Optimizing Year-End Business Benefits Part 3: Succession and Exit Strategies

  • Home
  • Estate Planning
  • Optimizing Year-End Business Benefits Part 3: Succession and Exit Strategies
Ken Hargreaves, CFP®, AIF®, AWMA®, CRPC®

As the year draws to a close, business owners have a great opportunity to reflect on their company’s future and how it aligns with their retirement objectives. In Part 1 of our year-end optimization series, we explored how to maximize retirement contributions, defer income, and accelerate expenses to enhance tax efficiency and retirement savings. In Part 2, we discussed optimizing health benefits through healthcare plans, Health Savings Accounts (HSAs), and other medical benefit strategies that provide significant tax advantages and boost employee morale.

Now, let’s focus on the final piece of your year-end business optimization strategy: succession and exit planning. As you tweak your retirement plans and health benefits for yourself and your company, keeping an eye on your exit strategy will make every decision more effective and aligned with your goals.

When it comes to connecting your retirement plans with your business exit strategy, there’s a lot to think about, and the earlier you begin integrating your company’s benefits with your own exit strategies, the easier it will be. As you sit down to review your end-of-year strategy, keep these thoughts and tactics in the back of your mind.

Exit Strategies

Employee Stock Ownership Plan

Not every business owner is keen on selling their business to an outsider. After years, perhaps even decades, building up a team around you, you may decide that the business is best left in the hands of those who helped build it, your employees.

One effective method of passing your company down to employees is by using an Employee Stock Ownership Plan (ESOP), which lets your employees buy into the company over time. A major indirect benefit is your employees will have a vested interest in your company succeeding beyond your retirement.

Family Limited Partnerships (FLPs) and Family LLCs

If you’re running a family business, Family Limited Partnerships (FLPs) or Family LLCs can be an effective method to transfer the business to your heirs while minimizing tax consequences. These structures allow you to apply valuation discounts, which can lower the taxable value of the business interests being transferred and also help reduce estate and gift taxes, all designed to help keep wealth in the family while minimizing tax liabilities.

Pre-Transaction Charitable Gifts of Stock

One option is to make pre-transaction charitable gifts of stock to a qualified charity of your choice or via a Charitable Remainder Trust.

By gifting the stock before the sale, you benefit from a larger tax deduction, the charity receives a greater contribution, and you avoid the capital gains tax—resulting in a win-win situation for both parties. Moreover, using a Charitable Remainder Trust could allow you to create a lifetime income stream for yourself or other beneficiaries while still committing to charitable giving.

If you wait until after the sale to make a charitable donation, the proceeds would already be subject to capital gains taxes, reducing the effective value of your donation.

What To Do With Your Proceeds

When it’s time to sell, whether gradually or immediately, structuring the sale in a tax-efficient way may give your retirement funds the boost they need to survive the long haul. Rather than taking a lump sum, which could negatively affect your tax situation in multiple ways, you may want to consider an installment sale—receiving payments over time instead of one lump sum. Doing so might help spread out the tax liability and even keep you in a lower tax bracket.

Section 1042 Rollovers

You’ll also need a plan for handling the proceeds once you receive them. Without proper planning, capital gains taxes can significantly reduce your net gains. While you can’t roll your funds directly into a tax-advantaged retirement account like an IRA without paying your fair share of taxes first, you might qualify for a Section 1042 rollover. This allows for tax-deferred reinvestment of ESOP proceeds into securities of domestic operating companies, such as stocks and bonds that meet certain criteria, paying taxes only when you sell.

Opportunity Zones

Alternatively, you may be able to defer taxes by investing in an Opportunity Zone—economically distressed areas that provide tax incentives to encourage economic growth. One way to achieve this is through a Qualified Opportunity Fund (QOF). For example, if you realize capital gains from selling company shares, you can reinvest those gains in a QOF to defer taxes on the original gain. By December 31, 2026, taxes on the deferred gains will become due.

However, you are not required to sell your QOF assets at that time. If you hold the investment for at least ten years, any appreciation may potentially be sold tax-free. It’s important to note that while QOFs offer attractive tax benefits, they also involve significant risks.

Section 1202 Exclusions

If your business qualifies as a small business corporation, you might be able to take advantage of the Section 1202 exclusion. To do this, you need to structure your business as a C corporation and hold the small business stock for at least five years before selling. If these requirements are met, you may be able to exclude a significant portion (up to 100% if you meet certain conditions!) of the federal capital gains tax on the sale of the stock.

Managing Risks

Let’s say you have a successful business, and much of your continued success depends on a few key employees. It may be macabre to think about it, but what would happen to your business if one of them passed away? Beyond the emotional toll it would play, it could seriously affect the remainder of your life as well. Just like we purchase life insurance in case the unthinkable happens, we can also purchase key person insurance to help protect our finances in case of sudden and unexpected loss.

If your business is a partnership, a buy-sell agreement is essential. It helps ensure that, in the event of a partner’s death or departure, the remaining partners can buy out the interest, keeping the ownership structure intact. This kind of agreement can prevent conflicts, lead to a smooth transition, and help ensure that your portion of the company (your future retirement) stays as secure as possible.

In Conclusion

Integrating succession and exit planning into your year-end optimization strategy can help lead to a complete and thoughtful approach to your financial future. By combining the strategies discussed in Parts 1 and 2—retirement contributions and health benefits—with business succession planning, you can better position yourself and your business for potential future success and security.

However, many of these strategies are highly advanced and often require a team of experts—lawyers, tax professionals, and financial advisors—to implement effectively. Given the significant tax implications of these strategies, it’s essential to consult with your CPA to ensure alignment with your broader financial goals. Many of these options are also time-sensitive, given the upcoming sunset of the Tax Cuts and Jobs Act (TCJA) at the end of 2025, lower lifetime exemption limits, and the expiration of Opportunity Zone benefits. By starting now, you can potentially make a significant impact on your financial future.

The bottom line is the earlier you start planning your business exit strategy, the more likely you are to achieve your financial goals post-business and well into your retirement.

Next Steps:

If all of this sounds complex and you need guidance, we’re here to help. We can assist in meticulously planning your year-end business and personal goals to align with broader exit and succession strategies, always with an eye on keeping taxes low and extending your wealth to the next generations. Click the button below to set up a consultation while there’s still time to take meaningful action!

Disclosures

Different types of investments involve varying degrees of risk, and there can be no assurance that any specific investment or strategy will be suitable or profitable for a client’s portfolio. All investment strategies have the potential for profit or loss. Information presented is believed to be factual and up-to-date, but we do not guarantee its accuracy and it should not be regarded as a complete analysis of the subjects discussed. All expressions of opinion reflect the judgment of the author/presenter as of the date of publication and are subject to change and do not constitute personalized investment advice.

A professional advisor should be consulted before implementing any investment strategy. WealthGen Advisors does not represent, warranty, or imply that the services or methods of analysis employed by the Firm can or will predict future results, successfully identify market tops or bottoms, or insulate clients from losses due to market corrections or declines. Investments are subject to market risks and potential loss of principal invested, and all investment strategies likewise have the potential for profit or loss. Past performance is no guarantee of future results.

Please note: While we strive to provide accurate and helpful information, we are not Certified Public Accountants (CPAs). The information in this article is intended for informational and educational purposes only and should not be interpreted as tax advice. It is crucial to consult with a CPA or tax professional to discuss you

Author

  • A Florida native, and full-time Sarasota resident, Ken founded WealthGen Advisors, LLC after spending more than fourteen years in the financial advisory industry. Ken holds multiple industry designations, as well as a master's degree in Financial Planning. Prior to founding WealthGen Advisors, Ken spent almost a decade in New York and then Texas as Vice President at The Capital Group, a $2T global investment manager serving institutional clients and pension funds.

    View all posts

Join Our Newsletter

We send updates regularly. Get notified when new resources and financial insights are available.

"*" indicates required fields

This field is for validation purposes and should be left unchanged.

Latest Posts

Latest Video

Setting Up a Business Retirement Plan? Don't Do This!

Free Resources

Our Blog

Insightful articles that reflect our low-cost, "stay the course" investment philosophy.

Our Videos

Free videos that cover complex topics in an easy-to-digest explainer style.

Choose your advisor

Ken Hargreaves - Wealth ManagerKen Hargreaves - Wealth Manager

Ken Hargreaves
CFP®, AIF®, AWMA®, CRPC®

Founder, Wealth Manager
Shane Klemcke - Wealth ManagerShane Klemcke - Wealth Manager

Shane Klemcke
CRPC®

Wealth Manager