Use the Increased Federal Estate and Gift Tax Exemption to Transfer Business Ownership Interests

Take advantage of this window of opportunity for tax-free wealth transfer

The Tax Cuts and Jobs Act of 2017 expanded the federal estate and gift tax exemption to $11.2 million per person, or $22.4 million for a married couple.

Under the Act, these higher limits are applicable through December 31, 2025.  On January 1, 2026 the limits return to $5 million per person, adjusted for inflation.

These changes present a significant but temporary opportunity for tax-free wealth transfer, including gifts of ownership interests in the family business.  Also, in certain circumstances valuation discounts may further reduce the value of the gifted business interest, which would facilitate larger gifts while remaining within the exemption amount.  These gifts will also qualify for the annual exclusion, which currently stands at $14,000 per recipient and may also be split with your spouse, resulting in $28,000 per recipient annual gifts that do not reduce your lifetime exemption.

Gifting strategies

Business owners are often reluctant to gift business ownership interests because they are concerned about losing control of the business, or do not want to make gifts to minor children.   There are many ways to overcome this problem.  The most common solutions are to gift only non-voting shares and include restrictions on their sale or transfer, or to gift the shares to a trust of which you or your spouse are trustee.

Conventional gifting strategy is to transfer assets that are likely to appreciate in the future.  That way, the asset is transferred at a low value and appreciates in the hands of the recipient.  The first step in this process is to identify the assets to be transferred and determine their value.  If you are considering transfer of an ownership interest in a business, it would be prudent to have that business valued by a qualified business appraiser.

We’ve got your back

Although 2025 seems like a long way off, you never know what changes may occur.  Although it is unlikely that tax laws will change after the mid-term election, you never know what the tax law changes will be after the 2020 presidential election.  This is great opportunity to transfer assets at little or no estate and gift tax cost.  If this is interesting to you, there is no reason to delay.  Contact your attorney or CPA and start the process now, before this opportunity is gone.