Washington Estate Planning Law Blog : Washington Estate Planning Lawyer & Attorney : John Hugg Law Firm : WA Elder Law, Wills, Trusts : Seattle, Woodinville, Bellevue

In its article Amid Debate, Business Owners Struggle with Estate-Tax Strategies, the Wall Street Journal reported that the federal estate tax is a significant concern for family business owners even though few actually wind up paying the tax. Family Businesses in Washington State should be even more concerned because the estate tax exemption in here is $2 million and not $3.5 million as with the federal estate tax exemption. However, one reason so few family business owners pay estate tax is most likely due to the use of various estate planning techniques. These techniques can include annual gifts, trusts, intra-family transactions, life insurance and even a properly drafted Will. But early planning is essential. The estate planning process can draw out for years given the many complexities facing a family business. These complexities include, among many others: selecting and grooming a successor, family dynamics and squabbles, excess cash flow to fund life insurance policies, the desire to have children earn the business rather than simply inherit it by birthright and many more. Since it’s almost certain the estate tax isn’t going away, neither will these issues for family businesses.

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Or so I seem to hear every time I discuss the need to hire an expert to value business and real estate interests. It’s frequently been my experience that few things bring implementation of a succession plan to a halt faster than having to pay a valuation expert. After all, those guys don’t know anything . . . right? However, in case after case, a detailed, substantiated valuation, bests the IRS almost every time there’s a dispute over asset valuation or the application of minority, lack of control or other discounts. The case of Litchfield v. Commissioner, T.C. Memo 2009-21 which came down earlier this year is no exception.

In Litchfield, the estate owned interests in a real estate company and a securities company. A portion of the interests were owned by Ms. Litchfield outright and a portion of the interests were owned through a QTIP trust. The combined interests added up to a minority stake in each company, permitting the application of a valuation discount. In upholding most of the discounted valuation, the tax court found that the estate’s valuation expert used more precise methods for determining value and had a more thorough knowledge of the companies’ business strategies. This depth of understanding was found to be more convincing than the less rigorous valuation methods used by the IRS. So remember the real benefit of a valuation expert—done properly, your transactions and discounts are more likely to be honored in the face of an IRS challenge.
 

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When a business has been in the family for more than one generation the number of family member shareholders can grow significantly. The minor children in the newest generation probably have little or no comprehension of business in general, let alone the family business. It can, however, pay dividends to educate the newest generation as early as possible about what the business does, how is works and who’s involved. Learning about these and other aspects of the business can help a child decide if he or she wants to be involved with the business and to understand the impact the business may have on the family and the child in particular. A recent Family Business Magazine article outlined a fun way for kids to learn about the family business. At the annual retreat the family would separate the kids into teams and have various competitions—disassembling and reassembling certain company products, thinking up new products, trivia games and scavenger hunts. Everything revolved around the business, its products, its customers, the family and the family history. This type of “education” can be fun and informative and is likely more effective than trying to have an eight year-old sit through your own version of Business and Economics 101. For more information about family business go to:

www.familybusinessmagazine.com/index.html

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