An Easy Way to Get Your Business Out of Your Estate...Yet Keep Control


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In the mid-1950s, I did my first consultation with a family business owner who had the it's-time-to-transfer-my-business-to-the-kids itch. And one thing is certain...more than 50 years later, nothing has changed.

The two biggest transfer fears of the 1950s are still going strong at the beginning of the 21st century. What are they? Here's a hint. The number two fear is taxes—estate taxes that is. And the all-time number one transfer-to-the-kids fear? CONTROL! Yes, and get this, almost all owners (19 out of 20 to be exact) are frozen with fear when it comes to passing control to their own flesh and blood. So much so that many go to the big business in the sky and force their surviving families to overpay their estate tax. Why? Well, they held control (more than 50%) of the company's common stock right up to the day they died.

But relax...there are little-known, yet easy, ways to beat both fears. We use them year in and year out to turn worried family business owner into happy and fearless I-control-it-but-don't-own-it-business owner. Two simple tax tricks is all it takes.

Let's start with an example of how easy it is to maintain control using trick #1. The owner (Joe Finisher) exchanges all of his stock in the corporation for two types of common stock: voting common (say 100 shares) and nonvoting common (say 10,000 shares). This transaction—called a "recapitalization"—is tax-free and works for both C corporations (tax-paying) and S corporations. Joe is now in the perfect position to keep the 100 voting shares and transfer the 10,000 nonvoting shares to the kids.

And now trick #2: the transfer. Joe then sells or gives the nonvoting shares to his kids over a period of years. Joe can own as little as one percent of all the stock (100 shares of voting stock) and still retain 100% of the voting control. Just what he wanted—low value, high control. No fears. Perfect!

One more hint: Generally, annual gifts of $22,000 ($11,000 for Dad and $11,000 for Mom) of stock are used to transfer the family business to the kids when the business is worth about $2 million or less. When the business is worth more than $2 million, an intentionally defective trust (IDT) is usually your best choice. Both—the gift or the IDT—are tax-free to you and your kids.

Once the control and transfer issues are out of the way, my experience shows that owners of family businesses immediately want to learn more about how to win the estate tax game. Then the tax planning really gets exciting because we show you how to pass all of your wealth–intact–to your family... and tax-free.