Home › Island News › Business
Tax Secrets of the Wealthy: Succession and transfer planning — The new hot tax topic
More Business 
Share and Enjoy 
The stock market is volatile. “Uncertain,” most analysts say. Getting a bank to finance growth or a business acquisition is tough.
Try to sell your business and you will find that the number of willing and able buyers is not only smaller but offer less than you could have received two or three years ago.
Can this type of negative business environment have any positive tax impact on closely held businesses? The answer is a resounding yes! In what area? Transfer planning. How do I know?
Two reasons: First, my transfer/succession/estate planning seminars pull larger audiences. And Dad (the business owner and founder) often brings the business kid(s) along. More importantly, owners of family businesses call me to get more information, consult and then implement plans to transfer their businesses to their kids.
For years, we heard owners talk, but do nothing, about putting a transfer plan into effect. Now they are taking action. Heartwarming!
Two questions are central to every transfer plan: 1. What is my business worth? And 2. What are the tax consequences?
Let’s answer these questions one at a time.
Whether your transfer plan is a sale of the business to the kids (usually a tax disaster), a gift, a redemption or some other strategy or combination of lifetime transfer methods, the same big question stands tall —”How do I value my business for tax purposes?” And the question does not change if you want to wait to transfer all or part of your business after death.
Since the business is almost always the biggest dollar-value asset of a family business owner, its value is critical to both the transfer plan and the estate plan.
I still find the following numbers hard to believe, but these are the facts based on my experience of working with hundreds of business owners through the years.
About five percent really know what their business is worth (usually the result of a professional appraisal); about 50 percent greatly overvalue their business, and about 45 percent use book value as the measure of the business’ worth (almost always too-low and usually results in a losing battle with the IRS).
You wouldn’t set the price on an item or service you are about to sell until you determine the cost. The same logic applies to developing a transfer-your-business plan. The fair market value (FMV) of your business dictates your potential estate tax costs. The message is clear: You must know this cost.
If you plan to sell your business, instead of transferring it to the kids, it is essential to have your business appraised by someone who understands your business and the potential buyers in your industry.
Once you know the value of your business, you can compute the amount of dollar damage the estate tax can cause. Best of all, you are in a position to create a transfer plan that can reduce (almost always even eliminate) the estate tax, yet keep you in control of the business for as long as you live, and provide you and your spouse with a source of retirement income.
Sadly, often readers call me after their business has been sold. Typically, they make two mistakes: 1. Sold the business for a lower price than its real FMV, and worse yet, 2. suffer unnecessary tax costs because of the way the sale was structured.
If you are even thinking of selling your business, get competent and experienced professional help. The name of the game is only partially how much you get in sales-price dollars, the real answer is how many after-tax dollars you keep in your pocket. Simply put: Right price; right tax strategy.
Now, let’s tackle the transfer-of-your business problem: to your kid(s), employee(s) or any other person close to your heart. Notice —no sale, but a transfer. A sale is a tax disaster, no matter how clever it might be structured.
The only, the best and the right strategy is always an intentionally defective trust (IDT). What is and how does an IDT work? To answer the question, let me digress for a moment (with an analogy).
Look at your watch please and tell me what time it is. One or two seconds later you tell me the correct time. Then, I say, “Can you build me one of those things?” Of course, you can’t, yet you know how to tell time perfectly. And it’s easy.
Now, back to an IDT, the transfer weapon of choice. An IDT allows you to transfer your business or investment assets, (like real estate or a stock portfolio) tax-free. That’s tax-free. Let’s put some numbers on this no-tax table.
For example, you have had your business professionally appraised. It’s worth $3 million. Using an IDT will save you a bout $810,000 (a bit more or less depending on the state income tax rate where you live) per $1 million of FMV. So, the $3 million sale of your business to your kids will save your family $2.43 million in taxes.
No kidding. And it’s easy. We do it all the time not a peep out of the IRS. Of course, like the watch, you must do the documents and the entire transaction exactly right, or you will not get perfect results.
Let’s summarize. When you want to sell or transfer your business, first make sure you know the correct FMV requires a professional appraisal. You must (no exceptions) work with an experienced succession/transfer professional.
Finally, never —but never—sell your business to your kids, a younger generation family member or an employee. Use an IDT. Not only is the transfer tax-free (to you and the person(s) to whom transferred), but you can control the business for life.
---
Irv Blackman is a certified public accountant who lives part-time on Marco Island and specializes in estate planning, business succession and asset protection. E-mail him at wealthy@blackmankallick.com or call 417-9732. His Web site is http://www.taxsecretsofthewealthy.com.
Comments
This site does not necessarily agree with comments posted below — responsibility lies with the relevant reader alone. Read our privacy policy & user agreement.
Post your comment
(Requires free registration.)