hire purchase is simple, as the following example shows: A business owner donates $ 500,000 to an irrevocable trust. Some time later, the business owner sells $ 5 million in company shares to the trust in exchange for a promissory note. The appendix provides for nine years of interest, and a balloon capital payment is due at the end of the ninth year. The interest rate on the note is set at the lowest IRS approved rate known as the applicable federal rate (1.08% for November 2021). There is no capital gains tax as the sale is between a grantor and a grantor trust, which is an ignored transaction under Revenue Ruling 85-13.

Strategic borrowing can also mitigate income taxes resulting from the sale of a business. When borrowing is cheap, owners often invest their after-sales proceeds and draw on a line of credit backed by their investments to pay taxes. Benefits include the ability to fully invest the proceeds while paying off the debt over time. If a business owner believes that the stock market can exceed the cost of borrowing, which is currently below 2%, there is the potential for successful arbitrage. In many company sales, the founder retains a stake, sometimes 20%, after the transaction. If the acquirer later buys the founder, this provides an opportunity for the seller to cash out the line and exit the transaction.


After-tax revenue is critical to a company sale. Upon completion of the sale, the owner and his family will fall back on their investable assets to replace the income previously generated by the business. Owners benefit from considering factors such as their lifestyle needs, charitable giving, and the annual spending rate. Working with an experienced asset manager and other advisors in the run-up to the sale informs the seller not only about the value of the company, but also about whether the amount received will last a lifetime after tax.


Controlling and minimizing taxes is paramount. While reducing the income tax liability associated with a transaction could be discussed in a separate article, strategies such as donating to charity, investing in a zone of qualified opportunity, and taking advantage of Section 1202, if necessary, are valuable approaches. (IRC §1202 allows certain small business owners to avoid taxing some or all of their profits from the sale of qualifying small business stock.)

Discount value. Effective planning means structuring a transaction to reduce a future inheritance tax liability. An owner may have a selling price in mind based on cash flow or earnings multiples; however, this enterprise value is not an indicator of the fair value for gift tax purposes. The fair value is determined by a qualified valuation of the transferred shares. As the stake transferred is often a minority stake, its valuation will usually yield a lower value as it reflects discounts due to a lack of marketability and control. This gap in value gives business owners the opportunity to give away company shares at a reduced pre-sale value. For example, if the appraiser applied a 30 percent discount, only $ 11.7 million would be exempted from the value of a $ 16.7 million gift. This could save $ 2 million in inheritance taxes.


Planning before selling can be the primary tool for founders and entrepreneurs to protect the value they create. A lifetime gift works well when the donor keeps enough assets to sustain their usual standard of living. If the donor prefers indirect access to donated assets, donations can be made to an irrevocable trust benefiting from the donor’s spouse.

Lifelong access for spouses. A spouse lifetime access trust (SLAT) is an irrevocable trust in which the spouse of the giver is included as the current beneficiary. While the testator must give up control of the transferred property, the spouse has property at their disposal in a manner that does not cause inheritance tax inclusion.

After the death of the donor’s survivor and the spouse, the remaining trust assets pass to the descendants and are often held in other trust assets. Business owners routinely use SLATs as a repository for a major gift of company stock, taking advantage of their lifetime exemption, thereby freezing values ​​for transfer tax purposes.

SLATs are not only an efficient vehicle for freezing and / or discounting values, they also offer several other advantages. Because an SLAT is a “defective grantor trust” for income tax purposes, the grantor pays the trust’s income and profit taxes. This will continue to deplete the testator’s estate while increasing the value of the trust, thereby removing the value from the transfer tax system. SLATs can be structured as a “dynasty trust”, eliminating multi-generational wealth from the transfer tax system.

Finally, SLATs offer asset protection from the claims of unknown future creditors. This protection applies to assets that are transferred to the trust if the transfer is not for the purpose of defrauding a creditor.

Block higher exceptions. On January 1, 2018, the tax exemptions for estate, gift and GST fees were doubled under the Tax Cuts and Jobs Act of 2017. As mentioned above, the current exemptions are expected to be halved in 2026 and possibly sooner. However, if an individual donates all or part of the higher allowance to a SLAT prior to the reduction, the amount carried over beyond the future reduced allowance will be blocked and will not be subject to transfer tax under the guidelines of the IRS.

A recent donation of $ 11.7 million in company stock will not be subject to inheritance tax after the donor’s death. Should the donor die in 2022, when the state inheritance tax exemption was reduced to $ 6 million, it would save approximately $ 2.28 million in inheritance tax. And to continue the example above, if today’s donation of $ 11.7 million is made to a family trust, and then the exemption drops to $ 6 million in 2022, a sale of that interest could be for $ 18.7 million Saving US $ 5 Million in Inheritance Tax Founder’s Death.

Today’s planning to preserve tomorrow’s wealth

While planning can be tricky for business owners, taking a thoughtful approach within the five disciplines of wealth management will help maximize wealth. Familiarizing an entrepreneur with the concepts and strategies is only the first step. It is imperative that you have a coordinated team of experienced advisors, including lawyers, accountants, and asset managers, who can turn a successful business sale into a plan for the after-sale. The life changing opportunity of selling a closely owned business may only come once. Planning ahead puts the owner in the best position to execute the plan at the right time.

Katia friend is regional manager and Andrew Seiken is a Senior Wealth Strategist at BNY Mellon Wealth Management.

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