Six Custom Tax Planning Tips for High-Income Individuals and Families

Tax planning is a multifaceted process that requires a personalized approach, especially for high-income individuals and families.

By John M. Goralka

Sacramento, CA

Taxes are probably the greatest impediment to growing wealth. This is particularly true for the family business. There is no one-size-fits-all solution for tax planning. Your situation is uniquely your own, shaped by your specific goals, needs and limitations.

Yet when a high-income individual or family meets with a tax attorney to plan for their future, they often have a similar experience. The lawyer immediately throws out alphabet soup recommendations, from CLTs (charitable lead trusts) and GRATs (grantor retained annuity trusts) to DSTs (deferred sales trusts) and CRTs (charitable remainder trusts), before fully understanding their clients’ desires. The firm may have an interest in marketing specific products that they sell, which may also come with hidden costs and fine print.

If you want to sell your business and retire, you likely want to reduce your tax liability, but don’t stop there. What are your retirement goals? What are your cash flow needs to maintain your lifestyle? What are your family’s financial needs? What do you want to do with your money when you retire? Getting clear on both your dreams and your requirements is an essential first step in planning for the future.

The best time to start tax planning is two or three years before a major event, such as a business sale or retirement, because many of the most advantageous strategies to enhance the value of the business require a bit of lead time. For example, the two-year installment sale must be fully implemented at least two years and one day before the sale of the appreciated business or capital asset closes. Once implemented, the taxable capital gain is deferred for 20 or more years.

People often come to see me when they already have a buyer set up or an exit date in mind, but in my experience, giving yourself a longer runway minimizes stress and maximizes outcomes. You may be able to take steps to enhance or increase the value or purchase price of the business or assets to be sold. Also, as discussed below, the tax savings plan must be fully implemented before there is a binding agreement to sell. If not, the plan may be disallowed as an arbitrary assignment of income.

As you approach the exit for your business or retirement, consider how your plan will affect you and the people closest to you. Are you truly ready for retirement? What do you want the next chapter of your life to look like? When you run a business, you often have access to certain perks, such as a company car, club memberships or company payment of entertainment or other expenses. Are you prepared to give up these extras when you sell the business?

Your retirement will also impact your employees and family. In a business sale or transition, there are three main groups of potential buyers: family members, key employees or outside investors. Before making a decision, carefully consider the advantages and disadvantages of selling to each group and how these factors may affect the sale price and terms, as well as your relationships and the continued success of the business after the sale.

Do your research to find a tax planning firm that is suited to your individual needs. Look for a firm that has certified specialists in the areas most important to you, such as estate planning and taxation. Even among tax professionals, there is a great deal of variation. CPAs, for example, are experts on tax reporting but may not have the tax planning experience you seek. You need a tax professional familiar with recommending steps to materially reduce income and not just file a tax return. I recommend vetting lawyers and law firms on the Martindale-Hubbell directory. You can search for legal professionals in your area, assessing their credentials, certifications and practice areas and reading reviews from both their clients and industry peers.

For instance, in an asset sale of a general or C corporation, goodwill — an intangible asset that represents the value the business can offer a buyer — is typically viewed and taxed as either "company/enterprise goodwill" or as "personal goodwill." Since personal goodwill usually refers to the contributions of the business owner as an individual, you may achieve substantial savings. For a C corporation, which is subject to tax at both the corporate and individual levels, the characterization as personal goodwill entirely avoids the corporate level of tax for the amount allocated to personal goodwill.

For the stock sale of an S corporation, a corporation with limited shareholders, you can allocate a portion of your personal goodwill to a charitable structure — such as a split interest income trust — to provide an income deduction tax and ongoing income for you and your family after the sale. Such an allocation would not otherwise be possible due to the restrictions on who is a permissible shareholder in an S corporation.

John Goralka is the lead attorney and founder of the Goralka Law Firm, P.C., and is an experienced Sacramento estate planning and tax planning lawyer.

For help in Sacramento with estate planning or tax planning, please contact our office.

Six Custom Tax Planning Tips for High-Income Individuals and Families

Six Custom Tax Planning Tips for High-Income Individuals and Families

Tax planning is a multifaceted process that requires a personalized approach, especially for high-income individuals and families.

1. Identify both your financial and personal goals.

2. Plan early.

3. Consider your retirement plan details.

4. Work with a specialist.

5. Explore different tax strategies or opportunities.

6. Plan timing and formalities carefully.