Transferring Wealth as Part of a Well-Thought-Out Plan

Nov 11, 2022

The Window of Opportunity is Closing

Many trusted advisors, including wealth managers, financial planners, accountants, and estate attorneys, refer their clients to Merrimack Business Appraisers to prepare a business valuation as part of a broader plan to transfer wealth and manage tax liabilities. We continue to see increased activity in transferring shares through gifting and selling shares of a business.

As a business owner, you may be considering transferring shares by gift or sale in advance of year-end or as part of a longer-term strategy to take advantage of the generous federal estate exclusions scheduled to sunset at the end of 2025. Transferring wealth can take many forms including gifting shares to family, employees, or an outside party. Your trusted advisors can assist you in determining if you are transferring 100% or fractional amounts, the length of time (e.g., 20% over 5 years) to implement your strategy as well as if a trust will be the vehicle used with beneficiaries defined.

The Benefits of a Qualified Business Appraisal

Transferring shares of your business is an integral part of estate planning and strategic planning including succession planning. Your goals may be implementing your succession plan or implementing your estate plan. Whatever the motivation, it is important to understand the benefits of having a qualified appraisal prepared by a qualified appraiser. That is the criteria the IRS uses to substantiate the value of the shares.

When gifting shares of your business, you should have a business valuation prepared to determine the value of the business and the associated shares. Whether you are gifting shares to a long-time valued employee or a family member, the IRS may take interest in evaluating if the valuation was too low. Think of the business valuation as the supporting documentation for filing a gift tax return. You are required to file a gift tax return when transferring ownership interests in a business, and there are benefits to including a qualified appraisal by a qualified appraiser. Simply (we are talking about the IRS so it is a bit complicated), if you file a gift tax return with a qualified appraisal, the statute of limitations is shorter and the burden of proof of the valuation of the gift shifts from the taxpayer to the IRS. If you file a gift tax return without the supporting documentation of a qualified business valuation, the statute of limitations is longer and the IRS can challenge the valuation of the transfer of wealth and the burden of proof is on you, in this case the business owner who transferred the wealth. The risk is real.

With declines in the markets and many indicators of our economy entering a recession, now can be a wise time to transfer wealth based on lower business valuations.

If you are speaking to your advisors about transferring wealth via gifting or selling, contact Merrimack Business Appraisers so you have a qualified business appraisal developed by a qualified business appraiser.

Contact us.