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You’ll love this war story. It’s true. A reader (Joe) of this column recently called me with a typical request: “Irv, I want to retire. Will you value my business so I know how much to sell it for?”

After a short conversation, two important parts of Joe’s business and financial picture puzzle came into clear focus: (1) Joe’s business was valuable and would be easy to sell, but (2) the tax cost would be murder. Unfortunately, many reader, like Joe, are in the same boat. They just don’t know it.

An in-depth consultation a few weeks later completed the puzzle. Joe, age 62, is married to Mary (age 60), has three kids: a son and a daughter in the business and a son who is not interested in the business.

Joe owns all of the stock of Success Co., a C corporation (a tax-paying corporation). Success Co. owns appreciated assets — land, buildings and goodwill — that are worth about five times their book value on the company’s books. Goodwill, as is usually the case, is not on the books or, put another way, is on the books for zero.

Joe started the business 28 years ago with $4,000 of his own money and a large loan — paid back long ago — from his dad. To keep it simple, let’s say Joe’s tax basis for the Success Co. stock is zero.

Now the economic facts and the tax problem. The business, including the appreciated assets, is worth $4 million. Great! Unfortunately, the tax hit to the corporation, if it sold its assets, would be about $1.2 million. What happens when Joe takes the $2.8 million balance out of the corporation? Another tax hit. This time about $440,000. True enough, the $2,360,000 left is a nice bundle of cash, but not nearly enough to generate the after-tax investment income (estimated at $80,000 to $100,000 per year depending on interest rates and tax rates) required to maintain the retirement lifestyle Joe and his wife have dreamt about. For Joe to pay almost half of Success Co.’s value in taxes to accomplish his retirement goal is insanity.

(A side note to all you business owners who operate as a C corporation and intend to sell your business down the road: Elect S corporation status… NOW.)

What should Joe do?

Don’t sell the business. Keep it. Without covering every detail, here’s the basic plan we created for Joe.

Success Co. elected S corporation status. Joe retired. The kids run the business anyway. Yes, Joe consults — working half days — about six to ten times a month, except in the winter when he goes south to Florida. Success Co. usually makes $650,000 to $900,000 per year before any salary or fringe benefits to Joe. That leaves plenty of room for Joe to take $250,000 (more or less) of S corporation dividends (plus a small salary and his usual fringe benefits) to comfortably fund his annual retirement needs.

We also put two additional plans into effect: first, a lifetime plan that assures Joe and Mary can maintain their lifestyle for as long as they live. Second, an estate plan for Joe and Mary, funded by insurance, that will eliminate all gift and estate taxes.

To help pay the insurance premiums, Joe invested a portion of his conservative investments (CDs and municipal bonds) in life settlements (LS). Actually, LS have become the new darling of conservative investors: without being subject to stock market risks, LS have been yielding an average annual rate of return of 15.83 percent. LS are the brainchild of a public company that sells on the NASDAQ.

There are many ways to skin the retirement/transfer/estate plan cat.

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Irv Blackman is a certified public accountant and lawyer who specializes in estate planning, business succession and asset protection. Contact him at Blackman@EstateTaxSecrets.com or call 417-9732. His Web site is www.taxsecretsofthewealthy.com.