James Dornbrook Staff Writer at Kansas City Business Journal writes that business owners could cut taxes by granting stakes now. He says, it can be depressing for business owners to see the value of their companies decline dramatically because of the down economy. But area financial advisers and consultants point to a silver lining.
Lower valuations may present a great opportunity for business owners to reduce future estate taxes by transferring some ownership to the next generation now, said Scott Boswell, managing director of The Commerce Trust Co.’s West Region.
“Valuing the business and creating an estate plan that will help you minimize estate taxes and ensure there is a proper exit strategy in place for you and your business are all timeless issues,” Boswell said. “What is unique here, though, is that there is a window allowing people to make lemonade out of the lemons of their business being worth less than it was a year ago.”
Boswell said that estate taxes come into play after a business owner dies and anything in excess of the exemption amount faces a tax of as much as 45 percent. Although there is no estate tax to deal with in 2010, it is set to return the following year with only a $1 million exemption.
Gift taxes, which cover transfers of assets before a person’s death, carry a $13,000 annual exemption and a $1 million lifetime exemption for amounts that exceed the annual exemption.
Jack Ovel, president of The Commerce Trust’s West Region, said business valuations are down about 40 percent in some cases. That means a business worth $10 million two years ago may be worth $6 million now. A lack-of-marketability discount could result in an additional 40 percent haircut, making a business theoretically worth only $3.6 million today.
“If you wanted to transfer one quarter of the business now, you’re talking one-fourth of $3.6 million, which is only $900,000 and could easily be transferred under your lifetime (gift tax) exemption,” Ovel said. “So you could transfer one quarter of the business without incurring any tax.”
Seamus Smith, an estate planning lawyer with [CompanyWatch allows you to receive email alerts with stories related to your companies of interest. Vold & Morris LLC in Leawood, said the benefits from gifting multiply with low business valuations.
“If you transfer $13,000 of stock that you feel is undervalued, when that value rebounds, there is going to be an asset worth much more than $13,000 for your children,” Smith said. “So you get the original $13,000 plus all the additional appreciation, all of which might have been taxed at a rate of 45 percent at your death if you had an estate large enough to be subject to the (estate) tax.”
Smith said that the assets still could be subject to income taxes but that beneficiaries generally are subject to a much lower rate.
Another benefit of gifting part of a business is that assets placed in a trust for heirs generally are protected from creditors of both the grantor and the beneficiary, Smith said.
Mike Saxton, CEO of Overland Park-based Business Transition Specialists LLC, said gifting is a great strategy for businesses that are financially stable and have solid cash flow.
“But for businesses facing difficulties, they don’t want to do that because they might need that equity for other options,” Saxton said. “If you’re a business that is stuck in the mud a bit, you might need to make investments in the business or to recapitalize. So you might have no choice but to use your equity to acquire a partner.”
Saxton said that bringing in a partner in exchange for some ownership is a great way to acquire new expertise and connections for the business, as well as to recapitalize a business at a time when banks are lending only to the strongest of borrowers.
