By Ashley Kraus, Senior Associate
A liquidity event can create significant opportunities for business owners and their families. However, thoughtful estate planning should begin well before the transaction closes.
Before a liquidity event, it is important to evaluate wealth preservation strategies that may help minimize potential tax liabilities. Early planning can also support your long term financial goals. In addition, it can provide greater flexibility and control over how assets pass to future generations.
What Is a Liquidity Event?
A liquidity event occurs when an individual or business converts an asset into cash or readily marketable assets. For example, a business owner may sell equity in a company.
Other common liquidity events include selling appreciated real estate, merging or selling a business, or recapitalizing through private equity.
These transactions can substantially increase an individual’s net worth. As a result, they can create important opportunities for wealth transfer and tax planning.
Estate Planning Strategies to Consider Before a Liquidity Event
Several estate planning strategies may be worth evaluating before a liquidity event. The appropriate approach depends on your assets, financial goals, family circumstances, and the timing of the transaction.
Lifetime Gifting
Lifetime gifting may allow you to transfer wealth to children, other family members, or charitable organizations.
For example, you may consider making cash gifts before completing a transaction. As of 2027, you can make gifts up to $20,000 in value to individuals without using your lifetime gift tax exemption.
Additionally, cash contributions to public charities may qualify for deductions of up to 60% of your adjusted gross income (AGI).
Intentionally Defective Grantor Trusts (IDGTs)
An Intentionally Defective Grantor Trust (IDGT) may be another strategy to consider.
By gifting or selling assets to an IDGT, you may be able to “freeze” their value as of the transfer date. Consequently, future appreciation may occur outside your taxable estate.
For business equity, valuation discounts may also be available. These can include discounts for lack of marketability or lack of control.
Charitable Remainder Trusts
Charitable remainder trusts can support both financial planning and charitable giving objectives.
For example, certain trusts provide annuity payments to you during your lifetime. The remaining assets are then distributed to designated charities.
Different trust structures may be appropriate depending on your charitable goals and the potential growth of your assets.
Life Insurance Planning
Life insurance can also play an important role in planning for a liquidity event.
Depending on your jurisdiction, state estate or inheritance taxes may apply at death. Additional life insurance coverage may help provide liquidity to address those obligations.
Furthermore, life insurance can help equalize asset distributions among family members.
When Should Estate Planning Begin Before Selling a Business?
Estate planning should begin as soon as you start considering a business sale or other liquidity event.
Ideally, you should meet with your attorney, financial adviser, and CPA before the transaction advances. Together, your advisers can evaluate available strategies and determine which may support your financial and family goals.
Timing is especially important for tax planning. If you wait until a Letter of Intent is in place, certain planning opportunities may no longer be available.
Plan for the Transaction and What Comes After
A liquidity event is more than a financial transaction. It can also shape your family’s financial future and the transfer of wealth across generations.
Therefore, planning ahead matters. Coordinating your legal, tax, and financial strategies before a transaction can provide greater flexibility when important decisions arise.
Goosmann Law helps business owners and families navigate estate planning, trusts, and business succession considerations. Connect with our team to discuss your goals before a potential transaction moves forward.
Related insight: For additional perspectives on preparing a company for a potential sale, watch our Law Talk Live episode, Building a Business Worth Buying.
Explore further: Learn more about trust planning and long term wealth preservation in our Law Talk Live episode, South Dakota Trusts: Asset Protection & Estate Planning.
Legal Disclaimer: This article is provided for general informational purposes only and does not constitute legal, tax, or financial advice. Estate planning and tax strategies depend on individual circumstances, applicable laws, and the timing of a transaction. Tax laws, exemptions, and contribution limits are subject to change. Readers should consult qualified legal, tax, and financial advisers before making planning decisions. Reading this article or contacting Goosmann Law does not establish an attorney client relationship.