Estate Tax Planning Attorney in Chatsworth

Estate Tax Planning Attorney in Chatsworth

The general framework is on estate tax planning in California. What makes Chatsworth different from the residential neighborhoods around it is that a business can be worth a great deal more than its owner expects.

A house is worth what comparable houses sell for. A company is valued on its earnings, and a manufacturer or distributor with steady profit can carry a valuation multiple that surprises the family completely. That is the mechanism by which a Chatsworth estate reaches the federal exemption without anyone feeling wealthy.

Discounts are the lever, and they depend on your paperwork

Where the estate holds an interest in a company rather than the company outright, the taxable value is the value of that interest. A minority interest carries no control. An interest nobody can readily sell has no ready market. Both support a discount, and together they can reduce the reported value substantially.

These are legitimate and long established. They are also scrutinized, and they depend on the operating agreement genuinely restricting control and transfer in the way the appraisal assumes. An agreement that is loosely drafted, or one everybody ignores in practice, undercuts the position badly.

So the estate tax work here is usually not a new structure. It is making the existing entity documents consistent with the valuation position, and getting an appraisal from someone who does business valuation for tax purposes.

Liquidity, which is worse for a business than for land

If federal estate tax is due, it is due nine months after death and payable in cash. An estate holding a manufacturing company has value and no money, and unlike land a business cannot be partially sold without damaging what remains.

There are provisions allowing estate tax attributable to a closely held business to be paid in installments where the business makes up enough of the estate. Whether they apply depends on the numbers and the structure, and it is worth knowing the answer in advance rather than discovering it against a deadline. Insurance is the more common answer and it is cheaper than most owners expect.

Moving growth out before it happens

For a business expected to keep growing, the most effective planning transfers minority interests early, at a discounted value, so future appreciation accrues outside the estate. That is more effective than trying to reduce a value that has already accumulated.

It is also only worth doing where there is a real exposure. If the company is not near that scale, the money is better spent making sure the succession plan works.

Questions Chatsworth clients ask

Could our business really be worth that much? Possibly, and this is the surprise. A company is valued on earnings rather than on comparable sales, so a steadily profitable manufacturer or distributor can carry a multiple the family has never thought about.

What are valuation discounts? The taxable asset is the interest in the company, not a share of its assets. A minority interest lacks control and is hard to sell, both of which support a discount. They depend on the operating agreement genuinely restricting control and transfer, and on a defensible appraisal.

How would the tax get paid? That is the hard part, because federal estate tax is due nine months after death and payable in cash, and a business cannot be partly sold without damage. There are installment provisions for closely held businesses that may apply depending on the numbers, and insurance is the more common answer.

Should I give shares to my children now? If there is a genuine exposure, transferring minority interests early at a discounted value moves future growth outside the estate, which is more effective than reducing accumulated value. If there is no exposure, spend the money on the succession plan instead.

What is portability? It lets a surviving spouse use the deceased spouse’s unused federal exemption, but only if a federal estate tax return is filed at the first death to elect it, even when nothing is owed.

Talk to Eric or call 805-244-5291. I serve Chatsworth and the surrounding San Fernando Valley communities.

For the general framework, see estate tax planning in California and high-net-worth estate planning. For what happens to the company, see business succession in Chatsworth.