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Hasty Year-End Planning Can Have Lasting Consequences

Don’t let high-net-worth clients and business owners fumble the ball in their rush to beat the calendar.

Author Rita Mae Brown once said: “If it weren't for the last minute, nothing would get done.

I know it’s a very hectic and stressful time of year, but sometimes I think people put more thought into their last-minute gift shopping than they do the sale or transfer of their businesses. Owners and their advisors tend to get so fixated on the price tag for their business that they overlook the tax implications of when they’re selling, what they’re selling and how they’re selling. As a result, they lose millions of dollars in potential tax savings, and they deprive worthy causes of the resources they need to keep doing important work.

Successful business owners aren’t ill-informed or stingy with their money. Most would like to give more to charity, but they’re extremely busy running their enterprises. They haven’t had time to explore their philanthropic options or been given the right guidance about how to do so strategically.

That’s where you come in.

When it comes time to sell a business, the owner’s advisors are typically so focused on closing the transaction quickly at the highest possible price, they overlook (or intentionally ignore) many tax-saving opportunities, including philanthropy. “If we didn’t come up with that idea” the M&A team’s thinking goes, “then it can’t be a good idea,” or “the Internal Revenue Service won’t look favorably on it.” But when planned giving and other tax-saving strategies are swept under the rug, the only people who benefit from a business sale are the M&A team and of course, Uncle Sam.

Don’t let this happen to your clients.

Real World Example

A 12-doctor medical practice I know was being sold for a hefty $100 million. On the surface, it sounded like a very generous price tag for the business, but the team advising the doctors (the M&A team and family attorneys) made sure no one else could provide the doctors with tax savings strategies, including planned giving. Again, because the lead advisors didn’t really understand planned giving, they convinced the doctors that philanthropy didn’t have merit, and that mindset nearly cost the doctors $15 to $20 million in foregone tax savings.

Finally, my team and I were brought in about three weeks before closing to see what we could do to mitigate the doctors’ tax hit. Our instructions were to come up with “a bunch of good ideas,” then teach those ideas to the M&A team, who would then try to implement them. Typically, it takes six to 12 months to do your charitable planning correctly, not three weeks. We’re not magicians, but we were able to create some last-minute tax savings opportunities (see below). As you can imagine, however, the outcome for the clients certainly wasn’t as great is it could have been with sufficient planning.

The group practice (aka the buyers) was under pressure to put its acquisition capital to work as quickly as possible. They were highly motivated to close the transaction in calendar year 2022. Unfortunately, this didn’t give the doctors and their advisors much time to do significant tax planning.

The only alternative for the harried doctors was to push back their transaction until calendar year 2023. By doing so, they’d have time to do the right planning, which could put a lot more money in their pocket after taxes are netted out. But by delaying, they may have lost their buyers and/or had to settle for a lower sales price and other contingencies. Unfortunately, that’s what they did.

Last-Minute Tax-Planning Options

If you have clients under the gun to complete a major transaction before year end, one strategy is to allocate some of their other accumulated assets to a pooled income fund (PIF) or a charitable lead trust (CLT). Or they can make a big gift to charity to help them offset some of the income tax hit they’re facing. For instance, the charitable deduction for outright gifts of cash to a public charity is available up to 60% of adjusted gross income. A PIF allows donors to give money to a special type of charitable trust that will provide them with a partial charitable deduction (based on the age of the donor) and to receive income for the remainder of their lives.

Meanwhile, a CLT allows the donor to receive a large income tax deduction upfront. They give money to a charity for several years and then have the balance of the trust returned to them at the end of the term. These alternatives may take some time to understand, but they can be designed and implemented late in the game if a client is dead set on closing before year-end.

The only other option for reducing taxes before year-end is for clients to take funds from their savings or other investments and fund the appropriate trust with that money in advance of the closing. This is often difficult because a delayed closing may cause the taxable transaction to slide into the following year and cause a tax mismatch. The good news is that unused charitable deductions may be carried forward for five additional years.

In addition to business owners, I suspect you’re getting calls from frantic executives who expect to receive big bonuses or to exercise stock options before year-end that will give them 7-figure incomes. Naturally they’re looking to you for last-minute tax relief magic.

Just Say No!

While we never like to turn away business, we’re often doing a disservice to anxious clients by helping them engage in hastily designed year-end planning. The IRS typically shuts down for the last two weeks of the year, and it can be challenging to get employer identification numbers. Long story short, it can be nearly impossible to open an account for a new trust, much less implement it.

Someone once asked me what I do for a living. I told them I’m a charitable giving specialist who doesn’t care much about foundations and grants. This comment took them aback until I explained that I’m all about transforming successful business owners (who historically haven’t given much to charity) into generous entrepreneurs who give money away and make a big impact on the causes they care about.

With Dec. 31 bearing down on us, don’t let clients or their advisors pressure you into working your magic with a last-minute planning “Hail Mary” to mitigate their tax hit. It’s often their life’s work we’re talking about here, not a new scarf for Aunt Edna or Uncle Joe.

The biggest gift you can give frantic clients is help them see the wisdom of taking their time to do their planning right the following calendar year. However, if they insist on shoe-horning the closing into the final days of the calendar year, treat the request like day-old egg nogg and Just Say No!


Randy A. Fox,CFP, AEP  is the founder ofTwo Hawks Consulting LLC.He is a nationally known wealth strategist, philanthropic estate planner, educator and speaker. 

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