Whether it's a simple cross-purchase agreement or a complex exit plan, techniques to help boomers get top dollar for their business are developing at a rapid pace. Cliff Brown, president of Denver-based advisory firm Capstone Bay, took some time to explain a new twist on an old favorite, the structured sale, and how advisors can benefit by offering it clients.
Boomer Market Advisor: What is Capstone Bay's definition of a structured sale?
Cliff Brown: A structured sale is a twist on a traditional installment sale in that it provides the seller with a guaranteed payment stream from an assignment company that is owned by a Fortune 50 financial services
organization. Rather than a seller of real property -- whether that's a business interest or a piece of real estate -- and having to rely upon a buyer to make payments in order to receive the tax-deferral benefits of an installment sale, a structured sale is a way to allow for the seller to get cash, but then structure a series of payments over time that has been guaranteed by the full faith and credit of a very large corporate entity.
BMA: Controversy surrounds private annuity trusts. Is the structured sale similar in any way?
CB: There are several differences between the structured sale and a private annuity trust. First and foremost a private annuity trust is complex, it's expensive to establish and there are some issues and risks associated with establishing one in terms of the annual management and the ability of the trustee to make good on the payments. There's been a lot of recent news that the Internal Revenue Service has not been extremely happy with these types of trusts because of the abuses that have occurred. And moreover, a private annuity trust is something that one would typically see where there is an estate planning objective that is being combined with an income tax objective. In other words it's something that might be more appropriate for an intra-family transfer vs. a sale of a piece of property to a true third-party individual or parties.
BMA: What minimum value of the business would make a structured sale cost effective?
CB: The absolute minimum that is acceptable to the underlying Fortune 50 company is a $100,000 deferral. Having said that, though, I think most of the transactions we work on are significantly higher than that, and most of the business entities that we have engaged with to explore this concept have been in excess of $1 million and more appropriately in the range of $10 million.
BMA: For other advisors out there who are thinking about offering this type of strategy, how specialized is it and what amount of education does it require?
CB: Well, it is a specialty. And I think there is a lot of background information and experience that someone would need to have in order to effectively discuss this with their clients because it's a tax-deferral concept. There are mechanics involved in the transaction that have to be adhered to, strictly, in order to prevent the seller from having constructive receipt, for example, during the transaction. The average broker out there probably does not have the background information in hand, at least right now. It organized around the legal industry. When this idea originated within that industry, they really didn't know what to do with it.
BMA: We understand a private letter ruling is coming your way soon?
CB: A private letter ruling was requested earlier this year. All discussions to this point have been favorable. The other point is that we're relying more heavily on the actual Internal Revenue Code, two revenue rulings and some case law to support this transaction. This truly is just a form of an installment sale. Those have been around for decades. They're well established and the Internal Revenue Service is very liberal when it comes to looking at
installment sale transactions.