The opportunity to sell a business that you have built can be a lifechanging event.  There are a number of planning ideas that should be considered before there is a binding contract in place.  If you business is a candidate for the Section 1202 small business stock exclusion, you should be made aware of that option early in the process.  If your business doesn’t qualify or you were not aware of this option, there are many other options such as (i) an ESOP, (ii) a charitable remainder trust, (iii) a charitable lead trust, or a (iv) restricted sale trust.  Each of these options has benefits and risks.  Please contact someone that is knows this area before you sign that contact.

Now is the time to do asset protection and estate planning.  The exemptions will sunset on 01/01/2026.  The exemption is currently about $13M, but will fall to an inflation adjusted $5M on 01/01/2026 if the exemptions are allowed to fall.  If we have divided government, then it is likely that the exemptions will sunset.  We have a nice runway to do the planning.  You should take advantage of that runway.  I know planning for death, taxes and potential lawsuits is not something most people want to do, but it is planning that should be done!

The Inflation Reduction Act of 2022 will make a historic down payment on deficit reduction to
fight inflation, invest in domestic energy production and manufacturing, and reduce carbon
emissions by roughly 40 percent by 2030. The bill will also finally allow Medicare to negotiate
for prescription drug prices and extend the expanded Affordable Care Act program for three
years, through 2025.
The new proposal for the FY2022 Budget Reconciliation bill will invest approximately $300
billion in Deficit Reduction and $369 billion in Energy Security and Climate Change programs
over the next ten years.
Additionally, the agreement calls for comprehensive Permitting reform legislation to be passed
before the end of the fiscal year. Permitting reform is essential to unlocking domestic energy and
transmission projects, which will lower costs for consumers and help us meet our long-term
emissions goals.
15% Corporate Minimum Tax 313 billion*
Prescription Drug Pricing Reform 288 billion**
IRS Tax Enforcement 124 billion**
Carried Interest Loophole 14 billion*
Energy Security and Climate Change 369 billion***
Affordable Care Act Extension 64 billion**
* = Joint Committee on Taxation estimate
** = Congressional Budget Office estimate
The Inflation Reduction Act:
• Enacts historic deficit reduction to fight inflation
• Lowers energy costs, increases cleaner production, and reduces carbon emissions by
roughly 40 percent by 2030
• Allows Medicare to negotiate drug prices and caps out-of-pocket costs to $2,000
• Lowers ACA health care premiums for millions of Americans
• Make biggest corporations and ultra-wealthy pay their fair share
• There are no new taxes on families making $400,000 or less and no new taxes on small
businesses – we are closing tax loopholes and enforcing the tax code.

1202 is a little know or understood provision of the Internal Revenue Code that excludes the greater of (1) $10M or (2) ten times basis in original issue stock.  To qualify for 1202, the company must be a C corporation and have aggregate assets of $50M or less at stock issuance.  The investor must acquire shares in the original stock issuance.  The company must be engaged in an active trade or business.  The stock (QSBS) must be held for at least five years.

In addition, if you want to sell your QSBS before five years, 1045 allows you to rollover your QSBS into replacement QSBS.

There are a lot of complexities not mentioned in this post.  Contact me to learn more.

While each situation is different, I think in most cases, the decedent should keep his family informed of his or her estate plan.  If the decedent wants to treat his children or others differently, the decedent should communicate with that family member why.  It may be because a family member has special needs or it may be because that family member has exhibited behavior that demands action.  For example, if the family member has committed a crime or shown a tendency to bad behavior, it is reasonable to exclude or reduce that family members inheritance.

Notifying that family member should help avoid a will contest, or, if not, significantly improve the estate’s chances of a successful result in arbitration or litigation.  Of course, the family member may file suit anyway, and the estate may end up settling the matter to avoid the costs of litigation.  Nevertheless, in most cases, it is better to notify the family member in writing since the estate will then be in a much stronger position if a law suit is filed.

With the very real possibility that capital gains will be taxed at ordinary income rates for those making $1,ooo,ooo or more, it is time to consider the charitable remainder trust again.  A charitable remainder trust (CRT) is a split-interest trust, with the grantor receiving an income interest and charity receiving the remainder.  If you have a highly-appreciated asset, placing the asset in the CRT before the sale will allow you to defer the tax on the sale.  Taxes are paid on the distributions you receive from the trust.  Advanced structures of the CRT permit deferral for a long period of time.  With a 39.6% tax rate and market returns, it is very possible that you will do much better with the CRT than selling the asset and paying the tax.  If you are in a state with an income tax, the benefit is even greater.  And, of course, you will be making a significant gift to charity at termination. Depending on insurability, you can use some of the income tax savings to purchase life insurance to replace the amount passing to charity, if desired. And there is now an established market for the sale of income interests in CRTs, so, if circumstances change and you need to terminate the CRT, you can do so. You can also roll over your CRT into a new one if you like the CRT and want to continue the deferral.    

As I write this, Senate Democrats have made a reconciliation proposal.  Word is that not all Senate Democrats are on board yet, but this is their one shot and I expect something will get done.  My contacts in DC think that reduction in the exemption will be part of the bill, but don’t know if the exemption will be reduced to $3.5 million or an inflation adjusted $5 million.  Word is that action on grantor trusts, the 50 year limit on dynastic trusts and retroactive elimination of BDITs and BDOTs will not be part of the bill.  We will know soon enough.  However, if you have an estate that will be impacted by these changes, time to act is running out.

The recently enacted Secure Act, eliminates the life time stretch of retirement assets for non-spouse beneficiaries, with a few exceptions.  Instead, these assets will now be taxed within ten years.  For the charitably minded client, one idea being touted is a charitable remainder unitrust (CRT).  Based on materials I have seen, the ideal payout rate is 5% and the beneficiary needs to be young enough to expect 25 or more years of distributions.  Of course, because of the 10% remainder interest requirement, young beneficiaries will not be able to qualify.   It is unlikely (but possible) for the client to actually be better off with the CRT than without it..  Accordingly, the client must have a strong charitable intent to commit to this planning.  Having said that, however, assuming a long payout period and historical market returns the client may come close the beneficiary receiving same amount of distributions, and make a substantial charitable donation at the end.

The big risk, of course, is that the beneficiary dies early.  If the beneficiary is insurable, life insurance can be used to mitigate this risk.   The client may want to look into life insurance regardless to offset the amount that will pass to charity.

Congratulations to the Nationals!

With interest rates at near record lows, it is a great time to consider a grantor retained annuity trust (GRAT).  GRATs are a planning technique in the Internal Revenue Code to remove future appreciation in the asset gifted to the GRAT out of the grantor’s estate.  The grantor contributes an asset to the GRAT and retains an annuity for a term.  If the value of the annuity is less than the value of the asset, a taxable gift results for the difference.  Often, the GRAT is structured so that the annuity value and asset value are near equal (called “zeroing out”).  Assets remaining after the GRAT term ends, are out of the grantors estate.   There is minimal valuation risk with a GRAT since, if the value of the asset is found to be higher than reported, the annuity payment increases.  In order to be effective, the grantor must survive the GRAT term.  Accordingly, a GRAT isn’t a good technique for a grantor with health issues, unless a short term is used.

Often a discounted asset is contributed to the asset.  This makes it easier to grow the asset over the annuity payment.  However, the discounted asset doesn’t work so well, if the contributed asset doesn’t produce sufficient cash flow to pay the annuity.  There are ways to address this issue, however, and make the GRAT a potential home run!


The Tax Court in Estate of Aaron U. Jones upheld the use of tax-affecting in the valuation of gifts made of S corporation and limited partnership interests.  The business involved timber, and the income method is typically used to value an ongoing timber business.  Tax-affecting is adjusting the value to reflect an after tax value as if the business was a C corporation.  Tax-affecting for S corporations was in the IRS manual twenty years ago, but was removed after the IRS won a victory against its use in Gross v Commissioner.

It is unclear at this point how broad the Tax Court’s acceptance of tax-affecting will go, but it is certainly a welcome result for the taxpayer.

It is important to point out that the facts were good.  This was no death bed case, and the taxpayer retained a very qualified appraiser in the area of timber.  The IRS appraiser had little or no experience in the area.   This is a great lesson to take away.  Always have the better appraiser when you head into litigation with the IRS.

About Grady Dickens

I created this blog to comment on items of current interest regarding trusts, estate planning, charitable planning and tax law, and share my knowledge and over thirty years of experience as an attorney practicing in Dallas, Texas.