Effective estate planning requires taxpayers (especially those subject to estate tax) to have a proper plan in place for all assets. Oftentimes, individuals fail to properly plan for the estate tax as it relates to business entities (corporations, LLCs, etc.), thus missing out on substantial estate tax savings. A complex estate planning technique available to individuals who own entities with significant value is the gift-sale transaction.
Gift-sale transactions involve the transfer of an interest in a business entity to an irrevocable trust and thus outside of one’s estate. The trust will be for the benefit of your designated beneficiaries, typically family members. As the name suggests, the transaction involves two parts; a gift of a specified interest in the entity, and a sale of the remaining interest. The gift portion of the transaction will be used in conjunction with your remaining estate tax exemption amount (currently $5,490,000 for 2017, less any previous gifts); and the sale portion can utilize a long term, interest-only promissory note. In the end, the trust will own the shares of the business entity and you will hold the note in the amount of the sale price of the shares.
Gift-Sale Transaction Steps
- You must first determine which entity you wish to transfer.
- Preparation of Irrevocable Trust to receive the entity (if one does not already exist).
- A valuation of the entity must be done, to determine the specific value of the interests being transferred. Such valuation will often contain discounts for lack of control and lack of marketability.
- Once the transfer value has been determined, you must analyze the amount of your remaining estate tax exemption, and determine how much should be allocated to the gifting portion of the transfer.
- After the gifting portion has been made, the balance of the business interest will be sold for an interest-only promissory note.
An Example of the Gift-Sale Transaction in Action
- Value of ABC: $40,000,000
- Ownership of ABC: 99% combined ownership by Spouse 1 and Spouse 2 as limited partners; 1% owned by XYZ Enterprises, LLC as general partner
Contact Top Boca Raton Estate Attorneys Today
If you are an individual that is worried about the inevitable estate tax so to the size and value of your business entities, contact Morris Law Group today to discuss if a gift-sale transaction may be an appropriate course of action with one of our experienced estate attorneys.