Many business owners contemplate a succession plan to transfer the business to their children but are unsure of how to achieve this or the potential tax consequences of doing so. Have you given this any thought? Now is the time! With proper planning, gifting shares of the business to children can help reduce future estate taxes and is an effective way for the children to gain ownership in the business over time.
A gift tax return (Form 709) may be required to file for the gift. The donor (you) is primarily responsible for filing a gift tax return and paying any gift tax due. Currently, $13,000 per year per donor can be gifted without any gift tax consequences. Gifting shares of the business to children can also provide a lower estate value. The lower the value of the estate, the less tax.
For the 2012, the lifetime federal estate tax exemption is $5,120,000 with a tax rate of 35%. Barring any changes in the tax law in 2012, the exemption decreases automatically to $1,000,000 and the tax rate increases to 55% January 1, 2013. Again, now is the time to plan!
The IRS and tax law currently allow certain discounts on the value of the gifted business. Lack of marketability discount and minority interest discount are most often used. These discounts, when properly applied and documented, lower the value of the shares being gifted. This allows for the ability to transfer a larger portion of ownership each year, if desired.
A qualified business valuation calculates a discounted fair market value for the minority shares of the business to be gifted. This report serves as support for the value of the shares that are indicated on the gift tax return. A valuation report to be attached to a gift tax return contains required information that is reviewed by the Internal Revenue Service. A well thought out and well written report can save time and additional fees by averting inquiry or worse, an audit, by the IRS.
Call us today at Cassady Schiller to learn more about business valuations, valuation techniques and how we can assist you and your company in your endeavors.