Where to park proceeds from a large sale of a business.

Question

My Dad is selling shares in a business and needs to know where to wire the proceeds. Rounding off, the amount is three million dollars. One million of it will need to go to taxes later. I told him to wire it into his money market account at Vanguard. He can decide later where to invest it for the long-term, and will likely do so in about a month. The money market account appears to be insured for $500,000, but I don't expect Vanguard to go bankrupt in a month. My dad was looking at the Vanguard "Cash Plus Account" that is insured for $2.5M.

Where should he wire this amount to? What would you do with this amount of money? Other than a B of A savings account that earns close to zero, Vanguard is currently the only place where he has an account that will handle this amount of money. Should it go to something other than a money market account or this Cash Plus account?

Ben Trageser · Answer

@Denver McClure You may have some good insight into this

Steve Smith · Answer

1MM in taxes is a LOT of money to pay in tax, and with depreciation recapture, it could be worse. Get some good advise, there are a LOT of ways to shave that way down. Is real estate involved... a 1031 is a good option, and perhaps you could value the RE on the high side to reduce the stock gain. Look at selling it on installment, make some interest and spread out the tax over years. Or create a loss for the year of sale. Also, I believe there are some reinvestment plans that may work. It's been a long time since I sold my business, so I can't advise on current strategies now. Get some expert help, and be sure you're getting good help.

Josh St Laurent · Answer

@Craig A., you've gotten some solid advice already so I'll try to add some things to think about without repeating what has already been said.

Like @Max Gallagher mentioned the first thing a CFP would do is try to minimize the million dollar tax liability. There are things that be done before AND after the business sale to offset some of that. The goal would be to help him keep as much of that million as possible instead of giving it to Uncle Sam.

Second step would be to figure out what he needs that money to do for him. Sounds like maybe retirement is next so generating income with the dollars could be what you explore with him.

I think a money market could be a good temporary place to put the money but to your point you will want FDIC insurance. The cash plus program you described is what's called a deposit sweep program which just means they are using multiple banks to make deposits at since traditionally each bank will be limited to 250k in FDIC. So if a firm says we'll provide FDIC insurance up to a million it just means they'll be spreading your deposits across four banks.

Personally I don't like having $ over FDIC limits even though it's unlikely that a bank will fail, it's just not worth the risk.

With that being said there's not really a scenario coming to mind your Dad would want to keep that amount all in cash anyway, you'd want to work with a financial planner or RICP to strategize the best place for where to put that money to work.

Hope this helps!

Max Gallagher · Answer

Craig - Great question and congratulations to your father on the business sale. That's a significant transaction, and it's wise to tap your network for a full understanding of opportunities available. On insurance protection.. if a brokerage firm fails and assets are missing, SIPC coverage is what will be used to protect up to $500k, including $250k limits for cash. Most major brokerages also carry excess SIPC coverage which will cover significantly higher limits. Policy limits vary but your father will have adequate coverage with Vanguard, Fidelity, or Schwab. Fidelity and Schwab policies are slightly more robust but you're likely fine with any of the three. In my opinion, the risk of custodial failure is low and the protection is high.. not something to focus too much on in this decision.

As to the best place to park funds, with a known $1m tax liability coming due, safety and liquidity are priorities. Money market funds (ie. VMFXX) will offer some of the best yields (ie. 4.24%) and daily liquidity. These yields do fluctuate daily so you may also want to explore a liability-matching strategy where you buy t-bills at a specified duration (ie. 1 year) to match when your tax bill is due (ie. 1 year-ish). You may sacrifice some yield but you lock in a solid interest rate (ie. 4.05%) without having to worry about potential declining interest rates over the next year.

For the remaining $2M, a money market fund is a temporary solution. You would need to consider your dad's overall financial goals, other assets, income/expenses, etc to determine the best course of action. A financial planner can help immensely on the investment, taxes and estate planning front.

Finally, regarding the $1M tax liability, there are several advanced tax planning strategies I'd highly recommend exploring that have the potential to significantly reduce that bill. These aren't just about deductions; they involve strategic structuring and timing. For example, we could look at utilizing specific types of trusts, charitable giving strategies, or even exploring opportunity zone investments. This is an area where proactive planning can make a substantial difference. I have seen clients reduce tax bills by very large percentages through proper planning.Let me know if you have any questions or would like to talk in a bit more detail.

Where to park proceeds from a large sale of a business.

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