CLEVER ESTATE PLANNING FOR THE CLOSELY-HELD BUSINESS: RECAPITALIZATION AND FREEZE IN VALUE CAN SAVE SIGNIFICANT ESTATE TAXES
Even in bad market times, closely-held businesses continue to see growth. That growth is a double-edged sword. On the one hand, the partnership or stock ownership becomes more valuable – but, at the same time – the more valuable the stock at the time of the owner’s death, the greater the tax burden on the owner’s estate. To avoid this problem, consider recapitalizing—specifically, converting some of your corporation’s common stock into preferred stock. Recapitalization is the restructuring of the company’s capital structure. Capital that takes the form of preferred stock can have an attributable value essentially equal to the present value of future dividend payments to the preferred stockholder while the growth is steered to the common shares. This way, the business can continue to grow and see that growth segregated into its common stock value—while the preferred stock value remains essentially unchanged. This reduces the likelihood that the preferred stock, when it becomes part of your estate, will create an unsuspecting tax bill for your beneficiaries. Preferred stock valuation is a complex process. A company seeking to issue preferred stock should consult with Weiss LLP on the specific tax implications and with your accountant to analyze the company’s finances and conduct a credit and risk analysis. Factors to consider when deciding to issue preferred stock include the nature of and ability of the company to make dividend payments, whether preferred stockholders take preference in liquidation, the corporation’s credit, interest rates, and dividend yields. A properly-structured preferred stock recapitalization can account for all of these and other factors. Thoughtful planning reduces surprises! Call Weiss LLP for more information.