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The 49% Myth

by Brian Bornino

I recently heard in a seminar that a business owner could maintain control of his family business, yet accomplish effective estate planning, by gifting 49% of his ownership in the family business to his children.  This would allow the business owner to maintain control of the business (i.e., 51% controlling ownership position), yet take advantage of valuation discounts (e.g., discounts for lack of control and marketability) when transferring ownership to the next generation.

While I agree that the statements above are true, the business owner can achieve even better results with a voting/non-voting recapitalization prior to making the gifts.  For example, let’s assume that a business has 100 shares outstanding.  By effecting a 9,900-for-one stock split whereby 9,900 shares of non-voting stock are issued for each voting share, the company would then have 10,000 shares outstanding (i.e., 100 voting and 9,900 non-voting).  Then, the business owner could gift away all non-voting shares (i.e., 99% of the company’s value) and still:

  • Take advantage of valuation discounts on the transfer;
  • Maintain voting control of the company despite owning just 1% of the business; and
  • Reduce the value of the business in their estate to just 1% of the value of the company (while still maintaining control of the business).

While this is fairly common and basic estate planning, I thought I’d mention it since some people may still believe the myth that a business owner can only gift 49% of their ownership and still maintain control of their family business.

 

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