Potential Hitches in Estate Planning

Given the current lifetime exemptions, the owner of this hypothetical subject company could transfer any number of noncontrolling interests in the business to family members, key employees or successors without triggering any federal estate and gift taxes. Should this option be foregone and Congress reduce the lifetime estate and gift tax exemptions and the applicable tax rates, the next generation could get stuck with a substantial tax burden should future transfers be made or upon the owner’s death.

For example, if Congress were to revert t
he current exemptions and tax rates to, say, their 2002 levels of $1 million and 50%, respectively, the future beneficiaries of the subject company would be forced to pay an aggregate tax bill of $1.35 million. This effect would be further compounded if the company were to increase in value as time passed.

Sometimes such estate planning is easier said than done, as in the case of a senior generation member unwilling to give up control. In such cases, tax and accounting advisors might recommend the creation of a nonvoting class of equity that still allows for the tax-free transfer of wealth but the retention of control in the founder’s hands.

The benefits of not doing so are too substantial to ignore. Of course, before proceeding you should consult with your advisors, specifically your CPA and attorney, before executing any type of succession planning. 

Matthew McCranor and Kevin Moore are valuation analysts at Pennington, N.J.-based BCG Valuations.

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