Franchisees considering generational transfers

need to plan for heightened regulations.

By Keith Plywaczynski

For every business owner, a personal exit strategy is as important as the operational and strategic decisions that running a business requires. Planning for the future and monetizing your life’s work is a vital step in the franchise lifecycle. If your personal exit strategy is creating a family legacy through generational transferring, be wary of heightened regulations.

In August, the IRS proposed laws under section 204 of the Internal Revenue Code that will make significant changes to the valuation interest in family controlled entities for estate, gift and generation-skipping transfer tax purposes. The proposed regulations affect transferors of interests and are necessary to prevent the undervaluation of such transferred interests. If made final, these rules will greatly reduce or completely eliminate valuation discounts for transferring closely held business interests to family members. 

The proposed law has franchisees asking: “Should I accelerate my transfer strategy?” If you are considering transferring your business to your family, doing so by the end of 2016 may be the most prudent course of action. Here are three considerations for business owners seeking to transfer their business intra-family, in light of the proposed law.

1) Planning the exit strategy

The transfer of your business is dependent on many factors that need to be carefully considered. Trusted wealth managers, attorneys, accountants, and friends and family should be consulted for not only the financial, but the emotional variables inherent in transferring your business.

There are many techniques depending on your objectives. You can outright gift your entire business. Alternatively, you can gift a significant percentage of your equity while maintaining control of the company, or gift in combination with a partial sale. This allows you to retain some value of your business, if the business needs to create a liquidity event for you to meet your retirement objectives.

2) Changes in effect to valuation discounts

Every person has a $5.45 million exemption to pass assets to people who are not their spouses or charities. This exemption is either used at your passing or more proactively with gifting before death. The benefit of gifting your business earlier, if you are financially able, is the subsequent growth of the business and income that may grow on your children’s balance sheet (potentially in a trust). This would effectively mitigate potential future estate tax liability. 

A popular reason for passing your business through gifts to your children is the use of valuation discounts. In practice, if you are transferring a percentage of your business but your children do not have majority voting control or the ability to sell the business in an open market (due to lack of marketability), the value you transferred is at a discounted price. If you gift an asset that cannot be sold or controlled by the receiver of the gift, its value is not equivalent to having an asset that can be controlled or sold by the receiver. This value difference is known as a valuation discount and is precisely what the IRS is proposing to change. If you have transactions in mind, leverage this lead time to make transfers with valuation discounts.

3) Increased tax burden

 If the proposed IRS changes go into effect, then every transfer of stock will use more of your $5.45 million exemption because the transfer is not based on a value after valuation discounts. If you have an estate valuation that will cause estate tax to be paid at your passing, consider meeting with your advisors to discuss next steps before year’s end and potential tax law changes.

While the proposed regulations could come into play as early as 2017, a considerable stir within the industry could raise disputes, ultimately prolonging the finalization of the law. Pump the breaks if you are not ready for a transfer due to emotional or financial considerations. Nevertheless, franchisees should be aware of the changes and consider their course of action.

Keith Plywaczynski is managing partner and a senior wealth advisor at Mariner Wealth Advisors. He works primarily with high-net-worth individuals and specializes in helping corporate executives and business owners navigate the various complexities that impact their families and long-term financial goals. For information on Mariner, please visit


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