Lifetime Gifting of Stock or Business Interest

Lifetime gifting refers to transferring business interest to a younger generation

Lifetime gifting of your stock or other business interest (such as a partnership interest, if your business is not incorporated) refers to a formal or an informal plan of giving your interest in a business directly to other individuals, probably your children or grandchildren. As opposed to selling your business interest, giving your stock or other interest in a closely held business may have beneficial estate and income tax consequences both for you and for the beneficiaries. Lifetime gifting may also allow you to remain in control for a significant length of time.

Lifetime gifting allows you to transfer ownership of business

Transferring the stock or other business interest (such as a partnership interest, if your business is not incorporated) in your closely held company directly to your beneficiaries allows you to control the transfer of your business to the next owner(s). You can decide when to make the gifts, how much to gift, and to whom the gifts should be made.

For instance, you could plan to gift a majority interest in your company to your three children over the course of your life. Alternatively, you could gift your entire interest in your company over a five-year period, at the end of which you could retire. You might also want to transfer your business to some of your children but not others. You wouldn't have this sort of flexibility for the disposition of your business if you sold the business outright.

Gifts of stock or other business interest may reduce your estate

When you gift stock (or other ownership interests) in your closely held business, you remove the value of that interest from your estate. Furthermore, any appreciation in the value of the stock after the date of the gift will not be included in your estate. Gifting can therefore be an excellent way to freeze the value of your estate.

Gifts of stock or other business interests may qualify for annual gift tax exclusion

Gifts of stock or other business interests may qualify for the annual exclusion from the federal gift tax. In 2024, the annual exclusion allows an individual to transfer up to $18,000 per donee gift tax free. A married couple can split a gift and give away up to double that amount per year to an unlimited number of individuals (gift-splitting rules apply). Over a long period of time, you can transfer a substantial percentage of your closely held business to your children (or grandchildren) and avoid gift taxes.

Gifting your business interest may also allow you to discount the value of the gift

When you transfer your stock or business interest to another party, you may be able to discount the value of the gift from the underlying value of the business interest that is transferred. You may discount the value of the gift if it represents a minority interest in the company and if the stock or other interest cannot be readily sold in the marketplace (called a minority and lack of marketability discount). The average discounts are 20% to 40%. So, by way of example, say you transfer $$27,000 worth of stock to your child. After the appropriate discounts are applied (assume one-third), the value of the gift is only $18,000. The gift would then qualify for the annual exclusion and no tax would be due. By utilizing the discount over a long period of time, you can substantially leverage both the annual exclusion and the applicable exclusion amount ($13,610,000 in 2024).

Gifting allows you to remain in control of your business

Another benefit to gifting your interest in a closely held business is that you can determine how long you will remain in control of your business. By limiting the amount of stock that you transfer each year, you can continue to own a majority interest in the company for as long or short a period of time as you desire. As a majority stockholder, you can continue to control the operation and the governance of the company.

Gifting business interests may allow you to transfer income tax liability to beneficiaries who are in a lower tax bracket

Another reason to gift stock is to shift income from you to your children (who may be in a much lower income tax bracket). If you gift away stock that pays a dividend, the income from that stock may be taxed to your children at their marginal tax bracket. Your children may be in a lower income tax bracket than you. Thus, gifting the stock to your children may allow you to increase the after-tax income generated by the business for your family.