WEST VIRGINIA RECORD

CHARLESTON -- Lawyers planning to sell their businesses or help clients to sell businesses have a new means of ensuring that the rewards go to the people who put in the hard work of building those businesses, not the government.

Unless a sale is worked out carefully, well more than 15 percent of the proceeds go to federal capital gains tax and state income taxes, but it doesn't have to be that way. One large, highly rated annuity insurer has developed a Structured Sale Program, based on U.S. Tax Code, to help business owners keep more of that money.

Robert W. Wood, J.D., of Wood & Porter in San Francisco writes in the August 2006 issue of The Tax Adviser that "the seller gets a guaranteed payment stream without serious risk of either nonpayment or payment acceleration. The idea that the seller can dictate the terms of an installment sale and ensure the chosen payment stream is a powerful tool for the professional adviser."

Charleston insurance agent Ron Walters is the first agent in West Virginia who is authorized to offer structured sales.

"This whole transaction is designed to lessen the capital gains tax burden to anyone who sells their business," he said. "It is also designed to guarantee them a lifetime income they can never outlive."

As an example, if someone put $1 million into a business and sold it for $10 million, the entire $9 million gain would normally be taxed at a 15 percent level. The seller would be looking at a tax liability of $1.35 million payable up front the year the money is received. That would leave $7.65 million to invest.

But using the Structured Sale Program, the result would be much different, Walters said. For example, the seller might take just $4 million in gains in cash, which would be subject to the 15 percent tax take, or $600,000. But the other $5 million of gains would go into an annuity that would provide monthly payments of about $25,000 guaranteed for 20 years but payable for life.

Those payments would still be subject to the 15 percent capital gains tax but spread out over the years in which the income is received. The interest earnings would be tax deferred until they are actually received instead of being taxable annually as interest earned on the full investment.

Thus, instead of paying $1.35 million in taxes at the time of the sale, the seller would have to pay only $600,000 in taxes. In addition the $5 million in deferred proceeds would turn into $6 million after 20 years of monthly payments of $25,000.

"The seller ends up as the beneficiary of an iron-clad annuity guaranteed by a large and secure insurance company," Wood writes. "That is a powerful way to structure the sale of appreciated assets."

To work under Internal Revenue Service rules, the buyer of the business must immediately assign the periodic payment obligations to an assignment company, because the assets are not taxable only as long as the seller does not own them. So under the Structured Sale Program, the $5 million from our example would go to one particular assignment company, which would then purchase an annuity contract from the insurance company to fund its payment obligations to the seller of the business.

"This is a great estate-planning tool," Walters said. "This product does not compete with investment advisors or stockbrokers, because only a portion of the proceeds goes into fixed income. There is more available for investment."

There are certain restrictions on the program – such as inventory and goodwill are not eligible for tax deferral – and the minimum case size is $100,000. Walters said accountants, estate planners and tax attorneys especially should be interested in the Structured Sale Program.