When Hutzler Brothers Company closed its doors in 1990 it held the record for the longest downtown location for a department store in merchandising history. And the Baltimore-based firm had distinguished itself in many other ways. Shortly after the Civil War the Hurtzler Brothers implemented the first store-wide one-price policy on all items so customers could no longer haggle over the cost of a good. They were also the first to offer a liberal return policy and the first store in Maryland with its own delivery trucks. The store is also credited as the first not to discriminate against African-American patrons.
But Hutzler’s most commercially impactful innovation was the discount basement. And the concept quickly became a staple in every department store. These glorious subterranean floors filled with ridiculously low-priced goods, deemed unmarketable to all but the specifically inclined, were the first stop on the tour for many shoppers. But with the demise of Hurtzlers and others, these haunts became things of the past replaced by “bargain bins” and their inventory of limited appeal that often seemed to serve little purpose except to block the aisle.
Our industry is about to lose a discount basement of its own. Currently the Internal Revenue Code allows family business owners to stretch their lifetime estate and gift tax exemption if they start transferring the business to the kids now rather than at death.
A simple example: Mom and Dad own 100% of a business worth $20,000,000. They want to go ahead and transfer 50% right now to the kids to get the income from and the future appreciation of that portion out of their estate. They have between them two lifetime exemptions worth $10,900,000 (in 2016). A pro-rata allocation of the company’s fair-market-value to the transferred interest exhausts most of their exemptions ($10,000,000). However, if they restructure the company so that the 50% interest transferred is a non-voting share then they 1) continue to have full control, but more important 2) get a valuation discount because of the interest’s limited marketability and lack of say-so in the day-to-day operation caused by the non-voting status of the gift.
It’s not unusual for legal and tax planners to advise a devaluation of a non-voting interest by as much as much 40%. If so, then protecting the transfer from gift taxation only requires $6,000,000 of the parents’ exemptions.
The problem is that proposed Code section changes and regulations would put an end to this planning tool – and all the smart money says it will happen by early 2017.
It is a going-out-of-business sale for this planning concept and you should be alerting every family business-owning client, especially those with estate tax concerns, that there is a short window of opportunity to effectively transfer those business interests at a discount to the next generation. Call to discuss cases you may have and ask for content you use in a letter or email that will effectively get the word out.
Some would argue that discount basements didn’t disappear, rather they expanded and turned into discount stores. To no one’s surprise the largest discount chain is Wal-Mart with over 11,000 stores in 27 countries. In its prime Hurtzler’s had 10, all in Maryland.