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McCurrie McCurrie
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Tax laws benefit family business owners in New Jersey, part two

In the last post, we looked at some of the new changes in the tax laws and the impact they will have on family business owners. Because the gift-tax exemption was raised to $5 million for individuals and $10 million for couples, many people can benefit from using estate planning to begin transitioning their business to the future owners.

The concern raised by many individuals is how to transition the wealth of the business without surrendering leadership power. To effectively begin the process, individuals must consider who they eventually want to lead the business, how they will treat other beneficiaries and how to transition the wealth of the business without putting their own retirement stability at stake.

One man said that over the next two years, he will gradually give his sons nonvoting shares. By slowly transferring the shares to his sons, he can give them the financial gift he wants to, but when the time for succession comes, his sons will not be forced to acquire company debt or sell the business for less than it is worth because of estate-tax they could acquire. This move helps transfer ownership to the sons, but it does not take power away from the father, who is the CEO of the business and does not plan on retiring for almost 10 years.

Although these types of arrangements are financially very effective, they require complex and meticulous planning. An article in The Wall Street Journal says that they typically involve "the sale of shares in a privately held company at a discount, and a loan - plus a gift - from the business or its owners to finance the purchase." The beneficiary then gets to keep the excess value of the shares, as well as any appreciation, without any estate-tax penalties.

Regardless of what techniques are used to transfer wealth, it is important to make sure you do so with the big picture in mind. Before you begin transferring assets to your children, it is important to also consider how you plan to handle the timing and size of gifts to other beneficiaries.

Source: The Wall Street Journal, "Family Businesses Catch a Big Break," Anne Tergesen 19 February 2011

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