Financial Intel Monthly

Retained Interest (Including Different Class)

Jul 21, 2011 8:48:29 AM / by The Retirement Group (800) 900-5867

Retained Interest (Including Different Class)


What is a retained interest?
Retained interest involves recapitalizing a privately held company

One way to transfer your business is to recapitalize (in a tax-free reorganization) the existing common stock of the company into two classes of stock--voting and nonvoting stock. Once the two classes of stock have been created, you (the business owner) retain the voting class of stock and then gift the nonvoting stock to your children or other beneficiaries.

Gifts of stock may qualify for the annual exclusion from the federal gift tax. You may also be able to discount the value of the gifts.
Why use a retained interest?
Retained interest allows you to maintain control over the company while transferring equity to beneficiaries

Recapitalizing your privately held company into two classes of stock--voting shares and nonvoting shares--allows you to retain the voting shares (and thus continue to control the company) while transferring the nonvoting shares (and thus the equity) to your beneficiaries. Thus, recapitalizing the stock may be a very good strategy if you would like to continue to control your company but start to gift some of the equity to your beneficiaries.
Value of stock transferred to beneficiaries may be discounted

Another advantage of recapitalizing the stock in your company is that you can discount the value of the nonvoting stock transferred to your beneficiaries. In most cases, the value of the stock can be discounted because there will not be any ready market in which your beneficiaries could sell the stock (this is known as a lack of marketability discount). The stock can also be discounted because your beneficiaries will have only a minority interest in the company. This is because people will usually not want to buy stock in a closely held company if the shares represent a minority interest. In addition, the stock will be nonvoting (unless required by law--consult the corporation law of the state of incorporation). Typically, the discounts may range from 20 to 40 percent of the underlying fair market value of the shares. Your estate planning attorney and your accountant should determine the appropriate discount.

Example(s): You recapitalize the existing 100 shares of stock in your privately held company. You retain the voting shares and begin to gift the common shares to your three children. Each share of common stock that you gift has an underlying value of $1,000. However, because of the lack of marketability and minority discount, the value of the shares (for federal gift tax purposes) can be discounted by one-third. Thus, you could gift $15,000 worth of stock but value the gift for gift tax purposes at only $10,000.
Gift of nonvoting stock may qualify for annual gift tax exclusion

The gift of the nonvoting stock may qualify for the annual gift tax exclusion (which is currently $13,000 per donee) from federal gift taxes. A married couple could gift up to double that amount ($26,000) if they make the gifts jointly. Further, gift tax imposed on gifts in excess of the annual gift tax exclusion may be offset by your applicable exclusion amount ($5 million in 2011) if it is available. Along with the discount discussed previously, you could gift a substantial portion of the equity in your company and not pay any federal gift taxes on the transfers (although you may still owe state gift tax). Consult an attorney or a tax advisor to determine the qualification for annual exclusion.
Not included in your estate

The common stock you gift to your beneficiaries will not be included in your estate for estate tax purposes. However, you may have to pay gift taxes at the time of the initial transfer.

This material was prepared by Broadridge Investor Communication Solutions, Inc., and does not necessarily represent the views of The Retirement Group or FSC Financial Corp. This information should not be construed as investment advice. Neither the named Representatives nor Broker/Dealer gives tax or legal advice. All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. The publisher is not engaged in rendering legal, accounting or other professional services. If other expert assistance is needed, the reader is advised to engage the services of a competent professional. Please consult your Financial Advisor for further information or call 800-900-5867.

The Retirement Group is not affiliated with nor endorsed by,,,,, ING Retirement, AT&T, Qwest, Chevron, Hughes, Northrop Grumman, Raytheon, ExxonMobil, Glaxosmithkline, Merck, Pfizer, Verizon, Bank of America, Alcatel-Lucent or by your employer. We are an independent financial advisory group that specializes in transition planning and lump sum distribution. Please call our office at 800-900-5867 if you have additional questions or need help in the retirement planning process.

The Retirement Group is a Registered Investment Advisor not affiliated with  FSC Securities and may be reached at

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