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Shopping for Discounts

Posted in: Business Succession
November 30th, 2016

By Bill Sornstein

discount-signsThis is the time of year that shoppers look for big holiday discounts.  It always feels good to get 25-50% off.

You can also obtain deep discounts as a family business owner.  Estate and gifts taxes can create significant transfer taxes when you pass your business to the family.  There are tax saving opportunities available if you plan ahead.  The two primary discounts are for lack of marketability and lack of control.

All closely held businesses are inherently illiquid.  Unlike public companies that are listed on stock exchanges, it is difficult and time consuming to sell a small business.  Because of this lack of marketability, the IRS allows small businesses to take a discount when making lifetime transfers.

The other discount is for minority ownership (less than 50%).  If it is difficult to sell a small business due to lack of marketability, it is even more difficult to sell a non-controlling share of a small business.

Both of these discounts are only available for you and your family business when you do lifetime transfer planning.  Together, these discounts can reduce the value of transfers by 13% to 45% (1).  There are techniques that your estate and/or business planning attorney can use to take maximum advantage of this discount opportunity.

The actual value of your business, both with and without discounts, is typically determined by a formal valuation.  A qualified business valuation professional will properly document the rationale behind the valuation and will stand behind it in the event of an IRS challenge.

Discount planning is lifetime planning.  Your family will pay the full price (in terms of transfer taxes) if the transfer is done at death.

This type of discount planning is currently available, but there are several proposals that may change this.  The IRS has proposed regulations to Section 2704 that could significantly impact the discount planning available to family businesses.  On the other hand, there are proposals in Congress to eliminate transfer taxes entirely.  This makes it more important than ever to seek advice from qualified legal and tax professionals.

  1. “Discount for Lack of Marketability, Job Aid for IRS Valuation Professionals”, September 25, 2009

About the Author

Bill Sornstein has over 35 years of experience as a financial advisor helping individuals and small businesses build and protect wealth for the benefit of their families, businesses, heirs and employees.  He lives in Santa Ana, CA with his wife Camillia and their dogs, Zack and Ella. His other interests include teaching Aikido and playing trumpet in a blues band. Link to full bio.

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