Lifetime gifting of your stock or other business interest (such as a partnership interest, if your business is not incorporated) refers to a formal or an informal plan of giving your interest in a business directly to other individuals, probably your children or grandchildren. As opposed to selling your business interest, giving your stock or other interest in a closely held business may have beneficial estate and income tax consequences both for you and for the beneficiaries. Lifetime gifting may also allow you to remain in control for a significant length of time.
Reasons to Consider Lifetime Gifting
Lifetime gifting allows you to transfer ownership of business: Transferring the stock or other business interest (such as a partnership interest, if your business is not incorporated) in your closely held company directly to your beneficiaries allows you to control the transfer of your business to the next owner(s). You can decide when to make the gifts, how much to gift, and to whom the gifts should be made. For instance, you could plan to gift a majority interest in your company to your three children over the course of your life. Alternatively, you could gift your entire interest in your company over a five-year period, at the end of which you could retire. You might also want to transfer your business to some of your children but not others. You wouldn’t have this sort of flexibility for the disposition of your business if you sold the business outright.
Gifts of stock or other business interest may reduce your estate: When you gift stock (or other ownership interests) in your closely held business, you remove the value of that interest from your estate. Furthermore, any appreciation in the value of the stock after the date of the gift will not be included in your estate. Gifting can therefore be an excellent way to freeze the value of your estate.
Gifts of stock or other business interests may qualify for annual gift tax exclusion: Gifts of stock or other business interests may qualify for the annual exclusion from the federal gift tax. In 2013, the annual exclusion allows an individual to transfer up to $14,000 per donee gift tax free. A married couple can split a gift and give away up to double that amount ($28,000) per year to an unlimited number of individuals (gift-splitting rules apply). If you have three children, for example, you and your spouse could gift a total of $84,000 worth of stock in your business to your children and not incur any gift tax (although you may still owe state gift tax). Over a long period of time, you can transfer a substantial percentage of your closely held business to your children (or grandchildren) and avoid gift taxes.
Gifting your business interest may also allow you to discount the value of the gift: When you transfer your stock or business interest to another party, you may be able to discount the value of the gift from the underlying value of the business interest that is transferred. You may discount the value of the gift if it represents a minority interest in the company and if the stock or other interest cannot be readily sold in the marketplace (called a minority and lack of marketability discount). The average discounts are 20-40 percent. So, by way of example, say you transfer $15,000 worth of stock to your child. After the appropriate discounts are applied, the value of the gift is only $13,000. The gift would then qualify for the annual exclusion and no tax would be due. By utilizing the discount over a long period of time, you can substantially leverage both the annual exclusion and the applicable exclusion amount ($5,250,000 in 2013).
Gifting allows you to remain in control of your business: Another benefit to gifting your interest in a closely held business is that you can determine how long you will remain in control of your business. By limiting the amount of stock that you transfer each year, you can continue to own a majority interest in the company for as long or short a period of time as you desire. As a majority stockholder, you can continue to control the operation and the governance of the company.
Gifting business interests may allow you to transfer income tax liability to beneficiaries who are in a lower tax bracket: Another reason to gift stock is to shift income from you to your children (who may be in a much lower income tax bracket). If you gift away stock that pays a dividend, the income from that stock may be taxed to your children at their marginal tax bracket. Your children may be in a lower income tax bracket than you. Thus, gifting the stock to your children may allow you to increase the after-tax income generated by the business for your family.
Caution: Beware of the kiddie tax rules. Under the kiddie tax rules, unearned income above a specified amount (currently $2,000) is taxed at the parent’s highest marginal tax rate. The kiddie tax rules apply to: (1) those under age 18, (2) those age 18 whose earned income doesn’t exceed one-half of their support, and (3) those ages 19 to 23 who are full-time students and whose earned income doesn’t exceed one-half of their support.
If you have questions, contact the Experts at Henssler Financial:
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- Email: experts@henssler.com
- Phone: 770-429-9166.
Disclosures
The following information is reprinted with permission from Forefield, a division of Broadridge Financial Solutions, Inc. This article is meant to provide valuable background information on particular investments, NOT a recommendation to buy. The investments referenced within this article may currently be traded by Henssler Financial. All material presented is compiled from sources believed to be reliable and current, but accuracy cannot be guaranteed. The contents are intended for general information purposes only. Information provided should not be the sole basis in making any decisions and is not intended to replace the advice of a qualified professional, such as a tax consultant, insurance adviser or attorney. Although this material is designed to provide accurate and authoritative information with respect to the subject matter, it may not apply in all situations. Readers are urged to consult with their adviser concerning specific situations and questions. This is not to be construed as an offer to buy or sell any financial instruments. It is not our intention to state, indicate or imply in any manner that current or past results are indicative of future profitability or expectations. As with all investments, there are associated inherent risks. Please obtain and review all financial material carefully before investing. Henssler is not licensed to offer or sell insurance products, and this overview is not to be construed as an offer to purchase any insurance products.
