Let´s do the math on Murray Gerber´s company, Prototype & Plastic Mold Co. Inc., reported in your Feb. 5 article concerning the estate tax ("Estate tax debate picking up on the Hill," Page 4). "I was tremendously concerned about estate taxes," he said. "In truth, it was one of the reasons I decided to sell my business."
You reported that the company had sales of about $8 million, in an industry with 3-5 percent profit margins. So let´s say the company would have reported earnings of about $400,000 in 1999. Public plastics companies are trading at five or six times earnings, so the overall equity of Mr. Gerber´s company might have been worth about $2 million, if it was public.
Of course the company was not public, so deducting a discount for lack of liquidity (or marketability) of 30-40 percent would result in an aggregate fair market value for the equity of the company of about $1.3 million. This is a simplified analysis but probably not too far off.
Mr. Gerber, and all taxpayers, had a lifetime exclusion from estate and gift taxes of $650,000 in 1999 (this will rise to $1 million per taxpayer in 2006 under current law). If Mr. Gerber had a spouse, Mr. and Mrs. Gerber could have combined $650,000 gifts to their son James and transferred virtually all of the equity of Prototype & Plastic Mold to their son tax free in one year. Without a spouse he could have transferred about one-half of the equity tax free in 1999. The remainder could have been dribbled out in annual tax-free gifts of $10,000 to James, as well as any children or siblings James might have. There are a number of gifting techniques that would have allowed Mr. Gerber to leverage his gifts, speeding the transfer of ownership to his son.
Obviously, if Prototype & Plastic Mold had sales of $800 million and 5 percent margins it would take longer than a few years to transfer ownership tax free, but our firm has worked with hundreds of business owners who have done just that over a period of years.
With all due respect to Mr. Gerber, the statement that estate taxes played a big part in his decision is likely not true. The estate tax is a convenient excuse for the many reasons that owners decide to sell businesses, and reporters should dig deeper when the seller of a business offers it as the sole explanation.
Stephen J. Roberts
Management Planning Inc.