Gifting Your Business
As John, the owner of a local full-service cleaning and restoration company, nears retirement, he begins wondering what to do with his business. Though it has always been “the plan” to pass the business along to his son, John realizes he has never researched how to go about turning over the reins.
Luckily for John, “gifting” a business to family is frequently the way in which a transaction of this nature occurs, so there are specific ways already in place for how John should begin the process of giving the family business to his son.
A person may want to gift property for a variety of reasons, including probate, succession planning, retirement, Medicaid planning or simply to give a family member a gift of cash, securities, shares of a business or real estate.
The owner who desires to gift his business should begin the process by consulting a tax attorney and a valuation expert. It is important for the business owner to research before choosing these professionals in order to ensure they possess the proper qualifications and experience needed for the type of and cause for gifting.
It is wise to meet with and interview more than one qualified tax attorney and business valuation expert. Various sources can refer you to these professionals such as the corresponding state bar association and the National Association of Certified Valuators and Analysts (“NACVA”).
The IRS website is an excellent place for the business owner to start when he decides to gift or donate property. Every year the IRS updates standard gift tax and procedure publications. It is highly recommended that an individual looking to gift property become familiar with the process as dictated by the IRS.
Taxing and establishment
The IRS explains that Gift Taxes are placed on transfers of property when the originating owner receives less than full value (or nothing) for their property, whether they mean for this to happen or not.
In its clarification of the Gift Tax, the IRS says, “You make a gift if you give property (including money), or the use of or income from property, without expecting to receive something of at least equal value in return. If you sell something at less than its full value or if you make an interest-free or reduced-interest loan, you may be making a gift.”
There is a finite amount that can be gifted in this manner. In 2014, the annual gift tax exclusion amount is $14,000 per donor per year, or $28,000 for married U.S. citizens. In addition, the lifetime gift tax exemption amount is $5,340,000 as of 2014. Donors typically want to maximize the amount of wealth they can transfer under these amounts.
If you believe that you will have a taxable estate at the time of death, then there are clear advantages to gifting property. As a result of the $5,340,000 lifetime exemption, you can remove a considerable asset value, and appreciation thereafter, of the property from your estate for federal and state tax purposes. Although, for obvious reasons, the business owner should reconsider gifting if he foresees needing the assets and related cash flow in the future.
There are many ways to enhance the benefits of gifting through a number of different trusts and entities including: family limited partnerships; grantor retained annuity trusts (“GRATS”) and intra-family loans. To explore the options available and affiliated tax advantages to these options, a qualified tax attorney, trusts and estates attorney and CPA or Enrolled Agent are the proper sources for point-of-discussion and implementation.
As previously noted, a gift cannot exceed more than the fair market value (FMV) of the asset being transferred. In order to determine the FMV of an asset, a qualified appraiser needs to be engaged, and the signed appraisal is attached to the return as proof of the determined FMV.
According to Section 170(f)(11)(E) of the IRS, a qualified appraiser is one who
- is deemed so by a professional appraiser organization;
- is paid for appraisals on a regular basis;
- has the education and experience necessary for appraisers in general and specific to the appraisal at hand; and
- has been in good standing with the IRS for at least the last three years.
It is of the upmost importance for the business owner, when choosing an appraiser, to be certain he chooses a qualified appraiser. The National Association of Valuators and Analysts (www.nacva.com) is an excellent resource for a business owner to research and find qualified business appraisers.
In March 2014, I wrote an online exclusive article for Cleanfax that provided an introduction to business valuation, including basics information about the process and ways in which they are necessary, with gifting being one of many. This article can be at Cleanfax.com as an aid before beginning the gifting process (or any other process which requires a valuation expert).
The business owner is strongly advised to consider and implement proper estate planning. With a team of applicable experts, the owner will be able to minimize taxes and ensure that designated individuals will receive the desired gifting portion of the business.
By doing so, the owner can leverage the company that he or she worked hard to build. In addition, he or she will have the peace of mind that comes with knowing loved ones will be able to continue to run the business through succession and/or receive the proceeds through a sale or liquidation, while at the same time maximizing the tax advantages that accompany the gift.
Trisch Garthoeffner, CVA®, EA, is the President of Anchor Business Valuations LLC. She has more than 10 years of experience valuing privately held businesses ranging in sales size from $2 million to $50 million. Anchor values businesses in a variety of sectors for a variety of reasons, including divorce, preparing for a sale or acquisition, gifting, share valuation for employee incentive programs and financial reporting. Garthoeffner can be reached at (312)632-9144, and to learn more about Anchor's valuation services, please visit www.anchorbvfs.com.
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February 21, 2023