Gifting Your Business
If you're like many business owners, you'd prefer to have your children inherit the result of all your years of hard work and success. Of course, you can bequeath your business in your will, but transferring your business during your lifetime has many additional personal and tax benefits. By gifting the business over time, you can hand over the reins gradually as your offspring become better able to control and man age the business on their own, and you can minimize gift and estate taxes.
Using trusts
You can make gifts outright or use a trust. You can even structure a trust so that you keep control of the business for as long as you want. You can establish a revocable trust, which will bypass probate and allow you to change your mind and end the trust, or an irrevocable trust, such as a grantor retained annuity trust (GRAT) or a grantor retained unitrust (GRUT) that can provide you with income for a specified period of time and move your business out of your estate at a discount.
Using a family limited partnership
You can transfer your business interest using another entity, such as a family limited partnership (FLP). An FLP is a limited partnership formed to manage and control a family business. You (and your spouse) can be the general partners, retaining control of the business itself and receiving income from the business, while your children can be limited partners. By transferring the business to an FLP, you may be able to use valuation discounts and substantially reduce the value of the business for tax purposes by making annual gifts to the limited partners.
Minimizing gift and estate taxes
Gifting your business interests can minimize gift and estate taxes because:
- It transfers the value of any future appreciation in the business out of your estate to your heirs. This can be especially valuable if business growth is expected.
- Gifts of $13,000 per recipient (in 2009) are tax-free under the annual gift tax exclusion.
- Aggregate gifts up to $1 million are tax-free under your lifetime exemption.
- Partial interest gifts, as with GRATs, GRUTs and FLPs, may be valued at a discount for lack of marketability or restrictions on transferability.
Related links:
- Retirement Planning Options for Business Owners
- Retirement Plans for Small Businesses
- Business Succession Planning
- Selling Your Business
- Gifting Your Business