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Gifting A Business Can Cut Estate Taxes

If you have a family business, transferring shares of it to your heirs now rather than at your death could help minimize disruptions to the company and save millions in potential gift and estate taxes. You don’t have to give up your controlling interest. By retaining a majority of the stock, you can ensure that you always have a voice even when you retire. But if you think your business is about to take off, the time to get part of it out of your estate may be now, not later.

Gifts of Stock. Each year, a parent may give $13,000 to a child or other recipient without gift-tax consequences. In addition, everyone gets a $1 million lifetime gift-tax exemption. The annual exemption doesn’t count against the lifetime cap.

Suppose you and your spouse own a business that you plan to take public next year and you’d like to transfer partial ownership to your two children before the initial public offering—after which, you hope, your stake in the business will skyrocket. Together, you and your spouse could give the kids a tax-free gift of stock worth up to $2,052,000—using up your full lifetime exemptions, plus the $13,000 each of you may give each child.

And the benefit? Suppose that rather than receiving the stock now as a gift, your children inherited it after you and your spouse have died. Estate tax laws are in flux, and it’s impossible to say what their liability would be years or decades down the road. But under today’s rules, if $2.052 million in stock had appreciated to, say, $20 million, the children might owe estate taxes of almost $8 million. (This assumes you and your spouse used a bypass trust to preserve your full estate-tax exemptions—currently $3.5 million for each of you for 2009.) By giving the stock now, you avoid any tax on the transfer.

Giving away partial ownership could provide an even greater advantage if you are transferring a minority stake in the form of illiquid stock. For tax purposes, your gift can be discounted. For example, if you gave your daughter a 40% stake in your $400,000 company, the discount could reduce its value by another 25% to 35%. That share of the company might be valued at just $104,000—40% of $400,000, discounted by 35%.

Gifts of Real Estate. You don’t have to limit your gift to cash or stock; if your business owns real estate that either has a low tax basis or generates a lot of income, you can reduce your current income tax bill by shifting the ownership of these assets to family members in lower tax brackets and leasing the property from them. But you may want to give income-generating property only to adult children. For younger children (under age 19 or full-time students under age 24), the income is generally taxed at the parents’ tax rate under the “kiddie” tax.


This article was written by a professional financial journalist for Legend Financial Advisors, Inc. and is not intended as legal or investment advice.

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