Joe owns a manufacturing business in the Mid West that provides automotive and aircraft parts. He enjoys good relationships with long-term customers and his business has grown steadily. Joe had been thinking about retiring in about 5 to 7 years, but recently his wife contracted a medical condition that requires he spend more time attending to her needs and less time at the plant. This has caused him to speed up the timetable for his exit strategy. Joe’s CPA put him in touch with an experienced business broker to consult with him on the best way to proceed with his exit strategy.
After an in-depth market survey and analysis, the broker told him what he could expect from the sale of his business but that most certainly a well-run salable business. Like many business owners, Joe had assumed that his business would be worth more than what the market analysis suggested. Initially he felt like he had just taken a first strike. Needing to sell however, he retained the broker to initiate listing the business and looking for buyers.
Next Joe went back to his CPA to discuss the tax ramifications of the sale and discovered that nearly the entire sales price would be taxable. At first this didn’t make sense to Joe because several years before he had sold an investment property and only part of the sales price had been taxable. Joe’s CPA explained that Joe had a very low basis in his business because he had been able to start it with a little amount of money and had been able to borrow to finance his operations in the early years. Because of that nearly the entire sales price would be considered profit which would be taxed at around 30-35%. Joe thought… oh no… strike two.
Next Joe went to visit his financial advisor to discuss what kind of investments could be made with the money he expected from his sale, after taxes to generate the kind of income he needed in retirement and to help care for his ailing wife. Joe was not encouraged and was thinking that strike three was just around the corner.
Fortunately, Joe’s financial advisor had seen a presentation about the Deferred Sales Trust and it’s promise to help sellers of highly appreciated assets defer their capital gains. In doing so it might be possible to generate higher income from investments without being tempted to take excessive risks, as he believed he might have to. Joe’s advisor gave him some information about the DST and connected him to an expert on the strategy. Joe went back to his CPA to find out what his CPA could also tell him about this DST strategy, but Joe’s CPA had not yet heard of it.
Joe was concerned but decided to do some research on his own. After consulting with a DST Expert, Joe felt this might just be the right solution for him but wanted his CPA to vet it further. During the ensuing conversations, Joe’s CPA learned that the DST was a proprietary tax strategy that was not new, but was still new to him and many others. To his credit, he did not dismiss it out of hand but sought to gather all relevant information he could to properly advise Joe on the merits.
What he found was that the strategy was based scrupulously on Internal Revenue Code Section 453 (which he was familiar with) and that the evidence provided by the DST Tax attorney confirmed a perfect 25 year track record that had withstood scrutiny from the IRS on a number of occasions. He was also connected to other CPA’s who had done their own independent vetting of the DST for their own clients’ and suggested to Joe’s CPA that they had found the DST to be more that sufficiently legal, proven and tested.
Joe’s CPA was convinced. So was Joe, and a bit relieved. He incorporated the DST into the sale of his business, for which he ended up getting a higher price than originally expected. He now has more income coming in than he expected, his wife has recovered from her health scare and they are “living the dream” as they like to say.