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Retirement 
Protecting Your Private Business
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Building a business vs. bequeathing it |
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Goal: keep control and minimize estate taxes | |||||||||||||||||||||
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Use voting preferred stock | |||||||||||||||||||||
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Building a successful private business is an extraordinary achievement — passing it along to your heirs shouldn't offset much of your hard work. Estate taxes can rise as high as 55% (in federal taxes) once the value of your estate exceeds $3 million. |
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The goal for most entrepreneurs is to retain control of your business while you are involved in running it. This seems obvious, but this goal might put you in conflict with another: minimizing estate taxes. After all, to control your company, you must control the voting stock; this stock, in turn, will rise in value as your business grows, increasing the value of your estate and the eventual taxes on it. |
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One possible approach is to create two classes of stock: a voting preferred stock and a non-voting common stock. If you retain the voting preferred, you retain control of the company; if you give the non-voting common to your heirs while you are still alive, the increase in the value of the company accrues to them. For example, let's say you have a business worth $500,000 and five heirs. If you create a voting preferred for $450,000 and give the non-voting common to your heirs as a gift, no taxes are paid (gifts of $10,000 or less per individual are not taxed). After twenty years, your business might be worth $8 million (assuming it grew in value by 15% per year). Your preferred hasn't risen in value while the $7.5 million increase in the value of the company has gone to your heirs without paying any tax. And you never gave up control of your lifetime's work. |
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 Return to Taxes |
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