Value Your Business to Protect Your Family from the IRS

Do you know how to make a grown man cry? Tell him his business has been destroyed by fire, flood or God. Yes, a tragedy. But most likely, the loss was insured. What is even more important, Joe Owner is there…on the scene…to assess the damage…to make plans…and to start rebuilding. Chances are he will make the business bigger and better than ever before.

End of Scene Number One. Here is Scene Number Two. Even the most successful, egotistical and immortal business owner (Joe) knows, that some day he must go to the big business in the sky. That will not make him cry. Joe is too realistic for that. But tell him that after he is gone, his present plans or better yet—lack of a plan—means the IRS will dismantle his business.

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Imagine if you will, our departed Joe is in heaven talking to a representative of the IRS.

“Why?” Joe asks. “To pay taxes,” answers the IRS’ representative.

“How?” he asks. “By selling off the assets necessary to pay the tax.”

“When?” he asks. “Within two years.”

“Why?” Joe demands. “To pay your federal estate tax liability.”

“How much?” he queries. “That depends on the value of your business.”

“Good,” says Joe. “I can show you just how little the business is worth without me.” “Sorry,” responds the IRS representative. “It’s too late for that now.”

Is the above scenario realistic? Yes. Crazy as it sounds. If you own a closely held business and don’t pin down its value for tax purposes, you are setting yourself up to be mugged by the IRS.

Every business must someday be valued for tax purposes. It is best to be done voluntarily, by you (the owner) during life. If not, the valuation will be done in an involuntary situation, after death, by the IRS. The only “out” is to sell the business in a real transaction during your life. For most business owners, selling doesn’t make sense for many reasons. Some want to transfer the business to his/her kids; others wants to keep on working until he/she goes to business heaven.

Want to save your business and your family untold aggravation, not to mention savings of 55% (that will be the highest estate tax bracket in 2011)? Then do three things. 1) Find out the value of your business for tax purposes. 2) Put a transfer plan into place during your life. 3) Dovetail the first two with your estate plan. Done right, you can transfer your business to your kids tax-free during your life , yet control your business for as long as you live.