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GROUNDBREAKING NEWSPassing the TorchA Grim Economy is Good for Estate PlanningExample — Annual Gift Giving12 Utility Contractor | July 2009Business-savy owners interested inresolving ownership transfer and estatetaxation issues can take advantage of thecurrent depressed environment throughgifting. 2009 may be the best year yetfor estate planning even though the yearis shaping up to be one of the worst indecades for the construction industry.When values are depressed, estate transferscan accomplish more. If you are anowner of a company intending to continueas a family business, part of that estateplan should include gifting companystock to family members.In their article, “2009’s Grim Economy— A Time for Giving?” from the FMIQuarterly: 2009, Issue 2, Curt Young,Hobson Hogan and Tony Perrone discusshow an owner who is interested inresolving ownership transfer and estatetaxation issues can take advantage ofthe depressed economic environmentby engaging in estate planning and bygifting assets.Assumptions• Husband and wife donate $156,000 combined in annual gifts.• Assume husband and wife both own company stock.• Assume each gives stock to two children and four grandchildren,or 12 gifts total.• Under these assumptions, a maximum of $156k couldbe gifted without tax. (Husband and wife make 12 gifts at$13,000 each.)• Company generates $5M of sustainable pretax earnings.• Pretax earnings multiple has dropped from five- to threetimes.• In a “normal” investment and value environment, the companywould be valued at five times pretax earnings. In today’smarket, however, the company could be valued atthree times pretax earnings due to depressed economicconditions and more uncertainty about the future, meaninghigher risk and greater return demanded or lower prices(lower multiples) paid by investors.• Minority discount of 30 percent• A minority ownership position in a privately-owned companyis generally worth 25 to 35 percent less than a controllingposition, as a minority shareholder has little, if any,ability to dictate the key operational and financial decisionsof the company.“The current market environment, inconjunction with the accepted methodologyof valuing ownership interests ina privately owned business, makes itan opportune time to transfer companystock,” said Curt Young.To learn more about how FMI can helpowners through these challenging timesor to schedule an interview with CurtYoung, Hobson Hogan or Tony Perrone,contact Kathryn Robinson at krobinson@fminet.com or (919) 785-9211.• Husband and wife are majority (controlling) shareholders and theirshare of the company (estate) is worth more than $3.5 million.• Estate tax bracket in 2009 of 45 percent.Under the aforementioned assumptions, the total stockholders’equity in the hypothetical company would be worth $25 millionin a “normal” market (i.e., the company has the ability to generate$5 million of sustainable pretax earnings, and under “normal”conditions, the market would value the company at five times thisamount, or $25 million).To determine the ownership that could be transferred via a $156,000gift, which represents a minority ownership stake in the company, thevalue of the company ($25 million) was discounted by 30 percent($17.5 million). Thus, the $156,000 gift transferred 0.9 percent of ownership(0.9 percent = $156k/$17.5M). If these shares had not beengifted, their pro rata controlling interest value, as still held by the husbandand wife’s estate in 2009, would be worth $222,857 (0.9 percentx $25M) with the incremental estate tax of 45 percent on that value, or$100,286, assuming the total estate was worth more than the 2009 $3.5million exemption value. Moving stock from value based on “controllinginterest” to value based on a minority ownership stake will savetax dollars regardless of the economic vagaries of the marketplace.With depressed economic value, concurrent transference of stockfrom control to minority will amplify the potential tax savings.