#3 - Have You Considered Charitable Contributions?

It's estimated that 66-75% of small business owners donate to charity. Additionally, a 2023 U.S. Bank study found that 87% of business owners cited contributions to their communities as a key indicator of success. Being able to serve those in your community while giving back is highly rewarding. Plus, it's a great opportunity to network, and the tax benefits can be massive. Think about it. Would you rather pay Uncle Sam, or would you rather chip in to help causes you strongly believe in?

While there are no shortage of opportunities to chip in each year, we'd like to talk about one much larger exit planning strategy that owners may not be aware of, which involves donating their businesses. But wait, your business is your life's work, the largest portion of your net worth, and your primary income source. So how could you ever give it away even if you wanted to? Well, what if we told you that you can receive an immediate charitable tax deduction, defer retirement income to avoid a heavy up-front tax bill (especially for older businesses with a very low basis), and structure the plan accordingly so your estate recoups the entire value of your business when you pass away?

Charitable Remainder Trusts

Charitable remainder trusts (CRT) provide this opportunity. Here's how it works. When the business owner is ready to retire, he/she will transfer ownership to a charitable remainder trust prior to selling. The trustee (can be the business owner) can then sell the business, in which the proceeds are reinvested inside the trust. The investment is generally something that provides guaranteed annual income like an annuity, for example. Since the CRT is tax-exempt, it avoid capital gains taxes on the sale.

The business owner retains the right to receive annual income from the CRT for a specified term (usually for life). The income is generally a percentage of the trust's value (i.e., 5%), which is revalued annually. The owner would immediately receive a charitable income tax deduction, which can be carried forward to offset income. When the owner passes away, the remaining assets in the trust are donated to the designated charity.

Whole Life Insurance

In order to ensure the owner's family is fully compensated for the sale of the business if he/she were to pass away early (because the income distributions are generally paid for life), he/she can purchase whole life insurance, in which the death benefit equals or exceeds the value of the business. Some use the income distributions to fund the premiums, but a far better strategy would be buying the insurance well in advance because it's going to be much cheaper.

Additionally, another option we'd recommend looking into is taking out a COLI (corporate-owned life insurance) policy, structured for Infinite Banking, on the business owner. The business can make the premium payments years before the sale, and by designing this with high early cash value accumulation, this also serves as an asset on the company's balance sheet that can be safely leveraged to fund expenses, routine purchases, business expansions, investment opportunities, or emergencies. And let's not forget that it also secures a sizeable death benefit for the owner's family in case he/she were to pass away before the business's earning potential is reached.

Then, once the owner is ready to transfer the business to the trust, he/she can transfer ownership of the insurance policy to an ILIT (irrevocable life insurance trust). If structured properly, this would ensure the death benefit proceeds (which equal or exceed the business valuation) would be excluded from the insured's estate.

Conclusion

By using a charitable remainder trust combined with a seasoned Infinite Banking policy, business owners can monetize the value of their businesses in a tax-efficient manner while still contributing a substantial amount to a cause of your choice. The key is to start planning now. Be sure to speak with a tax professional or an estate planning attorney for specific tax considerations with this strategy.