March 2025
Selling a business is a major financial milestone that comes with significant tax implications for owners of closely held businesses. While many owners focus on securing the highest sale price, fewer explore strategies that maximize their after-tax wealth.
By structuring a sale through a charitable remainder unitrust (CRUT), business owners can reduce taxes, generate a lifetime income stream and ultimately leave a charitable legacy—while also ensuring their heirs receive an equivalent inheritance through life insurance.
A Business Sale Without A CRUT
Consider a couple, both aged 60, who sell their business for $10 million. If they sell the business outright, they will be subject, at a minimum, to a federal long-term capital gains tax rate of 23.8%. In this scenario, the tax bill would be $2,380,000, leaving proceeds after tax of $7,620,000. While this may seem like a sizable amount, the tax drag significantly reduces the amount of capital available for future investment and retirement income.
The CRUT Advantage: Deferring And Reducing Taxes
Instead of selling outright, the business owners could contribute their company to a CRUT before the sale. By doing so, they would benefit in several ways. First, the couple would receive a charitable income tax deduction equal to the value in today’s dollars of the amount that the IRS estimates would go to their chosen charity at the end of the trust’s term. Then, when the CRUT sells the business, no capital gains tax would be due immediately because the trust is a tax-exempt entity.
Another attractive benefit is that each year, the CRUT will pay a percentage of the trust’s value to noncharitable beneficiaries. Typically, the payments must be at least 5% and no more than 50% of the fair market value of the assets, valued annually. For example, if the payment percentage were set at 8%, the CRUT would distribute $800,000 annually to the couple. The CRUT’s assets are invested, growing tax-free with income payment recalculated annually based on the trust’s value. The couple will be taxed on the distributions in the same tax category as the income would have been had the couple sold the business. In this instance, at long-term capital gains rates.
Finally, upon the couple’s passing, the remaining assets in the CRUT pass to the chosen charity, fulfilling philanthropic goals.
Replacing The Business Proceeds With Life Insurance
While the CRUT offers significant tax advantages, it does mean that the business owners’ heirs will not receive the business proceeds directly. To address this and to replace this lost inheritance, a portion of the CRUT income stream can be used to purchase a second-to-die indexed universal life insurance policy with a $10 million death benefit. The estimated annual premium for this whole life policy is approximately $84,000 based on the couple’s age and good health.
The policy can be structured in one of two ways. In a personally owned policy, the heirs receive the death benefit, but it is included in the estate for tax purposes. For a policy owned by an irrevocable life insurance trust (ILIT), the death benefit passes to the heirs free of estate tax.
Evaluating Alternative Strategies
While a CRUT is a compelling option, it is not the only strategy available to business owners. Other alternatives include:
• Deferred Sales Trust: Allows tax deferral but involves ongoing fees and investment risks
• Delaware Statutory Trust: Typically used for real estate transactions, providing tax deferral but less flexibility for business sales
• IRC Section 1031 Exchange: Applicable only to real estate, not operating businesses
• Opportunity Zone Investment: Provides tax deferral and potential exclusion but requires investment in designated areas with longer holding periods
Key Considerations When Choosing A Strategy
Before implementing a CRUT or any alternative strategy, business owners should consider upfront and ongoing fees. While CRUTs offer long-term tax advantages, they require legal and administrative setup costs. Investment management is another key concern since a CRUT’s performance depends on how funds are invested post-sale. Legally, the CRUT’s trustee, and not the donors, are responsible for such investment decisions.
Business owners also need to consider their liquidity needs. If they need immediate cash access, alternative structures may be more suitable.
Another important factor to consider is that unlike some alternatives, a CRUT is irrevocable, meaning assets are permanently committed.
Avoiding Pitfalls: The Prearranged Sale Doctrine
The IRS scrutinizes CRUT transactions to ensure they are not being used just to avoid paying taxes. One key issue is the prearranged sale doctrine, which states that if a business owner has already negotiated a sale before transferring assets to a CRUT, the IRS may disregard the trust and apply capital gains tax.
Business owners can avoid this by doing a few things. First, work with legal and tax advisors early in the sale process. Next, make sure the CRUT trustee has control over the sale. Lastly, avoid any written agreements with buyers before funding the CRUT.
Optimizing Financial Outcomes
For business owners considering a sale, a CRUT may result in a more favorable financial alternative to an outright sale. It eliminates immediate capital gains taxes, provides a lifetime income stream, fulfills charitable intentions and—when combined with life insurance—preserves wealth for heirs.
Financial advisors can proactively introduce this strategy to clients who are selling closely held businesses, helping clients protect their families’ wealth while supporting causes they care about most. With proper planning, a CRUT can be a strategic solution for business owners looking to optimize financial outcomes from their business sales.
The information provided here is not investment, tax or financial advice. You should consult with a licensed professional for advice concerning your specific situation.