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Dear Trust Officer:
I own a small business, and I have no interest in selling it today. But I am wondering about the value of my business, which includes real estate and buildings. If I died suddenly, would my estate owe death taxes? How can I put a price on my business, when I am not a willing seller?—FORWARD THINKER
Dear FORWARD:
For business owners, before estate planning questions and issues of succession can be addressed, an accurate valuation is needed. The higher the value of your business, the greater the tax exposure, and the more important the estate planning steps.
Business valuation is as much an art as a science. One begins with the set of fundamental factors that the IRS looks at:
That’s just the starting point. Valuation discounts also may apply to the transfer of interests in a small business. Discounts for lack of marketability and for having a minority interest, for example, have become routine. There may also be a discount for the loss of key employee services. IRS has experts in this area, so it is important for every business owner to rely on experts of his or her own. A business valuation must be completed with great care and without bias for it to be effective in tax litigation. As one planner was heard to comment, when it comes to arranging a professional appraisal of a business, “expensive will be cheap.”
Article ©2024 M.A. Co. All rights reserved. Used with permission.
The Federal Trade Commission has issued an alert for a new scam for stealing from vulnerable familes, one which the agency believes should be in the Top Ten List of the Scammers Hall of Shame. The scammer impersonates a representative of the funeral home, and says that additional funds must be paid immediately or the funeral will be cancelled. “Can you imagine anything more despicable?” the FTC said in its announcement.
Obituaries typically include information about funeral arrangements, and that’s where the thieves get their leads. The days before a funeral may be especially emotional, making it hard to respond with cool rationality to the telephone call or text demanding payment.
The FTC offers three tips, which are applicable to all internet scams.
April is Financial Literacy Month, and the FTC has published supporting information.
Article ©2024 M.A. Co. All rights reserved. Used with permission.
President Biden’s budget proposal for the 2025 fiscal years include many important tax changes. The budget provides the road map for the direction that the President wants to take in tax policy.
Lower taxes for some
Higher taxes for others
This is but a partial list of the many tax changes proposed in the budget. The fate of these proposals is unknown at this time.
Article ©2024 M.A. Co. All rights reserved. Used with permission.
The following stories are true, the information taken from court decisions and newspaper reports. They are offered as examples of the unexpected problems that may occur with family businesses.
The unsatisfied daughter
Frederic Upsher-Smith founded a pharmaceutical company in 1919. The company survived the Great Depression and the war years, but it did not prosper. In 1969 the husband of Frederic’s granddaughter purchased the firm for $1,500. At that time the company had only one employee and two skin care products. The husband, Ken Evenstad, took the company in a new direction, focusing on generic medications. The business boomed. In 1984 Evenstad bought out his only partner for $4 million.
Beginning in 1993 and for the next 20 years, Ken and Grace Evenstad made gifts of stock to their children, Mark and Serene, until each family member held 25% of the company. Mark and Serene had worked for the company as teens. Serene chose not to work for the company after she graduated from Wellesley, while Mark eventually rose through the ranks to running it when he was 31, in 2001.
Mark did such a good job managing Upsher-Smith that in 2014 his parents gave him an additional 1.5% interest in the company. This greatly upset Serene, who felt that it was only fair that she and Mark have the same ownership interest. Her father could not understand why she felt that way, given that she contributed nothing to growing the company. The family members became estranged. Serene skipped her parents’ 50th wedding anniversary.
Upsher-Smith was sold to a Japanese firm in 2017 for $1.3 billion. Serene received $283 million as her share, but she was not satisfied, believing that she had been treated as a second-class shareholder. What’s more, she argued that her father and brother had “looted” the company before the sale, reducing its value. The family offered to settle the dispute with her with an additional payment of $150 million, which Serene tentatively accepted. But when she learned that Ken planned to terminate a family trust to fund the payment, Serene took the fight to a whole new level. “I couldn’t believe the betrayal,” she said.
Although Serene had received $328 million in total from the family business over the years, she sought an additional $228 million in damages, according to court records. She wrote to her father, shortly before he died in 2020, “You could have ended this at any time if you had been willing to treat me fairly and with respect.”
Ken did not respond to that, but Mark did. “How have you been 'harmed' by mom and dad? How have you helped them in their time of need?”
After an expensive court fight, Serene was awarded $56.4 million, rough one-third of the amount she turned down.
The Biltmore estate
George W. Vanderbilt, the grandson of Cornelius Vanderbilt, acquired thousands of acres of land in North Carolina, where he built a mansion from 1889 to 1895. Named Biltmore, the 178,926 square foot building is the largest privately owned residence in the United States.
George had one child, a daughter, Cornelia, who married John Cecil. The Cecils opened the Biltmore to the public in 1930 at the request of the City of Ashville, in hopes of promoting tourism during the Great Depression. In 1932 the TBC corporation was formed to own and manage the estate.
The Cecils had two sons, George and William. They worked to make the estate profitable as a tourist attraction. After Cornelia died in 1976, the brothers disagreed on the future of TBC. George surrendered all of his shares in TBC in exchange for 3,000 acres of the estate and the dairy operation, which was more profitable at that time.
In 1995, on the 100th anniversary of the opening of the mansion, William turned management responsibilities over to his son, William Jr. According to Wikipedia, the house is assessed at $157.2 million for property taxes, but that is reduced to $79.1 million thanks to agricultural deferments. TBC has shown a profit every year since 1995, with the exception of 2008 during the Great Recession. Money is earned by selling tickets to tour the house, and from a variety of supporting operations owned by TBC.
William Jr. and his wife Mimi had two children, Bill and Dini. Bill became TBC’s president and CEO, and Dini became the Vice Chairman of the Board of Directors. Around 2001 Dini met with a consultant from the Family Business Consulting Group. After reading books on the subject, in 2003 Dini started a Family Preservation Program for TBC, which involved two annual meetings of all her and Bill’s children. During these meetings they would work on policies and educational programs for the benefit of their families, which were intended to help them become more effective owners of TBC, as well as keeping TBC in the family.
The children ranged from 8 to 15 years old at the first meeting. As they grew older, the children attended educational seminars that focused on topics such as financial literacy or family-based money management.
So far as we know, this effort to give the youngest generation a sense of responsibility for the family enterprise has succeeded. We only know about these facts because of a court case, a tax issue. In 2010, William Jr. and Mimi made taxable gifts of all their ownership in TBC. They gave the voting shares to Bill and Dini, and the nonvoting shares to the grandchildren. The couple each reported taxable gifts of over $10 million. Upon audit, the IRS disputed those values, and sought additional taxes. The details on the business management by the family came out in the Tax Court testimony.
William Jr. and Mimi both died before the resolution of the case, which came 13 years after their gifts. It was a complete victory for their estates, and a vindication of their estate planning strategy.
Put us on your team
These two stories may seem unique at first glance, but the issues presented are common to many family businesses. How does the older generation provide for fair treatment of those who participate in the business and those who profit passively from it? How will ownership be passed to the next generation? How will the taxes on those transfers be paid?
Over the years we’ve helped many business owners with their succession planning. Our counsel includes expertise in estate settlement and trust management, as well as sensitivity to a variety of family issues that attend wealth preservation and wealth management. We would be pleased to share this expertise with your family as well.
Article ©2024 M.A. Co. All rights reserved. Used with permission.
INVESTMENT PRODUCTS/SERVICES ARE:
NOT A DEPOSIT - NOT FDIC INSURED - NOT INSURED BY ANY FEDERAL GOVERNMENT AGENCY
NOT GUARANTEED BY THE BANK - MAY LOSE VALUE
