Gifting Interest in Your Business

Gifting Interest in Your Business

PROBLEM:

When a business owner dies, the FMV of the business is included in the owner’s gross estate for estate tax purposes. Estate tax breaks are available only if the business is a significant portion of the owner’s gross estate (generally 35% to 50%).

APPLICABLE RULES:

1) A tax payer can give $13,000 to any number of recipients each year. No estate or gift tax is due on the gifts as long as no recipient receives more than $13,000. To qualify for the annual exclusion a gift must be a present interest (not in trust or conditional). A married couple can give $26,000 per recipient per year.

2) A gift is valued at the time it is made. THe recipient’s basis for calculating gain is the donor’s adjusted basis plus any gift tax paid on the appreciation of the property to the time of the gift. The basis for calculating loss is the lower of donor’s adjusted basis or FMV at the time of the gift.

3) Property acquired from a decedent is valued on the date of decedent’s death or six months after death if alternate valuation is elected. Basis is the FMV on the date of death or on the alternate valuation date.

4) The value of a gift of less than a controlling interest in a business can be discounted on a gift or estate tax return. The discount is based on the recipient’s lack of control over the business and the absence of a ready market for the shares. Discounts range from 20 to 35% but have been higher in some cases.

SOLUTION:

A long-range gift program can be used to remove business interests from the owner’s taxable estate. Transfers of business interests must generally be made incrementally to keep each gift below the $13,000 annual exclusion limit. Gifts of stock shares or partnership interests can be used to remove business interests from the estate.

Business owners can also use a family limited partnership to carry out a gifting program. Gifts of limited partnership interests qualify for the annual exclusion as present interest gifts even if the donor is the general partner controlling the partnership. A family limited partnership gives the added advantage that the owners, as general partners, can retain control over the assets for a longer period of time.

Comments are closed.