- How much wealth do you want when you exit your company? And, for parents, the follow-up question: How much wealth do you want your children to have?
- How long before you leave your company?
- Hired a Certified Business Appraiser to assign a conservative, but supportable value to the company.Result: Based on current tax case law and valuation principles, the appraiser valued the transfer of a 49% minority (less than controlling) interest at $4 million. In her opinion, the appropriate minority discount was 35 percent of the full fair market value (assumed to be $12 million) of the stock. Result: Using the 35 percent discount, George could give away half of the company to his children (a gift valued at approximately $4 million) and would pay no gift tax based on 2011 law which provides for a $5 million lifetime gift tax exemption. While George was happy with the idea of not paying tax, he didn’t relish using most of his lifetime gift and estate tax exemption, and wanted a better answer. So he took another step to avoid needlessly wasting this most valuable exemption.
- Created a GRAT—a Grantor Retained Annuity Trust. (See “GRAT Note” at the end of this article for more detailed information.)Result: Using a GRAT—perhaps the biggest lever in the Wealth Preservation Game—George would avoid using a significant part of his $5 million lifetime gift tax exclusion, and would still give almost 50 percent of the company to his children.
- Transfer one-half of a business with a fair market value of $9-$12 million to his children in four years (a timeframe George chose) using little or none of his lifetime exemption.
- Receive all of the cash flow from the company during that four-year period, because the annuity payment to George was designed to equal the amount of cash flow expected from the stock transferred into the GRAT. And George needed this income to achieve his financial security exit objective.
- Transfer (after four years, or at the termination of the trust) the trust asset (one-half of the company) to trusts for his children, completely free of any gift tax.
The information contained in this article is general in nature and is not legal, tax or financial advice. For information regarding your particular situation, contact an attorney or a tax or financial advisor. The information in this newsletter is provided with the understanding that it does not render legal, accounting, tax or financial advice. In specific cases, clients should consult their legal, accounting, tax or financial advisor. This article is not intended to give advice or to represent our firm as being qualified to give advice in all areas of professional services. Exit Planning is a discipline that typically requires the collaboration of multiple professional advisors. To the extent that our firm does not have the expertise required on a particular matter, we will always work closely with you to help you gain access to the resources and professional advice that you need
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Cliff Duffield: 913 302 6937