"Gifting" is one succession option that allows the owner to transfer the business to the next generation over time -- in a way that reduces or even eliminates any estate or gift taxes. Each year an owner can give $11,000 to a child tax-free; husband and wife business owners can each give a part of the operation worth $11,000 to their child, for a total of $22,000. Neither the donors nor the recipient pay taxes on the gift.
You can also, during your lifetime or upon your death, give away an additional $600,000 of the value of the business without paying any taxes. Your spouse has the same opportunity. Jointly, therefore, you can make tax-free transfers of up to $1.2 million in addition to the annual gift of $22,000 per family member.
In addition to minimizing their own taxes, gifting allows entrepreneurs to oversee management succession as well as the change in ownership. You have the opportunity to maintain control of your company while giving your offspring increasingly meaningful roles in running the business.
If you haven't incorporated your business, you might consider doing so, as a corporate entity allows you to transfer the company in pieces, i.e., shares of stock. Each share can have its own value, making the transfer easier over time. Be careful in assigning a value to the shares yourself, however. The government may not agree with your valuation, leaving you vulnerable to taxes. Therefore, it's sometimes wise to consult a qualified valuation company as well as your accountant and tax attorney.
If you would like to learn more about the IRS rules on gifting, visit the IRS page Gift Giving.
Back to The Financial Aspects of Succession Planning
