Page 50 - MetalForming August 2013

Blackman on Taxes
By Irving Blackman
Secrets About Business Succession, Business Valuation and Estate Planning
When a business owner calls me to consult, the three most common questions are:
1) “Can you help me tax-effectively sell/transfer my business?”
2) “Can you value my business?”
3) “Can you give me a second opin- ion on my estate plan?”
Experience has taught me that the right answer must encompass all three questions, because: a sale or transfer of the business requires a valuation; a valuation usually involves some kind of sale or transfer (both have significant tax consequences); and if you own a business, your estate plan cannot be complete without a valuation and/or a transfer/sale plan (a succession plan).
The sale or transfer of your busi- ness can only take place in one of two important time frames: during your life or after your death. An unplanned sale after death almost always results in a disaster. So, we are going to stay in a lifetime-planning mode to solve your succession problems while you are alive and well.
The Secrets
Business Valuation—The secret is how to maximize the discount of the business for tax purposes. Here’s an example: Success Co. (owned 100 per- cent by Joe) now is run by Joe’s son (Sam). Joe wants to sell Success Co. to Sam for $8.6 million (the value deter-
Irv Blackman, CPA and lawyer, is a retired found- ing partner of Blackman Kallick Bartelstein, LLP and chairman emeritus of the New Century Bank (both in Chicago). Want to consult? Need a sec- ond opinion? Contact Irv:
tel. 847/674-5295
ir v@ir vblackman.com www.taxsecretsofthewealthy.com
mined by a professional appraiser). Now the secret: Joe recapitalizes Success Co. (100 shares of voting stock/20,000 shares of nonvoting stock)—a tax-free transaction. Only the nonvoting stock will be sold to Sam (using an intentionally defective trust, IDT—more explained later). The appraiser updated his valuation, valu- ing the voting stock at $100,000 and the nonvoting stock at $5.1 million. The nonvoting stock is entitled to var- ious discounts—of 40 percent—under
the tax law.
And a big bonus to Joe: keeping the
voting stock, so he can still control Suc- cess Co.
Sale of Success Co.—Here’s how I explained the tax consequences of a sale to Joe: “If you sell Success Co. to Sam, each $1 million of the price will be socked with three taxes:
1) “Sam must earn $1.666 million. The 40 percent income tax (federal and state) nails Sam for $666,000. Only $1 million is left.
2) “Sam pays you $1 million for your stock (assume zero tax basis). Your cap- ital gains tax enriches the IRS by $200,000...now only $800,000 is left.
3) “At your death, the IRS siphons off another 40 percent, or $320,000, for estate tax...only $480,000 left.”
Now the secret: Instead of an out- right sale, sell the nonvoting stock of Success Co. for the same $5.1 million to an IDT. Joe gets paid in full with an interest-bearing note from the IDT.
Sam is the beneficiary of the trust and has no obligation to pay the note. Instead, the cash flow of Success Co. is used to pay the note and interest. Every penny Joe receives for payment of the note, plus interest is tax-free.
Joe and Sam will save about $200,000 in taxes for each $1 million of the price (about $1,020,000 in tax savings).
Second Opinion of Joe’s Estate Plan—In addition to Success Co., Joe and his wife Mary have another $10.4 million in assets, including two homes, a 401(k) and various investments. The estimated tax (income tax on the 401(k) and estate tax), if Joe and Mary both died would be $3.5 million—that is based on their current estate plan.
After our second opinion, the new plan we implement will eliminate the estate tax and create an additional $2.5 million in tax-free wealth (using a com- bination of strategies to purchase tax- free, second-to-life insurance on Joe and Mary, while funding the premium payments with the 401(k) money, which is subject to double tax: income tax and estate tax).
We also will use other lifetime strate- gies to eliminate the estate tax: an ongoing annual gifting program to Joe and Mary’s three children and seven grandchildren; and creating a family limited partnership for their invest- ments, and a charitable lead annuity trust.
Conquering the IRS
Takes More Than
a Local Lawyer
Following is the real-life story of a long-time reader (Joe) of this col- umn. Joe is married to Mary, owns a business (Success Co.), has three kids (one—Sam—who Joe wants to ulti- mately own Success Co.). Joe hired me to do his estate plan. I told Joe that part of our job was to make sure Mary would be comfortable with our final plans. Joe agreed.
Then it happened. Joe called. Apolo- getic. Mary suddenly decided she would be more comfortable working with a local lawyer.
“Go with Mary’s wishes,” I said. “Let
48 MetalForming/August 2013
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