Council Post: How To Legally Not Owe Taxes When Selling A Business Or Real Estate

James Daily founding partner of Daily Law Group, a fiduciary abuse litigation, crisis management, business advisory firm. 

While in quarantine, I was tested for Covid-19. Fortunately, the results were negative, but I had four days before they returned to contemplate the two certainties in life: death and taxes. After watching Back to the Future, I identified a different kind of “flux capacitor,” but instead of time traveling, it’s a legal way to avoid owing taxes when you sell your company or real estate. 

This strategy — which stems from an idea by law professor Craig Hampton — allows you to control your wealth, fund your dreams and earn unparalleled cash. How do elite business owners avoid paying capital gains tax on the sale of a business or real estate? The answer is simple: they don’t owe taxes. To illustrate how it works, I’ll use one of my legal cases. 

The Scenario

The case was a family dispute over a $200-million estate belonging to a man we’ll call Tom. In the 1980s, Tom merged his business with a public company, increasing his stock value from $2.50 to $32 a share. Because he didn’t sell the company, capital gains tax didn’t apply to that value increase. However, selling that stock today would result in an even larger, but entirely avoidable, capital gains tax.

If Tom had transferred his shares into an international life insurance policy, the stock value increase after the transfer would not be subject to income tax, even if the shares were sold later. Tom could have borrowed against his policy tax-free, his heirs would have inherited the policy and its assets would go to them tax-free.

Instead, they were left to fight over what to do with the taxable assets.

How It Works

This advice isn’t about buying a policy or even estate planning. It’s about not owing taxes on the proceeds from the sale of a business or real estate.

With offshore insurance companies, you can deposit stocks, property, IRA funds or other assets as payment into your life insurance policy, which is configured to include “in kind” assets that are normally taxable. Therefore, it becomes a holding vehicle for your assets, offering liquidity (immediate access to your money) without limiting your returns. 

International life insurance is like Las Vegas: what’s inside the policy stays in the policy. The value of your assets is frozen, so it can grow tax-free and remain tax-free, even if sold or passed to your heirs. (That said, profits from your business, interest, dividends and real estate rent are usually taxable, even inside the policy.)

You can invest the profits however you like — for example, in your own business — or use them to pay your policy premium. You can also use your policy as collateral to secure loans or borrow from the policy, which is considered non-taxable debt, instead of income. 

If your policy is a pot of money, you place “IOUs” in the pot whenever you borrow from it. When you die, the IOUs are paid off, and the remaining assets go to your heirs.

Creating The Policy

You won’t find these complex policies “on the shelf” of traditional insurance companies. You want to search for a lawyer or financial planner who specializes in drafting them and can identify the best strategy and international jurisdiction for your situation.

By creatively arranging your finances this way, you may not have to pay income taxes. While “life insurance” may sound about as exciting as your mother telling you to eat your broccoli, it’s nothing short of the flux capacitor as a tax strategy.

The information provided here is not legal advice and does not purport to be a substitute for the advice of counsel on any specific matter. For legal advice, you should consult with an attorney concerning your specific situation.

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