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VideoEstate Planning Before a Business Sale: Strategies to Preserve Wealth | Podcast
National Market Leader, Private Equity
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Private Equity in Motion
In this episode of Weaver: Beyond the Numbers, Private Equity in Motion, Sean Muller sits down with Mark Watson to discuss why estate planning should be part of business owner’s sell-side planning strategy long before a transaction closes. Mark explains how transferring business interests before signing a letter of intent (LOI) may help shift future appreciation outside an owner’s estate and support long-term wealth preservation. The conversation also covers the differences between grantor retained annuity trust, spousal lifetime access trusts and dynasty trusts, along with key considerations for business owners preparing for a successful transition.
Questions Answered in Estate Planning Strategies Before a Business Sale:
- Why should business owners begin estate planning before signing a letter of intent (LOI)?
- How can transferring ownership interests before a sale help preserve wealth and shift future appreciation outside an owner’s estate?
- How do GRATs, spousal lifetime access trusts and dynasty trusts differ as estate planning strategies?
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Detailed Description of Estate Planning Before a Business Sale: Strategies to Preserve Wealth
00:00:00
Sean: We’re continuing our sell-side series. Mark Watson is joining me again. We talked a little bit about charitable giving in part of sale planning, but now we’re going to talk about actually estate planning.
Mark, what are some things sellers should be thinking about on the estate plan side? Because a lot of times they get this pile of money and they close and they go, what do I do now? Or certainly, there’s stuff to do there. But if you want to really do some planning, there’s some things you can do pre-closing, right?
00:00:28
Mark: Yeah, absolutely. An individual seller should certainly take into account estate planning and consider estate planning. And the key to successful estate planning is to transfer the interest in the business at its lowest possible value and shift future appreciation out of the estate.
00:00:47
Mark: And in order to do that, the planning needs to occur preferably before a letter of intent (LOI) is signed and certainly before a binding agreement is signed because you’re going to get the lowest values in that environment. Once the LOI is signed or the binding agreement is signed, the value’s going to be higher.
00:01:04
Mark: We want to do it in advance of that and the strategies that you would typically see used there are transferring to a grantor retained annuity trust, spousal lifetime access trust or a dynasty trust. At the end of the day, we’re trying to move appreciation out of the estate to future generations.
00:01:22
Sean: And why would one pick, not going too in-depth, but why would somebody pick one of these trusts versus another?
00:01:31
Mark: Well, a grantor retained annuity trust is a no-risk strategy. You can transfer assets to it. You’re going to retain an income stream from that trust and it’s just future appreciation that goes to the next generation. And you can structure that in a way that if it doesn’t work out, there’s really no downside to it other than the cost of setting it up.
00:01:49
Mark: A spousal lifetime access trust, that’s an irrevocable gift to this trust. You’re not retaining an interest in the trust. You’re going to use up some of your exemption to do it. But since your spouse is a beneficiary of that trust, you indirectly can retain assets or get assets from that trust.
00:02:11
Sean: As long as your spouse still likes you.
00:02:12
Mark: As long as your spouse still likes you. And then a dynasty trust is appropriate where you don’t want your spouse to be a beneficiary of the trust. You just want it to be for future generations, children, grandchildren, etc. And that’s the most irrevocable. You’re giving it up, you’re not retaining any ability to get it back, but you’ve sheltered assets now for multiple generations.
00:02:34
Sean: Why do we think we get a lower value pre-LOI?
00:02:38
Mark: Well, because typically businesses are valued based on current earnings. And a buyer may be willing to pay more than the current earning valuation based on the particular situation. So once the LOI or the binding agreement is signed, generally you’re going to see that the values are going to be higher than if you did it pre-LOI or pre-binding agreement.
00:03:02
Sean: Well, as you can see here, there’s a lot you can be doing on the charitable side and the estate planning side. When you go to sell your business, you really need to worry about some of that math because you worked really hard a lot of times in these businesses, and you also want to maintain enough assets to live your life without giving it all away. There’s a lot of math that comes into this.
00:03:23
Mark: Very important consideration.
00:03:24
Sean: Yeah. Well, thanks, Mark, for joining me.
00:03:26
Mark: Thank you.
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