Monday, April 11, 2011 Exit Planning for Baby Boomers
Last week, I identified 3 factors that would allow Baby Boomer business owners contemplating exit planning (succession planning) an opportunity to transfer a great deal of wealth (in the form of business interests) to a child, key employee or co-owner (aka “Insider”).
Those factors were:
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Tax Relief Act of 2010
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Presence of Valuation Discounts
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Relatively Low Interest Rates (Applicable Federal Rate “AFR”)
Today, I want to highlight the presence of valuation discounts and discuss their uses and benefits. When preparing a business for transfer to an Insider, a business owner must first determine the value of the business. The lower a business value, the more value that can be transferred…especially when using the $5 million gift tax exemption that I spoke of last week.
When determining the value of a company (and looking for the minimum value) there are two main valuation discounts that a certified business appraiser may use. The two discounts applied most often include minority/non-controlling interest and lack of marketability. Generally, the minority interest discount corresponds to the degree of control or influence inherent in the transferred interest, whereas the lack of marketability discount corresponds to the transferred interest's degree of liquidity. The two are interrelated because a minority interest tends to be harder to sell and is therefore less marketable.
To show the power of valuation discounts while using the gift tax exemption mentioned above, take the following:
A husband and wife want to transfer their business to a child using their combined $10 million gift tax exemption. Using a valuation discount of 35% for lack of control and lack of marketability, they are able to transfer a business worth $15,000,000 to the child gift tax free. Further, all future appreciation to the business will not be taxed to the husband and wife.
Next time, I’ll explain how the Applicable Federal Rate can be used in minimizing taxes while maximizing wealth transfer.
BridgeBuilder
Garrett Griffin |