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Caring For Generations

Sooner-Than-Later Business Ownership Gifting

by | Jun 14, 2023 | Business Law, business planning, estate and tax planning

In an earlier Geyer Law blog post, we advised giving to charity “sooner rather than later”, not only because the charities will be able to use the money to further their cause and help their constituents, but because early planning on the part of the donor allows time for more nuanced strategizing and greater opportunities for tax savings.

When business owners decide to gift shares of their company to children or grandchildren, they may be envisioning having those beneficiaries actually come into the company to help run it. “Many high net worth individuals can see significant tax savings if they gift ownership shares to their children rather than waiting to transfer ownership in a will or even gifting several years from now,” an Adams Capital blog post observes.

Sometimes, though, the motivation for making gifts may have less to do with “succession planning” so much as a way to help with an adult child or grandchild’s current financial needs by shifting dividend income to them (plus a share of the proceeds in any future sale of the business), while taking advantage of tax savings for the business owner.

This type of gifting works particularly well when children are in lower tax brackets than the donor, Adams Capital explains, by shifting future cash distributions and taxable income to the new owners of the shares.

The tax principle at work here is based on simple logic – the donee will have only a minority interest in the business. The “lack of control” and “lack of marketability” factors will kick in, causing the IRS to value that gift at a lower amount for gift tax purposes. Meanwhile, business owners may use the annual gift tax exclusion ($17,000 per donee, $34,000 per donee for a married couple) to make transfers of company stock.

Our attorneys at Geyer Law work with clients’ tax advisors to structure the plan. In the case of larger gifts, it may be necessary to involve an independent third-party valuation expert to determine cost basis and help avoid a tax audit.

– by Cara M. Chittenden, Associate Attorney with Rebecca W. Geyer & Associates