Page 56 - MetalForming April 2016

Blackman on Taxes
By Irving Blackman
Sell Your Business to a Key Employee— Tax-Free for Both of You
Own all or part of a closely held business? Someday the succes- sion-plan buzzer will go off. You would like to see the value of your busi- ness in your personal bank account. Wouldn't it be nice if all of those dollars came to you tax-free?
Irv Blackman, CPA and lawyer, is a retired found- ing partner of Blackman Kallick Bartelstein, LLP and chairman emeritus of the New Century Bank (both in Chicago). Want to consult? Need a sec- ond opinion? Contact Irv:
tel. 847/674-5295
ir v@ir vblackman.com www.taxsecretsofthewealthy.com
It can be done legally. An intention- ally defective trust (IDT) is the strategy that makes the transfer tax-free. This article zeros in on a transfer to a key employee. Why? In practice, a key employee is the logical choice when no close relative of the owner is in the picture. But there are a couple of chal- lenges: The employee has no money, and very few professionals know how to implement an IDT. What to do?
Let's take a look at an actual case. Joe, age 64, wants to sell his business, Success Co., to Cy, a key employee who actually runs Success Co. but has no money to fund the purchase. Joe goes to see his lawyer, and explains, “Cy and I have agreed on a price for Success Co., $5.7 million to be paid over 10
years with 4-percent interest on the unpaid balance. My tax basis for Suc- cess Co.’s stock (an S corporation) is about $500,000. What’s the best way to structure the sale?”
Joe’s lawyer advises the use of an installment sale. Why? Joe will not pay tax on the $5.2 million capital gain or interest income until he actually gets paid by Cy.
The Tax Cost of
an Installment Sale
Joe’s lawyer explains the tax conse- quences of an installment sale: The top rate for ordinary income is 39.6 per- cent, which includes the interest income Joe will receive. Capital gains (long-term) are taxed at 20 percent.
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54 MetalForming/April 2016
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