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:
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.