Charitable planning has long been a tool of the trade for advisors looking to reduce high-net-worth clients' income and estate tax obligations. What few of these advisors realize, however, is that such planning lends itself equally to the corporate space, where it can yield even greater dividends.
"Much of the law with respect to wealth replacement trusts for individuals applies very readily to the corporate setting," said Gerald Treacy, president of Arcline Consulting, Poulsbo, Wash., who spoke on the topic during an education workshop at the Association for Advanced Life Underwriting's annual convention, held here recently.
"Businesses have blown hundreds of millions of dollars in bottom-line profits by not recognizing these tools," he said.
These patent-pending techniques can substantially reduce tax liabilities that companies would otherwise incur when selling highly appreciated assets. Given the higher tax rate to which corporations are subject compared to the capital gains rate that applies to individuals–35% or more vs. 15%–the appeal of corporate charitable planning is all the greater, said Treacy.
To illustrate, he described a corporation A that transfers highly appreciated land worth $50 million and has a cost basis of $2 million to a business asset sale trust. The trust sells the land, saving the business $16.8 million in tax that would otherwise be paid if the company sold the asset outside the trust.
The corporation gets a roughly $5 million charitable deduction for creating and funding the trust, secures from the vehicle 20 years of income payments, and uses a portion of the tax savings to acquire life insurance on key executives' lives, thereby "making up" for trust assets that later pass to charity.
At the end of the 20-year term, the trust distributes the assets to a corporation foundation created by the business. And the business receives proceeds of the life insurance policies.
"Life insurance proceeds are a huge advantage of the trust because they make up for the [asset] loss," said Treacy. "Also, if named an irrevocable beneficiary of the trust, the foundation can seek financing from a bank on the strength of future distributions."
In addition to C corporations, pass-through entities (such as S corporations, LLCs and partnerships) also can leverage the trust. The vehicle's advantages for such businesses are still greater, said Treacy, because the tax benefits flow directly to the business owners/members.
Similar in function to the business asset sale trust is the mergers and acquisition trust, which can minimize tax consequences for acquired businesses. In Treacy's example, a business to be sold transfers highly appreciated assets to an M&A trust, which sells the assets as part of the merger or acquisition, saving the purchased business $15.8 million in tax.
