We’re reminded every day at Insight that we have the opportunity to work with an amazing group of clients. Their experiences are diverse and interesting. They are CEOs, entrepreneurs, doctors, lawyers, teachers, etc. But they all have one thing in common: their financial pictures are complicated. And complicated situations demand sophisticated solutions.
There isn’t a one-size-fits-all approach when it comes to financial planning, tax planning or asset management. Wealth is complex; it is held in different places and invested in different ways to reach different goals. Because of this, you need a financial advisor who takes a wholly personalized approach to managing your assets.
Your financial advisor needs to have a clear picture of your financial situation and an understanding of where you want to be in the future. In short, you financial planner needs to come up with sophisticated solutions to save your hard-earned money and help grow your overall wealth.
We recently had a client sell a business they had started more than 20 years ago. They, along with their partners, started the business from scratch and had a cost basis of near nothing. Needless to say, without proper planning, they were going to be staring at a very large tax bill. Additionally, this client also wanted to ensure the business would continue to flourish in the future so it could support the many employees who were like family.
The tax minimization plan didn’t begin the day the client decided to sell the business. Instead it began many years before when the client made the decision to start an Employee Stock Ownership Plan (ESOP). The ESOP proved to be a valuable savings tool for both the employer and the employees, but it proved invaluable when the client decided to sell.
First, the employers shares of the business that were held in the ESOP are now all tax-deferred assets, meaning they can be rolled into an IRA account. While the client will have to take required minimum distributions over their lifetime, they did not have to take the entire sale as a capital gain.
Second, the client made the decision they wanted to sell the business not to an outside buyer – but to the employees through the ESOP. Not only did this provide a wonderful opportunity for the employees, it also presented an interesting tax minimization opportunity for the shares of the business the client held directly.
Enter the 1042 Exchange. I can guarantee most of you have never heard of a 1042 Exchange. Many financial advisors have not. The benefits of a 1042, for business owners selling their business to an ESOP can be tremendous as it allows you to defer the capital gain tax on any shares sold to the ESOP potentially through your lifetime.
Imagine, for example, you sold $1,000,000 worth of shares to an ESOP. Assuming the highest capital gains tax rate – and a near zero cost basis – you could owe the government over $200,000 in taxes. A 1042 exchange allows you to invest the entire $1,000,000 in U.S. equities and not pay any taxes until you sell those equities sometime in the future.
This particular strategy was a complicated one. It took years of planning by the client and a concerted effort by CPAs, attorneys and Insight. It is likely appropriate for only a sliver of our clientele. But it is an example of the sophisticated solutions we are able to bring to bear on behalf of our most valued resource: our clients.
As you are facing complicated and complex transitions in your financial life, please remember to reach out to your Insight advisor. We can take our years of experience and countless relationships in the financial, tax and legal world to help craft a sophisticated solution for you.