Nashua, NH: Concerns About Estate Taxes and Business Succession Plan

Nashua Small Business Owner has Concerns About How Estate Taxes Will Affect His Business Succession Plan.

Estate taxes and proper estate planning are an important consideration for all New Hampshire closely held business owners. A successful small business recently asked how the IRS will establish “fair market value” for their closely held business that is governed by a buy-sell agreement.

When considering the Business Succession Planning interests, the IRS and the courts take into account discounts such as marketability discounts, minority discounts and built-in gains discounts. These discounts are a so-called reduction from the otherwise fair market value of the business interest being valued. These discounts are discussed below:

  • Marketability discounts reflect the fact that there is not a ready market for the business interest and it is therefore not easily sold or that there are restrictions on the ability to transfer the business interest.
  • Minority discounts reflect the fact that a purchaser will pay more for a controlling interest (generally, more than 50 percent of voting power) and the purchaser will pay less for a noncontrolling interest (generally, less than 50 percent of voting power).
  • Built-in gains discounts consider the tax liability associated with the asset being transferred.

Generally, valuation discounts are determined by a qualified business appraiser. It is critical to work with a qualified appraiser before the gift or estate tax return is filed. A qualified appraiser will not have a financial interest in the outcome and will have had substantial experience in appraising similar companies and in testifying in court (if necessary). The appraisal report should include:

  • An opinion of value;
  • All the facts upon which the value judgment is based; and
  • A thorough explanation of the reasons for the use of one method of measuring fair market value rather than another. The accounting firm that services the business might be disqualified from giving the appraisal because the accounting firm has an ongoing relationship with the business and therefore may be deemed less than independent. It is the better practice for the accounting firm to prepare relevant information for the appraisal but to have the appraisal performed by an independent third party.

If you have questions about buy-sell agreements, estate planning and business succession planning you can contact Attorney John S. Polgrean of the Trust and Estates department of Welts, White & Fontaine, P.C. at (603) 883-0797.

Author: Attorney John S. Polgrean

This blog is intended for informational use only. The information contained herein should not be construed as offering legal advice or a legal opinion. At Welts, White & Fontaine, P.C. our lawyers have experience with representing families and closely held businesses. We have balanced business plans with family and estate plans and we can help you develop strategies for a successful family owned business.