Coordinating Sale with Gifting to Minimize Estate Tax

You may have multiple goals

As the owner of a business, you may want to keep the business in your family but may not be ready to relinquish control just yet. You may want to pass your interest to family in the form of gifts, yet you may also have a need for income for final expenses or for your spouse at your death. Or perhaps you want to reduce the size of your estate. You can accomplish these multiple goals with careful planning. When you make gifts of shares of your business, you can systematically reduce its value in your estate. You can control the size and timing of your gifts, allowing you to keep some level of control for as long as you choose. Gifting removes value from your estate, while a sale of the interest remaining at your death can provide income for your estate. By combining these two tools, you can accomplish multiple goals.

There are several ways you can make gifts. Currently, you can make gifts up to $18,000 in 2024 per recipient per year free from federal gift taxes under the annual gift tax exclusion (although you may still owe state gift tax). If you are married and you are both U.S. citizens, you and your spouse can combine your gifts, doubling the annual gift tax exclusion. Even if one spouse owns all the assets, you can take advantage of gift splitting to use the annual exclusion.

Annual gifting programs are relatively simple and can provide a systematic reduction of your business interest (and consequently the size of your estate) over a period of years. You may also make gifts through the use of various trusts. Making gifts can accomplish two things. First, they can reduce the taxable value of your interest in the business, leading to a lower sale price (and perhaps lowering potential estate tax liability). They can also place the shares of the business directly in the hands of your intended receiver during your lifetime. You control both the timing and size of the gifts.

Smaller interest may mean lower sale price (and taxes)

When you sell your business interest during your lifetime, you are subject to capital gains tax on the difference between your basis (investment) and your sale price. By gifting portions of your interest, you reduce the value of your interest, which can result in a lower sale price (and capital gain) when you sell the remainder during your lifetime. Selling during your lifetime removes the value of the business from your estate.

When the sale occurs at your death, the proceeds are subject to the higher federal estate tax rates. By making gifts for a period of years, you can reduce the taxable value of the interest that remains in your estate, thus minimizing your potential estate tax liability.