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by Jeff Hipshman, CPA, Partner | 

Business owners can spend a lifetime building their enterprises, in the process creating substantial value and significant income. Deciding when and how to sell or transfer a business, therefore, can be a monumental decision. Selling it to a third party is one approach, which brings with it numerous financial, tax and personal considerations. However, for many entrepreneurs, their goal is to pass their business on to family members as part of their legacy. This route is no simple manner on many fronts, not the least of which is tax planning.

Maximize Your Exemption

If you do wish to transfer ownership to the next generation, starting such transfers sooner rather than later can be a smart move tax-wise – especially this year. The 2019 federal gift tax exemption is $11.4 million, but it’s scheduled to drop to $1 million in 2013.

By gifting interests now, you can potentially lock in the currently high exemption, plus keep future appreciation out of your taxable estate. (Keep in mind, however, that any gift tax exemption used during your life will reduce your estate tax exemption dollar for dollar.) This can potentially be a very valuable aspect of the strategy, in the event that your business is primed for future appreciation!

In some situations passing on full control of the company doesn’t make sense in the near-term, for example when your children aren’t yet old enough or have enough experience to run the company. If you’re not ready to relinquish operational control, simply hold on to more than 50 percent of the ownership interests.

An added benefit of retaining control is that the interests you’re transferring may be eligible for minority and lack-of-marketability discounts, which reduce value for gift tax purposes. You’ll need help from a professional appraiser to determine the fair market value of your business and the appropriate valuation discounts.

Leverage Annual Exclusions

What if you are relatively young and want to be involved in running the business for another 20 years or more, yet you definitely want to transfer ownership to your heirs? There are several viable strategies available in this case. For example, you can transfer ownership over time by systematically gifting interests equal to the annual gift tax exclusion (currently $15,000 per recipient) each year. Even though such gifts are tax-free, they don’t count toward your gift tax exemption.

So you can use your annual exclusions to make tax-free gifts in excess of your gift tax exemption or to preserve your exemption for future use.

Form an FLP

If you’d like to transfer more than 50 percent of ownership yet remain in operational control, consider a family limited partnership (FLP). You can gift limited partnership interests to your heirs but retain a general partnership interest and continue to control day-to-day operations. This can be done immediately or over time, applying your gift tax exemption or exclusions and valuation discounts as appropriate. So this structure can be very beneficial in that you can stay around and run the business, building its value and training your heirs in its operations, while at the same systematically planning for the ownership transition of the company according to your wishes and minimizing taxation for your heirs.

Be advised: The IRS often challenges the validity of FLPs. It’s important to structure and operate yours in a way that will pass muster.


Given the current economic and legislative environment, two other strategies to consider are transfers to grantor retained annuity trusts (GRATs) and sales to intentionally defective grantor trusts (IDGTs). These are “estate freeze” techniques and allow for the transfer of a business’s future appreciation without significant use of federal estate and gift tax exemptions. Closely held business interests are particularly well-suited for GRATs and IDGTs, especially if minority and lack of marketability discounts can be applied to reduce the value.

Get Started

These fundamental methods are a good place to get started thinking about how to take advantage of your gift tax exemption and exclusions to transfer ownership of your business to your heirs. Many more-complex options are also available that can help you further leverage them.

Work with your CPA to pinpoint the best way to put the company you’ve worked so hard to build safely in the hands of your chosen successors.

© 2019

This article first appeared in the Orange County Business Journal.

Contact Jeff Hipshman 714.505.9000 or jeff.hipshman@hmwccpa.com

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