By Fredrick P. Niemann, Esq. a New Jersey Passing on a Business Lawyer
Once the fair market value of your business has been determined, there are two discounting methods that may be applicable to reduce taxes if you decide to transfer ownership. These discounts help lower business valuation at the time of the transfer and as a result reduce your taxes in the process.
For example, if you’re a shareholder in a closely held, non-publicly traded company in New Jersey, the “lack of marketability discount” can be applied. In this situation, a buyer or successor in interest could not be expected to pay the full fair market value of you shares due to the lack of a readily accessible market for a future sale of those shares.
By creating a “minority shareholder” in the transfer, you may be able to take advantage of what is known as “minority discount.” With less than 50% ownership of the company, the lack of majority control lowers the value of your shares to your heirs or an outside buyer, again reducing the asset value that is subject to federal and NJ income taxes.
Transfer of Business Ownership through estate planning:
If your business is highly appreciated, you may be better off passing it on to your children through your estate. Of course, this approach can make your assets the target of some hefty federal and NJ estate taxes, which can be as high as 45%, depending upon your situation. Again, these taxes are based on the fair market value of your company at the time of transfer.
Valuation discounting, as described above, can help in minimizing estate taxes, if they apply to your particular situation. Another advantageous approach is through the creation of an irrevocable life insurance trust. When properly structured, the death benefit of this trust can remain outside of your estate and can be used to pay required estate taxes. The value of this death benefit should be based on the value of your company and the estimated portion of other assets which will be subject to estate tax. Without this protection, estate tax obligations could force your heirs to sell a portion or all of the business.
Contact me personally today to discuss your New Jersey business succession planning. I am easy to talk to, very approachable and can offer you practical, legal ways to handle your concerns. You can reach me toll free at (855) 376-5291 or e-mail me at firstname.lastname@example.org.