Gifting Stock

One way parents can transfer ownership in a family-owned business and reduce the size of their estate -- and their potential tax liability -- is by making gifts of stock in the company to their children. This strategy can substantially reduce transfer taxes, particularly for family firms which are not yet highly appreciated in value but which are expected to grow over time.

A business owner can make annual gifts of stock worth up to $11,000 yearly to each of her children, without paying gift taxes. If the gift is made jointly with her spouse, that amount doubles to $22,000. In transferring stock to the children, parents may be able to take advantage of special tax rules allowing owners of closely-held companies to give away minority interests in the company at a discounted value - sometimes 30%, 40% or even more. The minority discount permits greater savings on transfer taxes. The annual exclusion is adjusted for inflation every year.

Parents often choose to gift stock in the business only to those who will manage the business, and other assets to those who are inactive in the firm. This is a wise policy. For a family business to survive its leaders should have authority equal to their responsibilities. Suppose you actively manage the company, and your three brothers have other careers. If your parents give 25 percent of the voting shares to each of the four children, your authority could be undermined since your inactive siblings have the power to out-vote you.

A Good Valuation Is Essential
This and other financial strategies involving stock in a privately-owned business depend on knowing know what the stock is worth. The problem is that stockholders often think they know what their companies are worth but in reality they are shockingly misinformed. For example SPARDATA , a leading national business appraisal firm, did a study of over 2,000 business owners and found owners often misjudge the value of their businesses by 50% or more - sometimes by millions of dollars! That is why it is essential to have the business properly appraised before implementing this or any other financial plan involving closely-held stock.