Jun 1, 2006 12:00 PM

, By Elizabeth Miller, managing director, Trevor Stewart Burton & Jacobsen Inc., New York

By Elizabeth Miller, managing director, Trevor Stewart Burton & Jacobsen Inc., New York

One of the most financially attractive exit strategies for the owner of a closely held business is to sell his company stock to an employee stock ownership plan (ESOP). An ESOP-assisted buyout can serve as a successful business succession plan while also providing powerful tax and estate-planning advantages to the selling shareholders. Lawyers and accountants put this strategy in motion. But then it often stumbles because sellers fail to consider all their investment options for the proceeds and too often get locked into inappropriate and inflexible portfolios that cannot achieve their long-term goals. Good wealth advisors don't leave their clients out in the cold this way. Familiarize yourself with the issues, so that you can introduce the options and the issues to your clients before they're busy signing the papers for the sale of their companies.

The outright sale of a private business usually triggers a significant capital gains tax bill, because most sellers have a very low tax basis in their company's stock. But if an ESOP owns at least 30 percent of the company's stock, the sales transaction qualifies for rollover investment under the Internal Revenue Code. That is, the selling shareholder can reinvest his proceeds in qualified replacement property (QRP) — without triggering a taxable transaction. The full, accumulated capital gain is paid only when (and if) the QRP is sold.