Page 37 - MetalForming September 2009

for transferring your business (get it out of your estate), yet keeping absolute control for as long as you want.
Step No. 1—We recapitalize Suc- cess Co. (the old common stock dis- appears) and is immediately replaced by voting stock (say 100 shares) and nonvoting stock (say 10,000 shares). This is a tax-free transaction. Now, Joe can keep the 100 shares of voting stock and control. Joe will transfer the 10,000 shares of nonvoting stock to Steve. (Note: This example assumes Joe owns 100 percent of Success Co., but the concept works just fine if Joe owns a lower percentage.)
Step No. 2—If you are a C corpora- tion, elect S corporation status. Joe’s Success Co. is already an S corporation.
Step No. 3—Joe sells his nonvoting stock to an intentionally defective trust (IDT), which is easy to do and has a long list of tax advantages. We’ll cover only the most important ones:
1) Huge discount for tax purposes.
The nonvoting stock, because of vari- ous discounts allowed by the tax law, has a value of about 60 percent of the stock’s real value. For example, if Suc- cess Co. is really worth $7 million, the nonvoting stock would have a value for tax purposes of only $4.2 million (after a 40-percent discount of $2.8 million). An urgent note: the Obama administration is proposing a tax law change that will eliminate these dis- counts. My suggestion: Act quickly— this tax-saving opportunity could soon be history.
2) Tax-free to Joe. The IDT will pay for Joe’s nonvoting stock with a $4.2 million note. The note will be paid, including interest, to Joe by the IDT, using dividends from Success Co.
Typically, it takes five to eight years to pay off the note. All the payments received by Joe—for the note, plus inter- est—are tax-free. A great deal.
Wait, it gets better. When the note is paid off, the trustee of the IDT distrib-
utes the nonvoting stock to the trust’s beneficiary, Steve, with no tax conse- quences. How much taxes will Steve save? A whopping $2,772,000— 66 per- cent of $4.2 million, using the formula at the beginning of this article.
Here are some more goodies, tax and otherwise, that make an IDT an economic hero:
3) The ultimate transfer of the stock to Steve is not considered a gift for tax purposes, leaving your annual gift exclusion ($13,000) and lifetime exemp- tion ($1 million)—double if you are married—available for other estate- planning strategies.
4) A big deal for community prop- erty states like Texas and California, the stock transfer to Steve is not in the community, which means Steve’s wife has no interest in the stock.
5) An IDT works just as well if you want to transfer all or a portion of your business to other people, most commonly other shareholders (related or not), employees (usually the one or two top key people) or even a tax- advantaged sale to a buyer of Success Co.
Actually, I could write a small book about the wonders of an IDT. Done right, there is no downside. One warn- ing: Only work with experienced professionals.
Want to learn more about how to shield yourself and your family from the IRS when you transfer your business? Browse www.taxsecretsofthewealthy.com. If you can’t get a good answer from your professional advisors, call Irv at 847/674-5295 to discuss your business transfer problems. MF
Hotoff the Press
Your daily
source for
news of the metalforming industry
www.metalformingmagazine.com
www.metalformingmagazine.com
METALFORMING / SEPTEMBER 2009 35