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Gifting to the Family: Don’t Wait too Long!

Posted on December 2, 2021 by

Margaret Amsden

Margaret Amsden

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This has been an eventful, record-breaking year for mergers and acquisitions, up 158% from the same time last year. Stock values continue to rise while interest rates remain at record lows, creating a prime environment to make deals and close transactions. Consider this guidance to help take advantage of the current tax code and valuation discounts before they disappear.

Valuation Considerations

Whether considering an external sale or a family succession, it is necessary to obtain a quality business valuation to ensure a fair transaction. However, it is important to note that these valuations take time and require planning. People often wait until they are ready to complete a transaction or have an offer on the table before making plans for a valuation, but this may be too late. Ideally, the best time to gift to a family is before you have a third-party offer in hand—ideally from three to five years before you plan to go to market. For businesses that continue to feel the negative effects of the pandemic, there are opportunities to take advantage of depressed valuations to fast-track gifting for owners planning on transferring ownership to the next generation.

Currently, gifting a minority or non-controlling interest in a private entity will yield an interest valued at a lower price to account for lack of control and marketability. While some of the current proposals have been reigned in, the legislation continues to talk about curtailing the allowable discounts especially in the case of limited liability companies that hold publicly traded securities, non-operating cash assets or otherwise passive business interests. If you plan to make a gift in these types of assets, consider completing them as soon as possible. Gifting to remove future appreciation related to operating entities from taxable estates continues to qualify for valuation discounts, but these discounts are also at risk of disappearing making it more expensive to pass on the family business.

Gift Tax Exemption

For anyone with significant assets looking to reduce their tax liability now is a good time to take advantage of the gift tax exemption currently capping out at $11.7 million without being subject to the 40% federal estate or gift tax since that number is scheduled to be reduced to $6 million beginning on January 1, 2026. While there was previously a rush to complete these gifting transactions by the end of this year, those changes have been scrapped from the most recent version of the Build Back Better Act, H.R. 5346 (BBB) that would go into effect January 1, 2022. Hence, while less of an immediate concern, the provision allowing for gifting $11.7 million in a lifetime will still revert to $6 million as of 2026 even without interference from Congress.

Grantor Trusts

Funding grantor trusts could also prove beneficial to those with large estates. While the provisions seeking to tax these types of trusts and assets has similarly been removed from the BBB, it should not be forgotten in case the House of Representatives chooses to reinsert this provision from previous drafts as they have done in the past.

Many people have created Irrevocable Life Insurance Trusts (ILITs) to hold their life insurance policies and plan on making regular gifts to the trust to pay the premiums. However, since any future additions to these trusts could be counted toward your taxable estate, it may be prudent to review the terms of your trust and future premium requirements to determine whether it is more beneficial to make a lump sum gift now to avoid potential tax complications under pending regulations.

Reducing Tax Liability while Obtaining the Highest Valuation

Ultimately, business owners want to claim a high valuation in most situations, especially when considering a transaction, but when making gifts it is more desirable to claim a low valuation to minimize the utilization of their lifetime exemption. This tension creates a risky situation for owners who should seek help from their financial advisors to ensure that the proper balance is struck between reducing tax liability with gifting and obtaining the highest valuation when it comes time to sell.

Contact Us

If you need help navigating the current tax code and valuation discounts, please reach out. We can also help you reduce your future tax liability through gifting.

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Margaret Amsden

Shareholder, Private Client Services

Margaret leads the firm’s private client services group as the point person for individual, estate and succession planning tax strategies.

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