Maintain Control and Gift Part of Your Business
(Part two of a series on estate and succession planning issues. Part one of this series examined the five major threats to estate plans. In this installment, the author examines ways to maintain control of your business by gifting nonvoting stock.)
An old adage says, “It’s better to give than to receive.” When considering strategies to transfer your wealth to your family this maxim may be restated: “It’s better to give than to keep.” That’s because there are considerable business, personal and tax savings benefits to be realized by using gifting strategies during your lifetime.
Since a business frequently represents a large proportion of the value of the business owner’s estate, the estate tax consequences can be huge. Thus, taxes can severely reduce the amount of wealth that can be transferred to the next generation. In addition, your beneficiaries may not have the liquid cash needed to pay the taxes. As a result, they may be forced to sell business assets or real estate at a deep discount in order to meet the pressing payment deadlines of taxes and estate expenses. These unfortunate consequences can be avoided by removing business ownership value from your estate prior to death using lifetime gifts.
Tax Advantages of Lifetime Gifts
Fortunately, it is possible to give away during lifetime some or all of your business interests and pay no gift taxes, defer capital gains taxes and avoid the estate tax. Therefore, transferring as large a value of business interests as possible during your lifetime maximizes the after-tax value realized by your family.
Business owners avoid both estate and gift taxes by simply giving annual gifts to beneficiaries in an amount that is less than the gift tax annual exclusion amount. The gift tax annual exclusion amount is $12,000 and is adjusted for inflation. Therefore, if you give $12,000 or less to any one person in any given year, there is no gift tax. In addition to the $12,000 gift tax exclusion for individuals, husbands and wives may split gifts between them.
For example, if a husband wanted to give a $24,000 gift to his nephew, his wife could join in the gift and there would be no gift tax due because it would be deemed to be a $12,000 gift from the husband and a $12,000 gift from his wife. Although the Tax Relief Act of 2001 carries a provision to repeal the federal estate tax, there is no repeal of the gift tax, and the gift tax top rate becomes 35 percent in the year 2010.
Maintain Control by Gifting Nonvoting Stock
Many business owners face the dilemma of making gifts of business interests to their children when some are active in the business and others are not. It is easy to make gifts of business interest to children who work with you, but the challenge is what to give to children who are not active in the business. It may be in the best interests of family harmony to make nonbusiness gifts to inactive children at the same value as the business interests gifts given to the active children.
If there are no liquid assets with which to make equal gifts, then the business owner can reorganize the capital structure of the company and, as a result, have both voting and nonvoting stock. This approach is workable for both S- and C-type corporations. By separating the shares’ value from the voting control, the owner can make equal gifts of economic value but keep control concentrated in the hands of family members who are active in the business.
