If you own a family or small business, you hold one of the best opportunities out there for minimizing or eliminating estate taxes upon your death. This move isn’t for everyone. It means giving up some of your control over the business and it is not cheap to put the plan into place. But with the right plan, you can gradually give control and ownership of the business to the next generation and save your family hundreds of thousands of dollars in estate taxes.
Let’s use a small business owned by Joe and his wife Lynn as our example. The business could be sold right now for $3 million, but Joe and Lynn want their children to have it after their deaths. They think the value of the business will continue to grow so that it’s worth at least $5 million after both of their deaths. They plan to bring their adult children up through the ranks until they can run the business themselves.
Let’s also assume that our couple has a taxable estate aside from the business, and that their children would lose about 40 percent of the value of the business that is includible in Joe and Lynn’s estates to the government in estate taxes. Under these assumptions, if Joe and Lynn together own 100 percent of the business until they died, and the business was worth $5 million, the government will get about $2 million. Yes, two million dollars.
If, instead, the couple put into place a gifting program that will pass the entire business down to the kids over the next few years, utilizing tools such as the federal annual gift tax exclusion and fractional interest discounts, the estate taxes could be reduced by over $1 million. A million more dollars could go to their kids, instead of the federal government, if Joe and Lynn are willing to take some steps now.
One important requirement is that the assets must really change hands. The transfer cannot be in name only. The new owners must receive their shares of dividends, end-of-year profit sharing, etc. The parents may be able to retain management and operational control through the use of employment contracts, management agreements, etc., but the best plan is one that gradually passes the control over to the kids. Besides, Joe and Lynn have better things to do with their time once their legacy is safely passed to the next generation!
For more information or to contact us, please call 661-259-7930.