Are you ready to sell your business?
Do you prefer to sell the company to your younger owner(s)?
Are you interested in structuring the sale so that it is tax efficient to you and the buyer?
In certain cases, a traditional defined benefit plan, or cash balance plan can be structured to achieve that goal.
These plans can be designed, in conjunction with a 401(k)-profit-sharing plan, to provide very large contributions to the older owner(s) and small contributions to the younger owner(s) while limiting the contributions to the rank and file employees to a manageable amount.
For example, in a professional organization, it may be very difficult for younger owners to come up with the money to buy out the retiring owner. This is because the younger owner(s) may need to utilize pre-tax money. So, a $1,000,000 outlay will likely require $2,000,000 before taxes. As you can surmise, the immediate tax payable by the buyer and the seller is substantial.
Implementing a pension plan as a buyout tool saves the seller and buyer immediate taxation.
Contributions to the pension plan are deductible to the company, and the seller gets his accumulated contributions tax deferred. The deferral amounts get favorable treatment because distributions can be rolled over into an Individual Retirement Account (IRA) with taxes deferred until distributions are actually withdrawn from the IRA.
Please call us if you are interested in this buy out strategy.
To get an overview of a traditional defined benefit plan, or cash balance plan, please review this article: Traditional Defined Benefit Plan or Cash Balance Plan, Which is The Best Way to Go?