Introduction
Gifting your business may not be the first strategy that comes to mind when planning for the future, but it can be a powerful tool, both financially and personally. Whether you’re seeking to reduce potential estate taxes, transition ownership to family members, support a charitable cause, or simply ensure business continuity, gifting allows you to transfer ownership on your own terms. By understanding the available options—from lifetime gifts and trusts to charitable strategies and entity-based transfers—you can take a proactive approach to legacy planning while potentially easing the financial burden on your heirs.
Why would you want to give away your business?
Sometimes better to gift than sell due to tax law
There may be personal (nontax) reasons why you would want to gift some or all of your business interests. There is also a good reason built into the tax code. Gifting some or all of your business interest allows you to reduce or remove the value of your business from your estate, which could mean lower estate taxes that may be due at your death. Both the value of your gift and any gift taxes you paid when making the gift are removed from your estate. If you sold part or all of your business during your lifetime, you might be subject to capital gains tax. If your estate sells your business soon after your death, the sale price may determine the value of the business included in your estate for estate tax purposes.
Gifting can be used when value of your business is large or growing rapidly
If the value of your business is large, gifting can be used to move income within your family or to shift ownership of the business out of your estate. When you make a gift of some or all of your business interest, the value of the gift as well as the future appreciation is removed from your estate. You may be subject to gift taxes on the gift, but you will have frozen its value, meaning you won’t be subject to tax on any future appreciation. This can be a valuable strategy when you expect the value of the business to continue growing. If the value of your business is large, you might consider making a gift up to the size of the applicable exclusion amount ($13,610,000 in 2024) during your lifetime instead of waiting until your death in order to remove a larger portion (and its future appreciation) from your estate now.
Are there different ways to make gifts?
Lifetime gifts — direct from you to the recipient
You might choose to make lifetime gifts of your stock or business interest. When you decide to make lifetime gifts, you can give away a little or a lot to whomever you choose, and you can control the timing of the gift. Lifetime gifts of your business interest may allow you to relinquish control according to your own timetable, and they can be done privately if you so choose. An added benefit to gifting your business is the removal of the value of the gift from your estate, along with any future appreciation.
Using trusts
Gifting your business using a trust can be more difficult and requires documentation and transaction fees, but it still provides several benefits. You can structure the trust so that you keep control of the business for as long as you want. A living trust will allow you to keep your business interest out of probate, test the performance of the receiver before giving up complete control, and offers some protection from creditors during your lifetime. You can also establish a retained income trust — such as a grantor retained annuity trust — that will provide you with an income for a specified period of time and move your business out of your estate at a discount.
Charitable remainder trusts
A charitable remainder trust is a special planning technique through which you establish an irrevocable trust and use your business to provide an income stream to benefit you and/or your spouse, with the remainder interest going to a qualified charity as beneficiary.
For example, you could contribute your business stock to a charitable remainder trust and receive a charitable deduction. The charitable trust then pays you and/or your spouse an annuity or unitrust stream. At the end of the payment term, the remainder of the trust passes to the qualified charity. You receive a charitable deduction and support the charity of your choice.
The major tradeoff is that the trust must be irrevocable, meaning you can’t change your mind once it is set up. There are different types of charitable remainder trusts, and the IRS publishes a list of qualified charities.
Transfer using another entity
You can transfer your business interest using another entity, such as a family limited partnership (FLP). An FLP is an entity formed to manage and control your jointly owned family business. All the requirements for a limited partnership must be met, and personal service businesses (e.g., lawyer, plumber, photographer) don’t qualify. Usually, the parents are named general partners, retain control of the business itself, and receive an income, while the children are limited partners. By transferring the business to an FLP, the general partners (parents) may be able to use valuation discounts and substantially reduce the value of the business and perhaps any potential estate tax liability through annual gifts to the limited partner children. The FLP is flexible and can be modified to meet changing family or business needs.
Transfer your business interest at death through a will or trust
You may choose to make a gift of your business at your death. To ensure that your business is actually distributed to your designated beneficiaries, you should have a valid will or a trust in place. Gifting your business through your will can be effective when the intended receiver of your bequest is currently active in your business and is willing and able to carry on the business activities.
The absence of a will or a trust could mean court distribution of your business interest to unintended beneficiaries.
Conclusion
Gifting your business interest can be a thoughtful way to reduce estate taxes, ensure a smooth transition of ownership, and align your legacy with your personal values. Whether you choose to give your business outright, structure the transfer through a trust, or take advantage of annual exclusions and valuation discounts, this strategy offers flexibility and control when executed properly. As with any advanced planning technique, working with an experienced attorney or tax advisor is essential to navigate the complexities and secure the best outcome for both your business and your beneficiaries.
Scarlet Oak Financial Services can be reached at 800.871.1219 or contact us here. Click here to sign up for our newsletter with the latest economic news.
Source:
Broadridge Investor Communication Solutions, Inc. prepared this material for use by Scarlet Oak Financial Services.
Broadridge Investor Communication Solutions, Inc. does not provide investment, tax, legal, or retirement advice or recommendations. The information presented here is not specific to any individual’s personal circumstances. To the extent that this material concerns tax matters, it is not intended or written to be used, and cannot be used, by a taxpayer for the purpose of avoiding penalties that may be imposed by law. Each taxpayer should seek independent advice from a tax professional based on individual circumstances. Scarlet Oak Financial Services provide these materials for general information and educational purposes based upon publicly available information from sources believed to be reliable — we cannot assure the accuracy or completeness of these materials. The information in these materials may change at any time and without notice.
