Business Valuations Blog

Tax-Related Valuations: Recent Changes in Estate Tax Rules – Now May Be the Time to Transfer Your Privately-Held Company to the Next Generation

I feel terrible for those in the South who are struggling with some of the worst flooding that the U.S. has experienced in years. One pair of shoes I’m glad I’m not in belong to the person who had to decide whether or not to open up the Morganza Spillway. Open up the spillway – save New Orleans, but flood a rural area in which over 25,000 people live. Keep the spillway closed – keep the Mississippi River contained north of New Orleans, but risk another major flood in the city that birthed jazz music. This is a difficult decision that I would not wish on anyone. 


While on a much different scale, one decision that has recently become easier for business owners is when to “open the floodgates” and transfer wealth to the next generation. Recent changes in estate tax rules make 2011 and 2012 the most advantageous years to transfer assets in recent memory. Leading up to 2011, tax laws allowed for the transfer of a lifetime total of $1 million in gifted assets before a gift tax of 35% applied to each additional dollar of value transferred. Beginning in 2011 and continuing through 2012, the maximum lifetime amount that one person can gift in total is $5,000,000 before the gift tax kicks in. Whether this $4 million increase in the gift tax exemption will last beyond 2012 is anyone’s guess. Currently, the rules in place call for a return to a $1 million gift tax exemption and an increased gift tax rate of 55% in 2013. While it is possible that Congress may change the rules for 2013 and beyond to continue the higher gift tax exemption amount (and lower gift tax rate), the monstrous deficit our country faces may preclude this from happening. 


Not only do the current estate and gift tax rules present a golden opportunity to transfer wealth, but the current state of the economy and recent recession may allow the transfer of even more wealth than in pre-recession years. This is because many business values have been depressed as a result of deteriorated sales and profitability stemming from the recession. This rationale applies to privately-held companies, as well – but when ownership interests in privately-held companies are transferred through the gift or estate process, a third-party business valuation is often required (unlike when a publicly-traded stock is transferred). Without adequate valuation support, the door remains open for the IRS to challenge the value of the transferred assets, which may have appreciated by the time of the IRS challenge, making it harder to support the potentially depressed values today. 


Now may be the most advantageous time that business owners will have to transfer ownership in their companies to the next generation without incurring steep gift tax liabilities. By not releasing pent-up value now while the gift tax exemption is high could result in a “flood” of gift or estate tax liabilities in later years.

Do you have questions about when you should transfer your privately-held company to the next generation? Leave a message below, or contact Sean Saari in Skoda Minotti's Estate Tax Planning services by calling 440-449-6800.

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