453 Plan with Milestone
When you sell a business or other property, you can secure, invest, and grow that money while receiving payments over time. By placing the gains of a property sale into a 453 Plan with Milestone, the proceeds appreciate, tax deferred. This arrangement will allow you to create a long-term strategy to receive your payments when you may have a more favorable capital gains rate.
Advantages of a 453 Plan
If you’re considering selling property, there are advantages to using a 453 Plan with Milestone.
Using a 453 Plan can be a smart financial decision if you are selling a company or other property. If you’re interested in exploring this option further, we welcome you to contact Milestone.
453 Plan Example
Lucy wants to sell her booming floral business and plans to retire to Florida. She intends to sell the business for $12 million, and her adjusted cost basis is $2 million. Lucy wants to receive payments over a period of time. She consulted with her advisors, who suggested she consider a 453 Plan. With this approach, Lucy could receive periodic payments for her retirement and defer capital gains taxes beyond the first year of sale.
During the pre-negotiation process, Lucy was able to agree with the buyer that she would receive periodic payments. This was memorialized in the Letter of Intent in the form of an Installment Obligation. The Installment Obligation provides her with steady payments over the course of 15 years. A portion of the sale’s gains is used to pay selling costs and depreciation recapture taxes. Then, $10 million is available for the 453 Plan.
The buyer and Lucy agree to assign the buyer’s obligation to Milestone. The 453 Plan mirrors the Installment Obligation signed in the Letter of Intent. The plan is chosen with a risk tolerance and time horizon meeting her retirement goals. A stated rate of return is attached to the portfolio.
Using a 453 Plan, Lucy can see her portfolio appreciate. Her annual payments consist of the principal gain on the sale and the interest income. The payments are taxed according to the long-term capital gains rate in the year each payment is received*. Lucy may be able to claim a much lower tax rate as a result.
Long-term Capital Gains Rate = Tax Savings
Lucy benefits from spreading her payments and taxes over a predetermined period of time, rather than in one lump sum. Assuming a 20% capital gains rate, Lucy would normally owe $2 million in taxes after the initial sale**. After paying her tax, she would only be able to start investing $8 million. However, with a 453 Plan, Lucy starts with $10 million and can receive payments of $1 million over 15 years. She is only responsible for paying capital gains taxes on the $1 million payment she receives each year ($2 million total), while the interest and growth are reported as ordinary income.
*Current long-term capital gains rates are 0, 15, 20 and are based on certain income limits.
**Capital gains tax rates are subject to change.
Establishing a 453 Plan
The team at Milestone facilitates the entire process for sellers and buyers, providing peace of mind that the plan is set up efficiently and correctly. Here is a general overview of the steps involved.
- Determine if you are eligible. Eligibility depends on the type of asset you are selling and the terms of the sale. Milestone can help you determine if your sale is eligible.
- Draft a sales purchase agreement. If you decide to use a 453 Plan, you will need to draft an agreement that outlines the terms of the plan. This agreement will include details such as the payment schedule, the interest rate, and any other relevant terms.
- Choose your periodic payment obligation. You can decide how much money to receive immediately and how and when you want to receive payments over time.
- Open the investment account. Milestone will open an account with a third-party custodian, work with your financial advisor, and service the account for the duration of the plan.
- Choose investments. The financial advisor builds an investment portfolio based on the terms of the installment obligation. Your funds will grow in the account, tax deferred.
- Receive payments. As the buyer makes payments under the plan, you will need to keep track of these payments and report them on your tax returns.
- Report income and pay taxes. You will need to pay taxes on the income you receive under the plan in the year that you receive it.
If a 453 Plan is right for you, Milestone will be your partner through the entire process of establishing your plan. It’s a good idea to also consult with a tax professional to ensure that you are following all of the necessary steps in complying with relevant tax laws and regulations.