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Gifting Stock

One key to reducing estate taxes is to limit the amount of appreciation in your estate. In our Year End Planning Checklist, we touched on how important it is to refresh your estate plan every year. Giving away assets today can make the future appreciation on those assets be outside of your taxable estate. There may be no better gift than your company stock - it could be the most rapidly appreciating asset you own.

For example, assume your business is worth $500,000 today, but is likely to be worth $1 million in three years. By giving away the stock today, you will keep the future appreciation of $500,000 out of your taxable estate.

A flexible strategy for the business owner was reinstated in late 1990 when Congress retroactively repealed the estate freeze provisions that became law in 1987. Before 1987, business owners commonly recapitalized their businesses, retained preferred stock interests and gave some or all of the common stock to their beneficiaries. This way, they retained control of their companies and froze the value of their stock for estate tax purposes. All future appreciation affected only the common shares, not the owners' preferred stock.

Congress saw the loophole and created Section 2036(c) in an attempt to prevent future estate freezes. The section had been under constant attack since its creation and was finally repealed retroactively in 1990. In its place, Congress passed legislation that once again permits estate freezes, but only if certain requirements are met.

Gifting family business stock can be a very effective estate tax saving strategy. However, beware of some of the problems involved. The gift's value determines both the gift and estate tax ramifications. The IRS may challenge the value you place on the gift and try to increase it substantially. A recent law change requires the IRS to make any challenges to a gift tax return within the normal three-year statute of limitations, even though no tax is payable with the return.

Seek professional assistance from our comprehensive financial planning firm before attempting to transfer portions of your business to family members. Any one of our independent financial advisors would be happy to sit down with you and decide what investment strategy works best for you.

Material discussed is meant for general illustration and/or informational purposes only and it is not to be construed as tax, legal, or investment advice. Although the information has been gathered from sources believed to be reliable, please note that individual situations can vary therefore, the information should be relied upon when coordinated with individual professional advice. Past performance is no guarantee of future results. Diversification does not ensure against loss. Source: Financial Visions, Inc.

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