Estate Planning and The Recapitalization Of A Closely Held Business

by Bruce Givner on January 11, 2012

Owners of a closely held business come to us all the time and tell us that their goal is to reduce estate taxes or income taxes.  However, we know that the truth is that their most important goal is always the same: to maintain dictatorial control of everything until the day that they die. To help them achieve both their most important goal (dictatorial control) and their alleged goal of estate tax planning, a recapitalization of the closely held business is an important tool.

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Mom and Dad own 100% of the stock of M&D Business, Inc., a California “S” corporation.  As is almost always the case, there is only one type of stock, and Mom and Dad have been told that an “S” corporation can have only one class of stock.  Internal Revenue Code §1361(c)(4), entitled “Differences in common stock voting rights disregarded,” tells us that “a corporation shall not be treated as having more than 1 class of stock solely because there are differences in voting rights among the shares of common stock.  So, we “recapitalize” the corporation, which means Mom and Dad exchange their existing certificate – which shows them as owning 100 shares of stock – the only issued and authorized shares – for two certificates.  Certificate 1 is Green and is for 100 shares of voting common stock, and the other Certificate 1 is Red and is for 900 shares of non-voting common stock. That provides the setup for Mom and Dad to engage in sophisticated estate tax planning using the 900 non-voting shares, while retaining dictatorial control of the corporation.

For help with your closely held business and other important estate tax planning matters, call us. (310) 207-8008

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