43. Recapitalization

One may give careful consideration to a recapitalization of your corporation from 100% common stock to a combination of common and preferred stock. This planning device may freeze the estate tax value and facilitate
the administration of the estate of your corporation.

A recapitalization may be accomplished as a tax free exchange of common stock for common and preferred, or preferred stock may be issued as a tax free stock dividend to the common stockholders. One would issue
preferred stock with total par value equal to the current net worth of the corporation in exchange for most of the common stock the preferred stock would be voting stock and the common stock could be voting or nonvoting.

After the recapitalization, the common stock could give the intended heirs the ownership and control of the business while removing any growth of the corporation from the deceased's estate. There would be no loss of
control if one retains the voting preferred, nor would there be any gift tax on the "valueless" common stock.

The future growth in the value of the corporation can be placed outside of the estate at little or no gift tax or loss of value. The corporation could also acquire insurance on the life of the preferred shareholder with the intention of making a 303 stock redemption to pay the estate taxes and administrative expenses.

Tax reference verification 1-800-829-1040

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