Why is a business valuation an important part of gifting and wealth transitioning?
Any type of transfer you make, whether it’s a sale, gift or transfer, is subject to review and scrutiny by the Internal Revenue Service because of the gift tax associated with these actions. You need to demonstrate and document the fair market value of the transferring shares and have a comprehensive report prepared to support the transaction.
Your business is also typically the largest asset in your estate, but it’s the hardest to divide. You need to know the business’s value if you’re trying to figure out who inherits what and how much wealth you’ll transfer to each person.
A good strategy can help in transitioning the business, because many different scenarios can happen, especially if your family is continuing the business. For example, you may have four children but only one is active in the business. You want your estate to be equally divided, but you don’t want the active child to be the only one with a piece of the business. You also don’t want everyone running the business. But there are many solutions to this situation.
How can you divide a business up equally among family members?
The first is recapitalization of voting and nonvoting shares in the business. You would do this to a small percentage of the business’s voting shares, for example 10 percent. The other 90 percent would be nonvoting shares, which you can transfer to the nonactive children. The active children can then maintain voting control of the business, while the nonactive children receive the same economic benefits. This also allows you to transfer ownership and wealth without transferring control of the business, since you can keep your voting control until you’re ready to transfer it.
A second strategy is to create a family LLC or FLP. For example, let’s say you have a $10 million piece of real estate that’s your primary asset. This is a difficult asset to break up among children, but you still want to maintain ownership in the real estate. You can put that building into a family LLC or FLP and gift units in that entity to children, almost like shares of a new company. The units are a function of the value of the real estate.
Why is gifting and transitioning your wealth so important?
There are several financial benefits. Estate tax is onerous and can quickly get up to as high as 50 percent once you cross the threshold of a taxable estate. Half of the wealth you’ve spent a lifetime accumulating can go away quickly if you don’t plan.
There are also psychological benefits. Many people worry about leaving their children and inheritance when they pass away. If you’re able to give away or gift value while you’re still alive, you can see your children receiving enjoyment from that gift. Most children would rather receive a gift while their parents were still alive rather than after they pass.
Brian Bornino, CPA/ABV, CFA, CBA, is the director of Valuation Services at GBQ Consulting LLC. Reach him at (614) 947-5212 or [email protected].
