As one of the children of an owner of a well-known construction company, the client inherited a substantial and valuable interest in a privately held company many years ago. The company continued to grow, but the company was passed on to another sibling because he had another plan. Over the years, he has retained only a minority interest in the company, not enough to influence management.

After his children reached the age of majority, he experienced a health crisis. He visited our Estate Planning Center to fine a solution to manage his assets and prepare for succession to his children.

In the process of reviewing the client's assets and ensuring that they would be transferred in accordance with the client's wishes, we identified a long-standing interest in a privately held company and explained the potential inheritance tax implications of the asset: a minority interest in a privately held company may not have any influence over the company's operations, such as management, and may not result in any particular benefit to the shareholder if the company does not make distributions, but could result in a large inheritance tax liability if inheritance were initiated, depending on the valuation under the inheritance and gift tax laws.

During the review, we found out that the brother who had inherited the business did not have financial resources enough to purchase the company at a price that took into account inheritance and gift tax laws. We helped the client consummate the sale of shares by adjusting the sale price and identifying a buyer.

It is often difficult for investors to sell their shares in privately held companies unless the number of shares held is large enough to influence management of the invested company, which results in a lower actual exchange value than the valuation for estate and gift tax purposes. If the company does not voluntarily make distributions, as shareholders cannot force it to make distributions, it is often not particularly beneficial to hold such shares. If the company is not likely to go public, minority shareholders should be prepared for the fact that it is not particularly advantageous to hold the stock and may even be disadvantageous in matters such as inheritance in the future.

This case is significant in that the client was able to develop a plan of wealth succession and asset management under consultation with the Estate Planning Center and to achieve his desired estate plan, as well as eliminate the tax burden that could have resulted from holding unlisted shares.

 

​□ Attorney in charge: Cho Woong-kyu