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Tax Secrets of the Wealthy: Two or more kids? Tax victory in the horizon
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Starting in the mid-1970’s, we have been telling readers of this column and our clients to transfer their businesses to their kids during life. Waiting until you die to complete the transfer is an unnecessary and expensive waste of tax dollars. It was a tough fight Mom, but now the IRS agrees. Here’s the story.
The issue concerns the value of your business for tax purposes. Suppose you have four kids (all work in your business: Success Co.). If you wait until you dies, then leave Success Co. 25 percent to each of the kids, the IRS will value 100 percent of the business, focusing on the value of the total business (instead of each one-quarter part being left to each child). What’s the result? No discount for a minority interest. For example, a business with a fair market value (FMV) of $2 million, would be stuck with a $2 million value (no discount) for tax purposes.
Instead, suppose you transfer Success Co. to your four kids — 25 percent to each — during your life. This time, after years of fighting, the IRS finally agrees with us: The focus is on each one-quarter of the business transferred separately to each of your kids. How does the result differ? The shares transferred to each child are entitled to a minority discount. With minority discounts running in the 35 percent range, stop for a moment and figure out what a lifetime transfer of your business might save your family in taxes. (Tell your professional to see Technical Advice Memorandum 944001.) Using the above $2 million example (and a 35 percent discount) would make the same business worth only $1.3 million (a $700,000 discount) for tax purposes.
Are you thinking along these line? “Sure, I want to save taxes. But I’m not going to give up control of my business as long as I can draw a breath.” If so, you are perfectly normal and typical of the closely held family business owners who seek our advice.
Well, there is an answer to your save-taxes-but-want-to-keep-control dilemma. In a word, Recapitalize. The recapitalization is a tax-free maneuver. You wind up owning all of the voting stock (say 100 shares) and all of the nonvoting stock (say 10,000 shares). Now you can give each of your kids 2,500 shares of the nonvoting stock of Success Co. You get your minority discount. With your 100 shares of voting stock, you also keep absolute control of your business for as long as you want… even for life. Using this recapitalization concept will put you in the tax-winner’s circle every time, whether you have one kid or a dozen.
Neat!
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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.
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