Large Capital Gains and Tax Shock

Whenever you are dealing with a large sales transaction (sale of a business, large stock sale, etc.) taxes are a key driver. This is more true today than ever, due to changes in the tax laws. The impact of higher income on the limitation of tax deductions, the surtax, higher capital gain taxes all resulting in gains being taxed at an effective tax rate of nearly 25% versus 15% not that long ago.

Advance planning can potentially reduce the tax impact by considering tax strategies including: 

         Use of charitable trusts to reduce the overall tax impact and timing of recognition

         Consideration of installment sales to defer taxes

         Family trust sales

         1031 (like-kind exchanges) to defer taxability

         Finally do “deferred sales trusts” make sense and are they viable?

Overarching Takeaways

It is important to understand that these tax deferral strategies are complex and could have significant tax risk if not properly structured. One of today’s hot topics is the “Deferred Sales Trust” transaction which is gaining interest due to the current higher effective tax rates. These trusts need to be considered in light of numerous risks including validity of the trust, the transaction, changing future tax rates, and transaction costs. Essentially these transactions are structured in a way that allows a complete sale with all sales proceeds being realized but allowing the seller to use the installment method to spread out the tax while still knowing that the proceeds are secure.