As a successful business owner, your hard work and innovation drive the economy, creating jobs and stability. However, with success comes increased tax liability, making advanced tax planning not just a luxury but a necessity. Advanced tax planning isn’t about loopholes or last-minute deductions; it’s about intentionally structuring your wealth to minimize taxes now and in the future.
It’s important to understand that the effectiveness of any tax strategy depends entirely on individual circumstances. While the dream may be to avoid taxes entirely, the goal should be to pay no more than legally required – we like to say, “don’t be overly patriotic.” Our research indicates that the proactive advanced tax planning necessary to achieve this goal is rarely done, and successful business owners like you are tired of being the ones who pay the price.
Let’s explore a few cutting-edge tax strategies, especially for low-to-mid-market business owners.
First, imagine sending the annual insurance premiums you normally pay to your own insurance company, instead of the big guys. The funds are invested while waiting for a claim that may never come. Eventually, whatever funds are left over after a few years are distributed back to you at long-term capital gain tax rates. That’s the power of a micro-captive insurance company. When structured correctly, premiums paid by the captive can be fully deductible to the operating business. The funds build up inside your captive, tax-deferred, and if claims are low, the reserves stay with you—not the insurance company. For business owners approaching a sale, this becomes a powerful tool. For example, a founder preparing for a $20 million exit might set up a micro-captive three years prior to the sale, using it to cover risks like post-sale representations and warranties. Over that period, the business contributes $1.8 million in premiums, fully deductible, potentially saving over $700,000 in federal taxes. After the sale, unused funds can eventually be distributed as long-term capital gains, not ordinary income—allowing the owner to retain more of what they built.
Think about how much the stock you own has appreciated and how the potential tax ramifications have stopped you from diversifying or deploying those funds elsewhere. What if there was a strategy that grew your investment with the market, historically has often outperformed market returns and, at the same time, creates losses that can be used to offset gains from the sale of public stock (your portfolio) or private stock (your business)? By using a Leveraged Long/Short Strategy, business owners with highly appreciated companies can mitigate their tax exposure before and after a liquidity event. For example, an owner expecting a $15 million gain might invest $3 million into a Leveraged Long/Short Strategy at the beginning of the year of the exit. By the end of the year, the strategy has generated $2.5 million in capital losses, which directly offset the gain from the sale. At a 20% federal capital gains rate, that’s nearly $500,000 (correct to match) in tax deferral or reduction. Unlike many deferral tools, this one doesn’t tie up capital indefinitely—it simply shifts the tax burden more strategically, all while growing the assets with the market.
Imagine increasing the contribution limits of your retirement plans, except that the new limits allow high-income owners to contribute hundreds of thousands per year. For example, a 55-year-old owner anticipating a sale in three years might contribute $350,000 annually. That’s $1.05 million in tax-deductible contributions, with a potential tax savings of over $400,000, at top federal rates. After the sale, the retirement savings remain intact and continue to grow, tax deferred. In the years leading up to a sale, a Defined Benefit Plan can help significantly lower taxable income while boosting retirement savings.
Some investments offer tax incentives on top of the growth plan. An example of this is Movie Investments, which can provide unique tax advantages through federal and state incentives tied to qualified film and other media production. For business owners anticipating a liquidity event, this strategy can be used to reduce taxable income. For example, an owner might invest $300,000 of sale proceeds into a properly structured film. Depending on the structure, that investment could generate $1,500,000 or more in immediate deductions—potentially reducing federal tax liability by over $600,000 in the year of the sale. As with any tax-driven investment, a wind-down strategy should be planned from the beginning to manage long-term economics once the tax benefits have been realized.
For those planning beyond the sale and looking to protect future investment growth from taxation, a “Rainy-Day Fund” offers tax efficiency that’s hard to match. A portion of the sale proceeds—say, $20 million—can be structured so investments inside the structure grow tax-free. Funds can be accessed later through withdrawals and loans, income-tax free, without triggering taxable events. Over 10 years, if the underlying investments double in value, the owner has gained over $25 million free from income and capital gains taxes. At death, the full value and additional death benefit—often much more than original contributions—can pass to heirs’ income, capital gains and often estate tax-free. This is not a short-term strategy, but it can shield tens of millions from taxation over time.
These strategies are not mutually exclusive and can often be layered to achieve even greater tax efficiencies and wealth preservation. For example, a business owner might utilize Micro-Captive Insurance to manage specific business risks during the lead-up to an exit while simultaneously employing a Defined Benefit Plan to accelerate large deductions and, finally, use a “Rainy-Day Fund” to manage and transfer the accumulated wealth in a tax-efficient manner.
If you haven’t run a full “Wealth Stress Test” to show how your plan holds up under different tax scenarios, you’re likely leaving six or even seven figures on the table. Don’t settle for generic advice or reactive planning. You’ve worked too hard to give away more than your fair share. It’s time to take control. If you’re tired of being “overly patriotic,” hold your current team accountable or give Questmont Virtual Family Office a call.
Contributed content from Taylor K. Ranker II, chief executive officer and personal chief financial officer at Questmont Virtual Family Office.