Transitioning Business Ownership: Tax-Smart Gift Strategies

Transitioning Business Ownership Tax Smart Gift Strategies

Written by Lisa Cribben

April 26, 2024

Many business owners are looking to transition their business to the next generation. Gifting shares in the business stock is one way to do this and now is an opportune time to start planning. A tax-smart gift strategy in your estate plan can help you achieve a smooth business transition and preserve your legacy amidst a looming tax change set for 2026 that could alter the taxability of estates. 

Currently, anyone can gift $18,000 per year (up from $10,000 in 2000) to as many individuals as they choose.  In addition to the annual gifts, an individual can gift $13.61 million during their lifetime, which is referred to as the Lifetime Exemption. The Lifetime Exemption is up from $5.49 million in 2017, and $675,000 in 2000. Under the current tax law, however, this higher lifetime exemption will decrease after December 31, 2025.  While the exact exemption after 2025 is not currently known, it is anticipated to be somewhere between $6 million and $8 million based on the inflationary increases in 2024 and 2025.  Estate values over the exemption are subject to tax rates up to 40%.  Therefore, if your estate is anticipated to be higher than the Lifetime Exemption, now is the time to start thinking about your gifting plan. 

Gifting is a Good Strategy  

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Keep the Growth of the Company Out of Your Estate

The value of a business often grows at a faster pace than other investments. Because of the higher anticipated growth rate, business stock is a good asset to gift.   

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Discounts for Lack of Marketability and Lack of Control Can Lower Value

If a gift is made of a minority or non-controlling interest in a business, discounts are often applied for lack of control and marketability. With these discounts, a parent can transfer more stock under the gifting limits and get more of their assets out of their estate.  In addition, transferring minority interest that lack of control and limit voting rights are a good way to manage the business decisions of the company after gifts are made.   

Recommendations for Good Gifting Strategy 

To ensure the success of a gifting strategy here are some recommendations to consider.  

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Hire Qualified Professionals to Help You

It is important to hire qualified attorneys, accountants, financial planners, and appraisers to help you develop an effective plan and ensure IRS compliance.  Hiring a good appraiser is important because the gift tax return needs to include support for the value of the gift and gifts are reviewed and scrutinized by the IRS. It is anticipated that the IRS will increase estate tax return reviews in the coming years. It is important to note that estate tax returns have a three-year statute of limitations. 

In the next two years leading up to 2026 when the Lifetime Exemption amount is expected to decrease, the demand for qualified appraisers, accountants, and attorneys will be high. Just like other professionals, many experienced professionals have retired or left the profession resulting in fewer available estate planning professionals. To ensure you have qualified professionals on your team now is the time to start your gift-planning discussions. 

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Talk to Your Children About Your Plan 

Having conversations beforehand with your children helps establish your and your children’s expectations. Allowing them to ask questions upfront will help alleviate feelings of being treated unfairly.    

Estate planning can help manage taxes and preserve your family’s legacy and wealth. Having knowledgeable professionals on your side will maximize your family’s legacy and wealth while minimizing risks. For more information, please contact the professionals at Hawkins Ash CPAs,  to find out how they can help with your gifting and estate plan.  

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Lisa Cribben
I lead our Firm's valuation services group and have been working with companies for over 25 years on their valuation and business sale and purchase transaction needs. I have experience working with clients in all industries including healthcare, manufacturing, agriculture, retail, and construction.

I'm able to provide expert advice with a deep understanding of my clients' needs. Over the years, I have gained extensive experience in testifying in court on valuation and other financial matters. Additionally, I'm a frequent speaker on topics such as valuation, sale transactions, and transition planning.

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