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Reducing gift taxes on a company

One concern that business owners have when doing their estate planning is that gifting a company to their heirs could incur heavy gift taxes. In some cases, the heirs can’t afford to pay them and have no option but to sell the business. That allows them to pay the gift tax, but they lose the company.

How can you reduce the impact of the gift tax? One option is to use a trust to pay it as soon as possible, rather than transferring all ownership at the end.

For instance, maybe your company has a value of $1 million right now. You don’t plan to pass it to your children for 20 years, but what if it’s worth $40 million at that time? The amount owed in tax is vastly higher.

You can offset some of this by creating a trust for your heir or heirs and then putting shares of the company into the trust. As long as you keep the majority of the shares, you still get to run the business as you see fit, but you transfer a percentage to the trust at a vastly lower value. The shares then gain value along with the company over the 20 years to come.

This may not completely eliminate the gift tax, but it can reduce it by anywhere between 20% and 45%. Those are real savings and may make it possible for your heirs to keep the business after all.

With complex estate planning needs, make sure you know what options you have and what steps to take.

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