Considering a sale of your business? One little-known tax-savings strategy can save you MILLIONS

For years real estate owners have utilized powerful tax saving strategies to defer taxes when they sold real estate.  Until recently, business owners couldn’t do the same as real estate sellers and have been stuck just paying the taxes.

How a CAPS Trust is a game changer

Business owners now have tools available to them to defer taxes for up to 20 years when they sell their business.  The sales structure is called a CAPS Trust. A business owner can now sell his/her business and not pay taxes at close by utilizing IRS Code Section 453 for Installment Sales and an Irrevocable 3rd party trust.

For years I have watched business owners toil to build a business only to have 1/3 of it taken at closing and paid to Uncle Sam. You don’t have to pay taxes at close anymore. You can defer those taxes and have the use of them to make MORE MONEY for up to 20 years. One recent client saved $1.2 Million at close on the sale of his business.  Using “before tax” dollars saved with a CAPS Trust he will make enough money to pay the taxes with the money he saved in just over 10 years.

How it works

With a CAPS Trust sales structure, there is a Buyer and a Seller, just like a conventional sale; however, the business or real estate is sold to an unrelated third-party (Trust) which sells to the Buyer. From a Buyer’s perspective it is seamless: he/she purchases the business under the same terms, only it is purchased from “XYZ Trust” instead of “ABC Seller”.

From a Seller’s perspective the transaction is structured as an installment sale under Internal Revenue Service (IRS) Section 453 whereby the asset is first sold to an unrelated third-party (Trust) in exchange for a secured installment note. This note has flexibility of payment and terms, so the Seller can determine his/her cash flow needs on a monthly basis and structure the payments based on those needs. The note creates an income stream for the Seller, secured by the assets of the Trust. The Seller only pays taxes on the money he receives over time when he receives it just like he would if he did an installment sale.

Benefits of having “before tax” dollars to use

When the business or real estate is sold to the trust, the taxes are deferred (not necessarily eliminated) for the Seller.  Deferment is postponement or delay of paying the capital gains tax since the sale of the business or real estate is a taxable event.  One benefit of CAPS is the Seller maintains the use of “before tax” dollars which can be invested in stocks, bonds, marketable securities, annuities, life insurance, etc. to provide income to the Seller which is paid through the note.  For example, if you sell a $5 Million business and defer $1.2 Million in taxes you have the use of the full $5 Million instead of $3.8 Million. When you run the numbers on how $5 Million will grow if invested wisely compared to $3.8 Million, the benefits are staggering.

Benefits of maintaining control and timing.

A second benefit is control and timing.  The Sellers maintain control of when and how they receive their money, so they can use the tiered tax structure to defer and eliminate future taxes.   For example, let’s assume a person is selling their business for $2 Million and is married. Under the old structure the Seller would have a lump sum tax due of $364,470 after closing calculated as follows:


Sale Amount $2,000,000
Taxable Income Tax Lump
Married Jointly Taxed Amt Bracket Sum Tax
$0 – $77,200          77,200 0%              –
$77,201 – $479,000        401,800 15%       60,270
> $479,000     1,521,000 20%     304,200
    2,000,000     364,470

If the Seller takes out $77,200 each year, thus staying in the 0% tax bracket, the tax would be eliminated!  This saves a whopping $364,470 of taxes. If the Seller has a 5% State Tax Rate, the savings are closer to $460,000.

If you are concerned about leaving money on the table or paying too much in taxes you will want to learn more about the CAPS Trust to see if it can work for you. Visit for details.

By Rick Krebs, CPA

Member of the CAPS Trust Team

Principal, Business Sales Group, an M&A Advisory firm in Heber City, UT