The ability to legally mitigate estate and gift taxes is very appealing to successful business owners.
Provided by: The Wealth Advisor
And, there are many ways they can accomplish this goal.
According to Edward Renn, a leading tax expert and partner at Withers Bergman, “By using a specialized trust to effectively freeze the value of a company, future appreciation in the value of the company avoids estate and gift taxes. When done well, this strategy usually saves families millions of dollars. But, it has to be expertly implemented.”
Example: A 60-year-old business owner who has done well financially wants to take care of his children and grandchildren. He realizes that he will sell his business one day, and he detests taxes.
He chooses to make a gift of $500,000 in discounted company stock to a trust and sells another $4.5 million in discounted company stock to the trust.
The trust now has $5 million of discounted company stock.
Because the business owner is transferring stock that qualifies for a minority interest and marketability discount, with a 35% discount provided by a Qualified Appraiser, the business owner is transferring $6,750,000 of pro rata value in the company.
If the value of his company increased by 10 percent annually for nine years and then he sold the company, there would be more than $8.5 million available for his family.
Importantly, the $5 million in discounted company stock and all future appreciation within the trust is outside the business owner’s estate. In the future, the trust would continue to grow and all the appreciation would pass to the next generation without further estate taxation.
There are estate planning tools and strategies, such as this kind of trust, that can effectively transfer assets such as privately held business interests to in a tax efficient way to the next generation.
This is a particularly powerful approach when the assets being placed in the trust – such as a business – is expected to significantly appreciate over time.