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April 2023
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Article:
Practical Applications of Business Valuations for Estate
Planning Purposes
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Most business owners pay close
attention to the taxes that are assessed on gross revenue, taxable
income, and payroll. A more significant tax is lurking as the
profitability and stability of the closely-held business is
established. Over time this tax liability may become so significant as
to alter the ability of the business owner to transfer the business to
the "next generation." This tax is the estate tax. And,
unlike most other taxes that are assessed on the economic results of
operations, the estate tax is based on the value of the company as a
whole.
Estate taxes are due in a relatively
short period of time. Most small businesses are "for sale"
for more than a year. Yet, estate taxes are due in a matter of months
from the date of death of the business owner. To the extent the
business is the most significant, or only, asset in the estate,
liquidating that asset to pay the taxes can cause a huge economic loss
through a "fire sale" of an asset that otherwise would sell
for much more.
Unintended Consequences
Another significant issue in estate
planning is the attempt by most to "equalize" the estate
among children. Consider this example: An estate consists of a
business, a personal residence, marketable securities and cash. There
are three children and the estate documents state that one sibling is
to get the business, another the home, and the rest of the estate to
the third sibling with a cash payment made to equalize the estate
value. It sounds simple - the estate is split equally among the three
children. This is a very common scenario. It may make a lot of sense
when the planning documents are established.
However, the practical result is
often quite complex and problematic. One possibility is that the cash
and marketable securities are depleted by professional fees and taxes.
That leaves two siblings with valuable but illiquid assets. Another
possibility is that the sibling with the business has the asset that is
substantially more valuable than any of the other assets but is the
least marketable. Since there is insufficient cash in the estate and/or
the business, the only practical solution is to split up the ownership
of the business to equalize the estate. This raises considerations of
management control and profit allocation among the siblings. Valuing
the partial interests becomes a difficult and cumbersome process.
Five Key Steps
The above illustrates some of the
complexities involved in owning a small business at the time of death.
The challenge is not just estate taxes but also succession of ownership
in such a way that the business is not disrupted. The following are
five key steps to consider when preparing a comprehensive estate plan
involving a closely-held business.
READ
FULL ARTICLE
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Service Profile:
Forensic Accounting Services for Embezzlement and Fraud
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Increasingly, businesses are being
victimized by embezzlement and fraud, which are serious and costly
crimes. Arxis
Financial's forensic and fraud accountants assist in
determining the extent of monetary loss or damages and who committed
the fraud.
A detailed fraud examination can
uncover a dizzying maze of transactions, documents and stonewalling.
Forensic experts use a variety of techniques to detect fraud and trace
misappropriated cash. By scouring the company's financial ledgers and
supporting documents, a Certified Fraud Examiner can help unravel the
web of fraudulent transactions. For example, the investigator may
review or reconcile the company's bank accounts, identify payees, track
electronic transfers and payments through the company's general ledger,
and scrutinize documents supporting check disbursement, such as vendor
invoices and expense authorizations.
Our forensic and fraud accountants
serve a critical role in both plaintiff and defense matters. We have
extensive experience in determining the necessary documentation,
discovery approaches, and management of these documents. We then
evaluate, analyze, summarize, and present the evidence. In conjunction
with Arxis
Financial's experts, the attorney can assess whether
fraud occurred, the legal and financial viability of the case, and the
best litigation strategy.
If you have any questions about Forensic
Accounting Services for Embezzlement and Fraud, please
feel free to contact
us.
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Speeches:
Upcoming Speaking Engagements for Chris Hamilton
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Chris Hamilton's upcoming presentations include:
- "Valuation
Fundamentals, Techniques, and Theory" — 3 days, Salt Lake City (May)
- "Ethics,
Morality, and the Law" — Ronald Reagan Library (June)
If you are interested in asking Mr.
Hamilton to speak at your organization's upcoming meeting, please feel
free to contact him.
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